Monday, October 20, 2008

Keynesian Economics Back In Fashion

After decades of Monetarism and free market liberalism, it seems 'Keynesian economics' is coming back into fashion.

The term 'Keynesian economics' is a loose one. But, basically involves more government intervention, such as spending more in a recession to try and stimulate the economy. In particular, Keynes was an advocate of greater public spending during a time of recession.

In a recent post, I suggested the government need to increase public spending to avoid the worst of a recession and prevent unemployment rising too much.

Darling said yesterday:
"Much of what Keynes wrote still makes sense. You will see us switching our spending priorities to areas that make a difference - housing and energy are classic examples where people are feeling squeezed. What I want to avoid is getting ourselves in a position governments have done in the past, where you face an immediate problem and cut back on the things the country will need in the future ... we can allow borrowing to rise,"
It was also noted that UK public sector debt is much lower than many of our competitors, giving us room for expansionary fiscal policy. (of course, we could have had more room if the government had been more prudent in the boom years.

It remains to be seen whether we can spend ourselves out of a recession. But, at least it might mitigate some of the effects. The effectiveness of the spending will depend on:
  • What is the public spending targeted on?
  • Does the spending help to increase productivity e.g. education, transport links can help increase productivity and enable low inflation growth.
  • How Bad is the rest of the economy? If banking troubles persist, no amount of injections may be sufficient to overcome the black hole in the economy.

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