Monday, June 1, 2009

"Failed" Keynesianism Gets More Interesting Still: IMF Recommends African Nations Spend

As you may or may not know, I gave a lecture last summer at Acton University called, "Why Keynesianism Failed." And I have been invited back this summer to give a lecture with the same title.

Well, the geopolitical economic climate heading into my lecture later this month is considerably more interesting than it was a year ago. At the time, the Fed's ongoing attempts to kick-start the economy through monetary expansion, combined with the Bush administration's stimulus checks, made it seem like Keynesianism was alive and well as a policy prescription--despite its considerable shortcomings as a model of how economies actually work, and how economic agents (firms, consumers, politicians, etc.) act within them.

Of course, that was all before the subsequent crash of the financial markets, and the collapse of several large banking entities. In the wake of those events, we are now pursing Keynesian policies whenever possible, wherever possible, and at levels unimaginable last summer. In fact, it seems silly in retrospect to think that last summer I thought our government was following the ideas of Keynes when they sent us our tiny rebates and cut interest rates a little.

Of course we were indeed acting in a Keynesian manner last year, too, but today the comparison in terms of the relative flows of financial stimuli feels a bit like contrasting the flow of rain running out of my rain gutter -- even in a hard rain -- to the flows from Niagara Falls.

Today's latest evidence is the bankruptcy plan for General Motors, which makes us US citizens 60 percent owners of GM--regardless of how we each feel about it. Stated another way, since none of us thought GM was a sufficiently good bet to voluntarily invest our money in, our government has decided to forcibly make all of us investors in GM.

Now such policy actions are not surprising, even if Keynesianism really is a failed economic theory of how things work. First, the focus of Keynes's work, right or wrong, was always on the short term. In his Tract on Monetary Reform, Keynes reminded us that in the long run, "we are all dead." In Keynes's view, then, policy that might prove bad for the long-term could nevertheless be good policy in the short-term if it led to short-term improvements in the state of affairs.

Second, policymakers are not comfortable standing around doing nothing when bad stuff happens, even if doing nothing might be the very wisest idea for the longer term. For one thing, politicians like getting reelected, and a good way to make that happen is by taking action--any action--that will be perceived by voters as an attempt to make things better.

Further, remember Keynes's "we are all dead" line. Getting reelected is a short-term problem for politicians, and comes around just every four to six years. So if making voters feel good about you right now is the problem, then taking economic action to make voters feel better about you right now is a pretty clever strategy. They might not care for you in the long run, but the next election cycle is still a long ways off.

Now the US is a wealthy nation, so poorly chosen monetary and fiscal policy will not affect us much, relatively speaking. Even if the nation's GDP shrank by one third, we would still be one of the world's wealthiest countries.

But other nations have far less, and have economies that are far more fragile. So I find it distressing that the International Monetary Fund's latest recommendation for African nations is that they pursue additional fiscal stimulus spending.

If IMF policymakers are wrong in their Keynesian advice, then in the long run, African nations could be very dead indeed.

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