Monday, March 4, 2013

Is Olli Rehn Talking to Lord Keynes About Fiscal Policy?

Brad DeLong rightfully mocks the EU’s economics chief. Not to pile on but consider this from Rehn:
“Given that average debt exceeds 90pc of GDP in the EU, I don’t think there’s any room for manoeuvre to leave the path of budgetary consolidation … We won’t solve our growth problems by piling new debt on top of our old debt,” he said. Defying his critics, Mr Rehn said John Maynard Keynes himself would not be a Keynesian today’s circumstances.
Keynes wrote the General Theory back in 1936. At the time, the US government debt to GDP ratio had not yet reached 90 percent but it was climbing fast. In the UK, the government debt to GDP ratio was over 150 percent. This did not stop Lord Keynes from recommending fiscal stimulus in order to offset the continuing effects of the Great Depression. So Keynes was a Keynesian under similar circumstances back in 1936. What makes Mr. Rehn think Keynes would have changed his mind today?

1 comment:

  1. M. Pettis, most recent, and others read Keynes as having been advocating deficits in the US only, because it had current account surpluses.

    If that was Lord Keynes POV, then he would not have advocated deficits in GB then, or now.

    It seems very silly to me to argue about what Keynes would do now.

    It seems to me that Pettis asks, implicitly, the right question. How can deficits directly or powerfully help a country with a current account deficit increase employment? I have never seen the question answered "Yes," convincingly.

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