More than three decades have passed since Richard Nixon, the Republican US president, declared: “We are all Keynesians now.” The phrase rings truer today than at any time since, as governments seize on John Maynard Keynes’s idea that fiscal stimulus – public spending and tax cuts – can help dig their economies out of recession.
Economic remedy in a time of misery
The essential idea of John Maynard Keynes’s The General Theory of Employment, Interest and Money is that modern economies can suffer from a persistent lack of demand, consigning millions to what he argued is unnecessary unemployment and misery.
Although capitalist economies contain forces to restore full employment, these are weak and in some circumstances can take far too long to work. It is therefore better for governments to stimulate economies suffering from a lack of demand by stepping in with cheap money and deficit-financed tax cuts or public expenditure increases
The sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades, which held that efforts to use fiscal policy to manage the economy and mitigate downturns were doomed to failure. Now only Germany remains publicly sceptical that fiscal stimulus will work.
The new Keynesian consensus was set out in the communiqué issued by the Group of 20 leading industrialised and emerging economies in November, in which they vowed to “use fiscal measures to stimulate domestic demand to rapid effect” within a policy framework “conducive to fiscal sustainability”.
The incoming administration of Barack Obama is preparing a two-year fiscal stimulus package with a reported price tag of $675bn-$775bn, which many Washington-based analysts believe could swell to $850bn (£580bn, €600bn) or even $1,000bn – between 5 per cent and 7 per cent of national income.
Gordon Brown, UK prime minister, told reporters in late December that if monetary policy was impaired – in large part because of problems within the financial system – “then governments have to use fiscal policy, and that has been seen in every country of the world”.
Launching France’s fiscal stimulus, President Nicolas Sarkozy said: “Our answer to this crisis is investment because it is the best way to support growth and save the jobs of today – and the only way to prepare for the jobs of tomorrow.”
Read more here: The undeniable shift to Keynes