The U.K. has produced notable economists over the years, but John Maynard Keynes, the guru of government intervention, was one of truly global significance.
So it may be fitting that the U.K. will also become the deathbed of Keynesian economics.
Britain has been following the mainstream prescriptions of his followers more than any developed nation. It has cut interest rates, pumped up government spending, printed money like crazy, and nationalized almost half the banking industry.
Short of digging Karl Marx out of his London grave, and putting him in charge, it is hard to see how the state could get more involved in the economy.
The results will be dire. The economy is flat on its back, unemployment is rising, the pound is sinking, and the bond markets are bracketing the country with Greece and Portugal in the category marked “bankruptcy imminent.” At some point soon, even the most loyal disciples of Keynes will have to admit defeat, and accept that a radical change of direction is needed.
Lynn says that recent dispute between economists has brought the issue to the forefront (emphasis mine):
On Feb. 14, a group that included the former Bank of England policy makers Tim Besley, Howard Davies, Charles Goodhart and John Vickers published a letter to the Sunday Times calling on the government of Prime Minister Gordon Brown to control the ballooning deficit. If it didn’t, the stability of the economic recovery would be threatened, and there would be a run on the pound, they warned.
That brought a stinging response from the Keynesians, who are urging the U.K. to spend its way out of recession. Nobel laureates Joseph Stiglitz and Robert Solow were among the signatories to letters written by a group of 67 [Keynesian] economists insisting that deficit spending was the only way to salvage the economy.
Mr Obama’s cheerleader-in-chief in arguing the case for continued international deficit spending is the American economist Paul Krugman.
This hyperactive Nobel prize winner has achieved almost celebrity status for his extreme neo-Keynesian views. Yet his frequent polemics on the supposed merits of “let rip” public spending long since ceased to be based on objective analysis, and are instead argued as a matter of almost ideological conviction.
He’s as much a fundamentalist as the “deficit hawks” he mocks.
We need growth that doesn’t rely on debt but is based on real grounds. The world needs a new architecture for the financial markets and me and the EU will advertise for that very intensively.
Now more than ever, with the world on the brink of financial collapse, it’s necessary for leaders like President Obama to escape their comfort zones and embrace ideas that they would not have embraced in cushier times.
That takes guts. Let’s see who has them.