Politicians ignore Keynes at their peril [View All]

[CHIMO]

John Maynard Keynes explained the dynamics of an economy in a prolonged period of high unemployment more than 70 years ago in The General Theory. Unfortunately, it seems very few people in policymaking positions in the United States or Europe have heard of the book. Otherwise, they would be pushing economic policy in the exact opposite direction than it is currently heading.


Most wealthy countries have now made deficit reduction the primary focus of their economic policy. Even though the US and many eurozone countries are projected to be flirting with double-digit unemployment for years to come, their governments will be focused on cutting deficits rather than boosting the economy and creating jobs.


The outcome of this story is not pretty. Cutting deficits means raising taxes and/or cutting spending. In either case, it means pulling money out of the economy at a time when it is already well below full employment. This can lower deficits, but it also means lower GDP and higher unemployment.


This might be OK if we could show some benefit from lower deficits, but this is a case of pain with no gain. Ostensibly, there will be a lower interest-rate burden in future years, but even this is questionable. First, the contractionary policy being pursued by the deficit hawks will slow growth and lead to lower inflation or possibly even deflation. It is entirely possible that the debt-to-GDP ratio may actually end up higher by following their policies than by pursuing more expansionary policy.

http://www.guardian.co.uk/commentisfree/2010/may/17/keynes-danger-deficit-reduction