Great Article on Bloomberg.com "Deathbed of Keynesian Economics" A+

[dvictr]

Please write the author matthewlynn@bloomberg.net a thank you letter for a wonderful service and an outstanding piece of journalism. This guy deserves some type of award!

http://www.bloomberg.com/apps/news?pid=20601039&sid=a5t.xQdllnbo

Feb. 23 (Bloomberg) – 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.

The public debate about the state of the British economy was enlivened last week by a brawl between economists.

On Feb. 14, a group that included the former Bank of England policy makersTim Besley, Howard Davies, Charles Goodhart and John Vickers published aletter to the Sunday Times calling on the government of Prime MinisterGordon 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.

Keynesian Backlash

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 andRobert Solow were among the signatories to letters written by a group of 67 economists insisting that deficit spending was the only way to salvage the economy. The letters, published in the Financial Times, argued that a “a sharp shock” now “would be positively dangerous.”

So who is right, and who is wrong? It’s a debate that matters to the rest of the world. After all, if demand management doesn’t work here, it won’t work anywhere.

The U.K. has some experience of mass letter writing from Keynes’s devotees. In 1981, a group of 364 economists wrote an open letter ripping into the policies of then Prime Minister Margaret Thatcher. They turned out to betotally wrong, of course. With hindsight, no one can now dispute that her policies led to a long and durable economic revival.

Budget Blowout

And just as the Keynesians were wrong three decades ago, they are wrong now.

The U.K. has been in Keynes overdrive for the past 18 months. The budget deficit is already more than 12 percent of gross domestic product, on a par with Greece. And while the Greeks are cutting spending, the British deficit is widening. Figures for January showed another fiscal blowout. At the same time, interest rates have been slashed to 0.5 percent. And the pound has slumped in value, which is supposed to boost demand for British goods, and help close the trade gap.

Just about everything possible has been done to encourage consumption. The results have been miserable.

Retail sales excluding gasoline in January fell 1.2 percent from the previous month, twice as much as economists forecast. The number of people receiving unemployment benefits jumped to 1.64 million in January, the highest level since April 1997. The yield on U.K. government debt is now higher than on Spanish or Italian bonds, a sure sign that investors are losing faith in the country’s ability to pay its debts. The inflation rate has also accelerated to 3.5 percent.

Triple Whammy

In reality, Britain has the worst of all possible worlds: a stagnant economy, a crippling budget deficit and rising prices.

The Keynesian consensus is that things would have been far worse without the stimulus provided by government. And if the economy isn’t pumped up with inflated demand, it will collapse back into recession. If it’s not working, that just proves the stimulus should be even larger.

It is the argument quacks always push: If the medicine isn’t working, increase the dosage.

And yet, reality has to intrude into this debate at some point. The deficit can’t get much bigger, interest rates can’t be cut much lower, and sterling can’t lose much more value.

Stimulating the economy isn’t working.

In fact, it’s only making it worse. Consumers and businesses don’t want rising taxes. A falling currency pushes up the cost of everything the U.K. imports, stoking inflation. Savers get decimated, and yet the banks remain reluctant to lend because they rightly believe the economy is in the doldrums.

Recipe for Recovery

What’s needed is a total change of direction. Get the deficit under control. Raise interest rates to restore confidence in the pound, and reward saving. Cut taxes to stimulate enterprise and investment.

And yet the real lesson of the U.K. in 2010 will be of wider significance. A country can’t spend its way out of a recession. And it can’t fix what was at root a problem of too much debt by just borrowing more and more.

In the country of its birth, Keynesian economics is being tested. If the economy isn’t growing at a healthy clip again by the end of 2010, its failure will be obvious to everyone.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

Click on “Send Comment” in the sidebar display to send a letter to the editor.

To contact the writer of this column: Matthew Lynn in London atmatthewlynn@bloomberg.net.

Last Updated: February 22, 2010 19:00 EST

[onebornfreedotblogsp]

Sorry to dampen the enthusiasm, but it is worth bearing in mind that it is impossible to kill dreams and fantasies.

Therefor, the wildly popular fantasy that everyone can somehow live at the expense of everyone else will continue to thrive and gain more adherents , no matter what.

Best learn to live in that world, or find practical ways to limit the negative effects that that prevailing fantasy might have on yourself- instead of indulging in another fantasy, i.e. that many will read this article and others like it and suddenly “wake up”.

I suppose they might [very long odds against], but why take a chance or wait for “that day”?

Regards, onebornfree.

[Caley_McKibbin]

Good thing it was only 40 GBP that I didn’t get around to converting back to CAD since October. Nasty loss in exchange rate.

[Esuric]

Unfortunately, if his policy recommendations, which are of course correct, came into fruition, it would lead to a sharp deflationary correction. This is obviously the best way to go, but the Keynesians would cheer with glee. They would shout, “we told you so!” If the deflationary correction is allowed to purge the economy of malinvestments, then robust and stable growth would surely follow, and Keynes would finally be put to rest. But the government would intervene, claiming that inflation and deficits are absolutely vital; “we saw what happened when we listened to you free-marketeers” they would claim.

The best outcome, in my opinion, would be to let the cranks stay in power, and have them see, with their own eyes, their theories carried out all the way. They would entirely refute themselves in every way imaginable.

[Kakugo]

I see a big issue. Her Majesty’s Government (OK, back then it was His Majesty’s) started to implement Keynes’ recommendations immediately after WWII. It is little known that Keynes himself wrote down the ideas which killed off most of the British industry. The decision to group aircraft manufacturers into a few large companies by decree instead of letting the market sort itself was all Old John Maynard’s idea. So we lost Supermarine, Handley-Page, British Electrics, Hawker, de Havilland etc. And you may guess who inspired Attlee’s ideas of forcing new industries to open up shop where the government saw fit. And look at the British Leyland/Norton-Triumph-Villiers fiasco. Keynes may have been in this grave by then but even the dumbest economics student will tell you the decisions which destroyed the world’s most dynamic automotive industry were all inspired by Keynes.

British Conservatives may all bitch and moan about the present Neo-Keynesian system to take easy shots at the bumbling Gordon Brown but fail to acknowledge that government intervention now runs deep in Britain’s political veins. It’s not just a matter of running large deficits: it’s a matter of constantly expecting government intervention and all governing bodies from Downing Street to the smallest country council will only be too happy to deliver. And like all Conservatives once they will get to power they’ll quickly forget what they were preaching until moments ago.

[Praetyre]

Personally, I’m less interested in David Cameron’s victory than whether the UKIP or BNP will win the 2016 elections.