Keynes is back
6/3/21 21:02![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
abomvubuso posting in ![[community profile]](https://www.dreamwidth.org/img/silk/identity/community.png){kind=small}
talkpoliticsNot so long ago, I came across a headline saying the IMF was warning against cutting public spending and loans. The report was kind of striking, in that it seemed to be a marker of a major shift of paradigm. I mean, after half a century of advocating for fiscal prudence and austerity, IMF was now telling regulators in the developed countries they shouldn't be too worried about accruing large public debt at a time of Covid-19 woes. Seems like Keynes is rearing his moustache from behind the corner of Obscurity Avenue again, eh?
But surely, there must be much more to IMF's prescription than meets the eye. Essentially, they're advising the developed economies to give priority to recovery growth after the pandemic-induced deflation shock. In such a situation, it does make sense to support economic recovery, yes. The likes of Britain may've learned this lesson the hard way, after years spent in the austerity wilderness that Cameron had brought them into after the 2008 downturn. In fact, let me particularly use the UK as an example here.
But still. This is the IMF we're talking about, the holiest of holies, the institution that, as many Britons actually may still recall, proclaimed the death of Keynesianism back in the late 70s, when Callahan's Labour government was forced to impose draconian expenditure and loan cuts. It's the same institution that has gone through decades of fiscal intervention, always answering every and any economic problem with a couple of go-to tactics: fiscal austerity, less government, and market liberalisation. That's what everyone called the Washington consensus (after IMF's HQ location).
That has been the economics orthodoxy for ages. The mainstream paradigm of monetarism was that if governments kept fiscal supply under control, and thus inflation under the lid, everything would be fine.
Problem was, each time a certain austerity measure was being applied, it soon ceased being a reliable indicator for the effect on prices (and not only). That was the so called Goodhart's Law (ie "When a measure becomes a target, it ceases to be a good measure"). By the late 80s, monetarism had been soundly rejected, and exchange rate targeting became the new Holy Grail. If the GBP rate was fixed against the DEM, the UK was supposed to "import" stability from Germany, and so on.
That was a time when it became evident that one of the best talents of the treasury was to do a perfect U-turn while claiming to not have strayed one inch away from its established policy. This skill came in pretty handy when the currency manipulation tactic finally blew right into their face once the GBP was withdrawn from the ERM (the currency mechanism) in 1992. Then inflation became the new Holy Grail, replacing the older tactic.
This time the new narrative was that public expenditure and loans are bad, tax cuts are good, and freeing up the market is the path to prosperity. The GBP's collapse against the ERM was followed by a drastic budget shrinking, while across the Channel, the Euro zone was being designed in a way as to fit into the fiscal long-sleeved asylum shirt. We were being told that deregulation would pour lube into the wheels of globalisation. Whenever anyone raised a voice of concern about those insane profits and bonuses of the large financial institutions, the response was that the magical invisible hand of the infallible market would correct stuff on its own, and all would be fine. A period of "soft" regulation followed through the 2000s, and control over the systemic financial stability was eased.
The secret vice of this whole process was that of complacency, and utter conviction in its infallibility. A bunch of theories that were largely untested, yet sounded rather legit and sensible, like the one of supply-side economics, fiscal balances, and loan levels, or market risk, were raised to a status of axioms. The economy, a domain essentially based on faith and confidence, was being presented as some kind of exact science. Up to the 90s, the real world got boiled down to a set of complex mathematical equations, which no one, least of all the 4-year-term elected politicians, dared question.
Thus divorced from reality, economic policy swept away the post-war balance of interests between society and the market. Raw, dry econometrics replaced the understanding of political economics. It mattered no more that the profit from globalisation was largely being sucked by the super-wealthy, that the markets were turned into casinos, or that fiscal fundamentalism was spreading and stretching the social gaps like never before. Everything was about equations now, not people.
And now, what comes next? After Donald Trump, after Brexit and Covid-19, turns out we're back to square one. Time to beat the dust off of ole JMK's books at long last, eh?
But surely, there must be much more to IMF's prescription than meets the eye. Essentially, they're advising the developed economies to give priority to recovery growth after the pandemic-induced deflation shock. In such a situation, it does make sense to support economic recovery, yes. The likes of Britain may've learned this lesson the hard way, after years spent in the austerity wilderness that Cameron had brought them into after the 2008 downturn. In fact, let me particularly use the UK as an example here.
But still. This is the IMF we're talking about, the holiest of holies, the institution that, as many Britons actually may still recall, proclaimed the death of Keynesianism back in the late 70s, when Callahan's Labour government was forced to impose draconian expenditure and loan cuts. It's the same institution that has gone through decades of fiscal intervention, always answering every and any economic problem with a couple of go-to tactics: fiscal austerity, less government, and market liberalisation. That's what everyone called the Washington consensus (after IMF's HQ location).
That has been the economics orthodoxy for ages. The mainstream paradigm of monetarism was that if governments kept fiscal supply under control, and thus inflation under the lid, everything would be fine.
Problem was, each time a certain austerity measure was being applied, it soon ceased being a reliable indicator for the effect on prices (and not only). That was the so called Goodhart's Law (ie "When a measure becomes a target, it ceases to be a good measure"). By the late 80s, monetarism had been soundly rejected, and exchange rate targeting became the new Holy Grail. If the GBP rate was fixed against the DEM, the UK was supposed to "import" stability from Germany, and so on.
That was a time when it became evident that one of the best talents of the treasury was to do a perfect U-turn while claiming to not have strayed one inch away from its established policy. This skill came in pretty handy when the currency manipulation tactic finally blew right into their face once the GBP was withdrawn from the ERM (the currency mechanism) in 1992. Then inflation became the new Holy Grail, replacing the older tactic.
This time the new narrative was that public expenditure and loans are bad, tax cuts are good, and freeing up the market is the path to prosperity. The GBP's collapse against the ERM was followed by a drastic budget shrinking, while across the Channel, the Euro zone was being designed in a way as to fit into the fiscal long-sleeved asylum shirt. We were being told that deregulation would pour lube into the wheels of globalisation. Whenever anyone raised a voice of concern about those insane profits and bonuses of the large financial institutions, the response was that the magical invisible hand of the infallible market would correct stuff on its own, and all would be fine. A period of "soft" regulation followed through the 2000s, and control over the systemic financial stability was eased.
The secret vice of this whole process was that of complacency, and utter conviction in its infallibility. A bunch of theories that were largely untested, yet sounded rather legit and sensible, like the one of supply-side economics, fiscal balances, and loan levels, or market risk, were raised to a status of axioms. The economy, a domain essentially based on faith and confidence, was being presented as some kind of exact science. Up to the 90s, the real world got boiled down to a set of complex mathematical equations, which no one, least of all the 4-year-term elected politicians, dared question.
Thus divorced from reality, economic policy swept away the post-war balance of interests between society and the market. Raw, dry econometrics replaced the understanding of political economics. It mattered no more that the profit from globalisation was largely being sucked by the super-wealthy, that the markets were turned into casinos, or that fiscal fundamentalism was spreading and stretching the social gaps like never before. Everything was about equations now, not people.
And now, what comes next? After Donald Trump, after Brexit and Covid-19, turns out we're back to square one. Time to beat the dust off of ole JMK's books at long last, eh?
(no subject)
Date: 8/3/21 07:55 (UTC)About time.
But I would say that, wouldn't I?
(no subject)
Date: 9/3/21 14:50 (UTC)