Keynesian policies are not the answer
John Montgomery | January 28, 2009
Article from: The Australian
"WHEN you are in a hole, stop digging." This sensible law was coined by Denis Healey,
This is the exact opposite to the economic policy being followed in the US by Barack Obama, Nancy Pelosi and the Democrats, by Gordon Brown in Britain, and by Kevin Rudd here in Australia. Instead of sound money, the policy is one of throwing good money after bad.
The new policy of demand management through government spending - known as Keynesianism - will not work. It never has, for the simple reason that governments cannot run economies and they do not create wealth. By throwing government money around in any number of bail-outs, infrastructure programs and pet social projects, governments are running up debt and simultaneously failing to revive the economy.
Take, for example, the case made for infrastructure investment or public capital spending. The Keynesian argument is that this pumps money into the economy and helps fuel recovery and growth. This, the Left argues, was behind the success of
Of course, there were infrastructure projects carried out at this time, no doubt many of them a good thing, including the Hoover Dam and the
The most worrying thing about Keynesianism is that governments raise the money they spend from borrowing, issuing new bonds and, eventually, printing money. Printing money is a sure-fire recipe for inflation: real inflation, not the modest 3per cent of 2008 that was occasioned simply by movements in prices and the cost of oil. Real inflation is where your currency loses value because there are too many notes in circulation. The National Socialists introduced Mefo bills for this very purpose. In the
Solving one problem will likely cause another, in this present case the return of inflation from about 2012. To deal with this, monetary policy will again be tightened, and by about 2016 there will be another mild recession. The pattern of boom and bust will continue, made worse not better by central intervention.
Cutting taxes and interest rates is a more straightforward and more immediate policy mechanism in normal times. Of course, the banking collapse made the recession we were already heading into - thanks to the interest rate hikes of 2006-2008 - much worse. Now the problem is a lack of liquidity as banks refuse to lend to each other. The reason they are so reluctant is that no one knows where all the bad debt from the
My proposal then is to cut the government bank deposit guarantee to a sensible level - say $100,000 - and advise people to spread their savings among a number of accounts to that limit. At the same time, governments should freeze any loans they have made to the banks. The more money is moved around, the less control the banks will have and those that have the worst debts will fail.
Having thus cleaned out the stables, policy can then stimulate the private sector by a combination of low interest rates and tax cuts. Economic recovery will then follow, without the need for governments to hawk all our futures. This is because the fundamentals of economic life are still strong: new markets, new technologies, new demographics, new centres of wealth and new consumers. This is not rocket science. Capitalism will recover, but only when governments get out of the way and stop spreading doom and panic. I just hope Obama gets it before it is too late.
John Montgomery is a writer and consultant on economic development and urban growth. His latest book, The New Wealth of Cities, is published by Ashgate (2007).