Le Figaro: Why the economic crisis should kill Keynesian conventional thinking

Another post that is a shameless reposting of something that appeared elsewhere.  This first appeared in French, in Figaro, behind their paywall, but for some inexplicable reason, the English translation appeared on this side of the paywall.  Maybe they want the word spread to the non-French speaking world, which I am happy to do. 

The article is a criticism of Keynesian thinking. On the one hand this might be dismissed as a bit of rhetoric against an Anglo-Saxon economic philiosophy that has some traction in many parts of the world, but I think it hits the nail on the head.

What is missing is a further explanation of the nature of the crisis and more realistic outcomes.  If I had to sum it up, it would be the erosion of the West's competitive economic advantage and the consequent drop in living standards.  This is essentially no different from and old and tired business whose margins have been eroded.  The solution for the business is not to spend more and fund that spending by borrowing, but to cut its costs and if necessary to cut pay and bonuses and change the terms on which it deals with its suppliers.  Borrowing and spending leads to bankruptcy.  Ask any Greek or Italian.

A pre-eminent conservative French economist blames the West’s imploding economy on long-accepted Keynesian policies of boosting consumption via public spending.

PARIS – It would have been only logical that the recent financial crisis and its current consequences radically challenge the prevailing ideas on economics. But it is fascinating to see to what extent people can stick to erroneous beliefs. The strange and enduring success of anti-capitalist ideas after the spectacular collapse of communist and socialist societies illustrates this tendency all too well!

The ideas inspired by Keynesian theories are dangerously dominant. Despite the fact that they give no coherent explanation for the appearance of crises, everybody defined their “policies to end the crisis” according to Keynes’ ideas. The main point is simple: if there is an economic crisis, if economic growth is weak and the unemployment rate high, the right thing to do is to increase the global demand, which implies in particular to increase public spending. Every government favors this method, since it enables them to justify any demagogic spending, any waste of money.

Nevertheless, in all areas of human activity, wisdom means understanding the causes of a phenomenon before implementing measures to solve it. In our case, the economic and financial crisis was absolutely not the consequence of a lack of demand, but, on the contrary, of an excess of monetary credit and an excess of spending (for example, on real estate.)

A strange incoherence

Moreover, the very idea of increasing ex nihilo the global demand is an absurd idea: if a government spends more, it must find a way to finance it. Public spending always corresponds to a transfer of demand (at the expense of the taxpayers if it is financed by taxes, at the expense of the economy if it is financed by loans) and never to a net growth of demand. We should not be surprised if such a policy doesn’t bear fruits, as the American example shows: the public deficit of more than 13 percent of GDP did not prevent low economic growth and a high unemployment rate, while seriously disturbing the financial markets.

Keynesian thinking habits lead to a strange incoherence. Indeed, on the one hand, we recommend re-boosting consumption – which implies reducing savings – and on the other hand, we pretend to stimulate the economic activity and the investment by policies of monetary growth and low interest rates. But it is that kind of policy that caused the financial crisis in the first place, creating the illusion of important financing means thanks to purely artificial monetary credit, as we strive to reduce savings.

We should do exactly the opposite: cut out all obstacles – especially fiscal, which eliminate the incentive to save – and prevent any monetary growth which can only provide illusions and instability. That’s why it is dangerous to ask the European Central Bank to not only reduce inflation but also encourage growth. Like any central bank, it is quite unable to do so with success. The best thing to ask for would be to stop any monetary creation.

It is high time that we completely change the configuration of economic policy. It has consisted until now in creating massive public deficits and strong monetary growth. We should, on the contrary, drastically reduce public spending and tax burdens in order to encourage mass production, prevent any increase in money supply and incite people to save money within the framework of a major tax reform. The revolution we need now is first and foremost an intellectual one.