Sean O'Grady: Once again, the lessons of Keynes are being ignored

Economics

Share
Related Topics

After a brief but spirited revival, John Maynard Keynes has been put back in his box. A panicked world re-discovered the merit of the master's teachings when a re-run of the Great Depression loomed in the autumn of 2008. Budget deficits were allowed to soar, fiscal stimulus was all the rage and borrowings ballooned. The rule book was thrown away. It worked.

And now? Retrenchment. Austerity. Cuts. The Keynesian orthodoxy is being binned again, just as it was in the 1980s. Unlike the dawn of Thatcherism and Reaganomics, this is a pragmatic, almost involuntary revolution rather than an ideological one. This is because governments, not for the first time, misused Keynes's teachings.

In the case of both the UK and the US in the decade between 1997 and 2007, the previous regimes in both counties ran their economies according to what might be termed Anti-Keynesian principles. Keynes taught that you borrow and spend your way out of recession; but you also control spending and borrowing during an upswing, to avoid inflation, trade deficits and housing bubbles. America and Britain did the opposite.

In the case of the Bush administration this was, at least, intellectually consistent because the president was following an ideology whereby low taxes always and everywhere spur growth and yield more bountiful revenues than "punitive" ones as they unleash enterprise and effort (the phenomenon known, after its most effective advocate, as the "Laffer Curve").

Thus did America end up turning the Clinton administration's balanced budget way into the red – long before the financial crisis struck.

In Britain's case, Gordon Brown operated a supposedly sacrosanct set of fiscal rules that ran on impeccably Keynesian lines. And yet he too borrowed lavishly during our boom – the opposite of proper Keynesian demand management.

Bush and Brown, lest we forget, allowed credit and the banks to run out of control, greatly compounding their other errors.

So George Osborne and Barack Obama are in fact paying for the mistakes of their predecessors. They might wish us all to be Keynesians now, but they have precious little room for manoeuvre to practice the faith. We are where we are, for sure, but one wonders whether even Keynes would have been able to think his way out of this mess.

Mr Osborne has indicated that he has some flexibility on borrowing – he won't return us to a pre-Keynesian world of constant cuts, and that is good news.

Keynes might now recommend that the British and American governments "borrow to invest", which the markets might not be too spooked by if the funds were used not only to support the economy now, but to raise the long-term prospects for growth – well thought-out schemes to improve rail and air links, roads and other vital infrastructure would still allow the underlying deficits to be attacked.

Who knows? It is tricky to second-guess a dead genius. We can be more sure that, were he around today, he would spare little scorn for those politicians – and economists – who got us to where we are now.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Tradewind Recruitment: SEN Teacher

Negotiable: Tradewind Recruitment: SEN Teacher We have a fantastic special n...

Tradewind Recruitment: History Teacher

Negotiable: Tradewind Recruitment: My client is an 11-18 all ability co-educat...

Tradewind Recruitment: Year 6 Teacher

£100 - £150 per day: Tradewind Recruitment: Year 6 Teacher Birmingham Jan 2015...

Recruitment Genius: Transport Administrator / Planner

£20000 - £35000 per annum: Recruitment Genius: This fast growing reinforcing s...

Day In a Page

Read Next
 

If I were Prime Minister: Every privatised corner of the NHS would be taken back into public ownership

Philip Pullman
 

Errors & Omissions: Magna Carta, sexing bishops and ministerial aides

John Rentoul
Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee