Following the global
financial crisis of 2007–2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of ...
, there was a worldwide resurgence of interest in Keynesian economics among prominent economists and policy makers. This included discussions and implementation of economic policies in accordance with the recommendations made by
John Maynard Keynes
John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...
in response to the
Great Depression of the 1930s, most especially
fiscal stimulus and expansionary
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often ...
.
[
]
From the end of the Great Depression until the early 1970s,
Keynesian economics
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output ...
provided the main inspiration for economic policy makers in Western industrialized countries. The influence of Keynes's theories waned in the 1970s due to
stagflation and critiques from
Friedrich Hayek,
Milton Friedman,
Robert Lucas Jr., and other economists, who were less optimistic about the ability of interventionist government policy to positively regulate the economy, or otherwise opposed to Keynesian policies. From the early 1980s to 2008, the normative consensus among economists was that attempts at fiscal stimulus would be ineffective even in a recession, and such policies were only occasionally employed by the governments of developed countries.
In 2008, prominent economic journalists and economists began arguing in favour of Keynesian stimulus. From October onward, policy makers began announcing major stimulus packages, in hopes of heading off the possibility of a global depression. By early 2009, there was widespread acceptance among the world's economic policy makers about the need for fiscal stimulus. Yet by late 2009, the consensus among economists began to break down. In 2010, with a depression averted but unemployment in many countries still high, policy makers generally decided against further fiscal stimulus, with several citing concerns over public debt as a justification.
Unconventional monetary policy continued to be used in attempts to raise economic activity. By 2016, increasing concerns had arisen that monetary policy was reaching the limit of its effectiveness, and several countries began to return to fiscal stimulus.
Background
Competing views on macroeconomic policy
Macroeconomic policy focuses on high level government decisions which affect overall national economies rather than lower level decisions concerning markets for particular goods and services. Keynes was the first economist to popularize macroeconomics and also the notion that governments can and should intervene in the economy to alleviate the suffering caused by unemployment. Before the
Keynesian Revolution that followed Keynes's 1936 publication of his ''
General Theory'', the prevailing orthodoxy was that the economy would naturally establish
full employment. So successful was the revolution that the period spanning the aftermath of
World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the World War II by country, vast majority of the world's countries—including all of the great power ...
to about 1973 has been referred to as the ''Age of Keynes''. Stagnating economic performance in the early 1970s successfully shattered the previous consensus for Keynesian economics and provided support for a counter revolution. Milton Friedman's
monetarism school was prominent in displacing Keynes' ideas both in academia and from the practical world of economic policy making. A key common feature of the anti-Keynesian schools of thought is that they argued for policy ineffectiveness or policy irrelevance. Although the theoretical justifications vary, the various schools all hold that government intervention will be much less effective than Keynes had believed, with some advocates even claiming that in the long run interventionist policy will always be counterproductive.
Keynesian economics followed on from the Keynesian Revolution. In contrast to the recent resurgence of Keynesian policy making, the revolution initially comprised a shift change in theory.
There had been several experiments in policy making that can be seen as precursors for Keynes' ideas, most notably President
Franklin D. Roosevelt's famous "
New Deal
The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs agencies included the Civilian Con ...
" in the United States. These experiments had been influenced more by morals, geopolitics and political ideology than by new developments in economics, even though Keynes had found some support in the United States for his ideas about counter-cyclical public works policy as early as 1931.
According to Gordon Fletcher, Keynes' ''General Theory'' provided a conceptual justification for New Deal-type policies which was lacking in the established economics of the day. This was immensely significant, as in the absence of a proper theoretical underpinning there was a danger that ''ad hoc'' policies of moderate intervention would be overtaken by extremist solutions, as had already happened in much of Europe.
However, Keynes did not agree with all aspects of the New Deal; he considered that the almost immediate revival of business activity after the program's launch could only be accounted for by dangerous-to-rely-on psychological factors, such as the boost to confidence effected by Roosevelt's inspiring oratory.
Keynesian ascendancy 1941–1979
While working on his ''General Theory'', Keynes wrote to
George Bernard Shaw
George Bernard Shaw (26 July 1856 – 2 November 1950), known at his insistence simply as Bernard Shaw, was an Irish playwright, critic, polemicist and political activist. His influence on Western theatre, culture and politics extended from ...
, "I believe myself to be writing a book on economic theory which will largely revolutionize, not I suppose at once but in the course of the next ten years – the way the world thinks about economic problems. ... I don't merely hope what I say, in my own mind I'm quite sure." Keynes's ideas quickly became established as the new foundations for mainstream economics, and also as a leading inspiration for industrial nations economic policy makers from about 1941 to the midseventies, especially in the English speaking countries. The 1950s and 1960s period, when Keynes's influence was at its peak, to many appeared in retrospect to have been a
golden age.
At that time, in contrast to the decades before
WWII
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the World War II by country, vast majority of the world's countries—including all of the great power ...
, the industrialized world and much of the
developing world enjoyed high growth, low unemployment and an exceptionally low frequency of economic crises. In late 1965 ''
Time
Time is the continued sequence of existence and events that occurs in an apparently irreversible succession from the past, through the present, into the future. It is a component quantity of various measurements used to sequence events, t ...
'' magazine ran a cover article with the title inspired by
Milton Friedman's statement, later associated with
Richard Nixon
Richard Milhous Nixon (January 9, 1913April 22, 1994) was the 37th president of the United States, serving from 1969 to 1974. A member of the Republican Party, he previously served as a representative and senator from California and was t ...
, "
We are all Keynesians now"; the article described the exceptionally favourable economic conditions then prevailing, and reported that "Washington's economic managers scaled these heights by their adherence to Keynes's central theme: the modern capitalist economy does not automatically work at top efficiency but can be raised to that level by the intervention and influence of the government." The article also states that Keynes was one of the three most important economists ever, and that his ''General Theory'' was more influential than the ''magna opera'' of his rivals, namely
Adam Smith's ''
The Wealth of Nations
''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the '' magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in ...
'' and
Karl Marx
Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
's ''
Das Kapital''.
Displacement by monetarism and new classical economics 1979–1999
A swelling tide of criticism of Keynesian economics, most notably from
Milton Friedman, a leading figure of
monetarism, and the
Austrian School
The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian scho ...
's
Friedrich Hayek, was unleashed by the
stagflation of the 1970s. A series of events that contributed to this economic situation included Richard Nixon's imposition of
wage and price controls on 15 August 1971 and unilateral cancellation of the
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bret ...
in 1972, his
ceasing the direct convertibility of the United States dollar to gold, as well as the
1973 oil crisis and the
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
that followed.
In 1976,
Robert Lucas of the
Chicago school of economics introduced the
Lucas critique, which called into question the logic behind Keynesian macroeconomic policy making.
The
new classical economics became the dominant school in macroeconomics. By the mid-1970s, policy makers were beginning to lose their confidence in the effectiveness of government intervention in the economy. In 1976 British Prime Minister
James Callaghan said that the option of "spending our way out of recession" no longer exists. In 1979, the election of
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher (; 13 October 19258 April 2013) was Prime Minister of the United Kingdom from 1979 to 1990 and Leader of the Conservative Party from 1975 to 1990. She was the first female British prime ...
as prime minister brought monetarism to British economic policy. In the United States, the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
under
Paul Volcker adopted similar policies of monetary tightening in order to control inflation.
In the world of practical policy-making as opposed to economics as an academic discipline, the monetarist experiments in both the United States and Britain in the early 1980s were the pinnacle of anti-Keynesian and the rise of
perfect competition influence. The strong form of monetarism being tested at this time asserted that fiscal policy is of no effect, and that monetary policy should only try to target the money supply to control
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
, without attempting to target real
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...
s. This was in contrast to the Keynesian view that monetary policy should target interest rates, which it held could influence unemployment. Monetarism succeeded in bringing down inflation but at the cost of unemployment rates in excess of 10%, causing the deepest recession seen in the developed countries since the end of the Great Depression and severe debt crises in the developing world. Contrary to monetarist predictions, the relationship between the money supply and the price level proved unreliable in the short- to medium-term. Another monetarist prediction not borne out in practice was that the
velocity of money did not remain constant, and in fact dropped sharply. The
Bank of England abandoned its
sterling
Sterling may refer to:
Common meanings
* Sterling silver, a grade of silver
* Sterling (currency), the currency of the United Kingdom
** Pound sterling, the primary unit of that currency
Places United Kingdom
* Stirling, a Scottish city w ...
M3 money targeting in October 1985; the
United States Federal Reserve began increasing the money supply above monetarist-advised thresholds with no effect on inflation, and discarded monetarism by 1984.
Keynesian counter currents 1999–2007
By 1999, the
1997 Asian financial crisis and the harsh response by the
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster gl ...
(IMF) had already caused
free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any o ...
policies to be at least partially discredited in the eyes of developing world policy makers. The developing world as a whole stopped running current account deficits in 1999, largely as a result of government interventions to devalue the countries' currencies, which would help build foreign reserves to protect against future crises and help them enjoy export led growth rather than just rely on market forces.
For the advanced economies, while there was much talk of reforming the
international financial system
The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic actors that together facilitate international flows of financial capital for purposes of investment and trade finan ...
after the Asian crises, it was not until the market failure of the late 1990s and early 2000s
dot-com bubble
The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet.
Between 1995 and its peak in March 2000, the Nasdaq Comp ...
that there was a significant shift away from free market policies. In the United States, there was a return by the government of
George W. Bush to a moderate form of Keynesian policy, with interest rates lowered to ease unemployment and head off recession, along with a form of fiscal intervention with emergency tax cuts to boost spending. In Britain,
Chancellor of the Exchequer Gordon Brown
James Gordon Brown (born 20 February 1951) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Labour Party (UK), Leader of the Labour Party from 2007 to 2010. He previously served as Chance ...
had gone on record, saying "the real challenge was to interpret Keynes's insights for the modern world."
Yet American and British policy makers continued to ignore many elements of Keynesian thinking such as the recommendation to avoid large
trade imbalances and to reduce
government deficits in
boom years. There was no general global return to Keynesian economics in the first 8 years of the 2000s. European policy became slightly more interventionist after the start of the 21st century, but the shift in a Keynesian direction was smaller than was the case for the United States and Britain; however, continental Europeans had not generally embraced free market thinking as wholeheartedly as had the
English-speaking world
Speakers of English are also known as Anglophones, and the countries where English is natively spoken by the majority of the population are termed the ''Anglosphere''. Over two billion people speak English , making English the largest languag ...
in the 1980s and 1990s. Japan had been using moderate Keynesian policies in the nineties, and switched to
neoliberalism
Neoliberalism (also neo-liberalism) is a term used to signify the late 20th century political reappearance of 19th-century ideas associated with free-market capitalism after it fell into decline following the Second World War. A prominent ...
with the government of
Junichirō Koizumi in 2001–2006.
For the first half of the 2000s, free-market influences remained strong in powerful normative institutions like the
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
, the IMF, and in prominent opinion-forming media, such as the ''
Financial Times
The ''Financial Times'' (''FT'') is a British daily newspaper printed in broadsheet and published digitally that focuses on business and economic current affairs. Based in London, England, the paper is owned by a Japanese holding company, Nikke ...
'' and ''
The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Econ ...
''. The
Washington Consensus view that current account imbalances do not matter continued even in the face of a ballooning United States deficit, with mainstream academic opinion only turning to the view that the imbalances are unsustainable by 2007. Another notable anti-Keynesian view that remained dominant in United States and Britain policy making circles was the idea that markets work best if they are unregulated.
In the world of popular opinion, there had been an upsurge in vocal but minority opposition to the raw free market, with
anti-globalization protests
The anti-globalization movement or counter-globalization movement, is a social movement critical of economic globalization. The movement is also commonly referred to as the global justice movement, alter-globalization movement, anti-globalist m ...
becoming increasingly notable after 1998. By 2007, there had been bestsellers promoting Keynesian or at least pro-
mixed economy policies; among them were
Naomi Klein's ''
The Shock Doctrine'' and Song Hongbing's ''
Currency Wars''. In the academic world, the partial shift towards Keynesian policy had gone largely unnoticed.
On Keynesian resurgence
In the wake of the
financial crisis of 2007–2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of ...
and the search for a way out of the crisis, a worldwide move toward Keynesian
deficit
A deficit is the amount by which a sum falls short of some reference amount.
Economics
* Balance of payments deficit, when the balance of payments is negative
* Government budget deficit
* Deficit spending, the amount by which spending exceeds ...
financing and general resurgence of Keynesian policies resulted in a new economic consensus, which involved reassessment or even reversal of normative judgments on a number of topics. The Keynesian view receiving most attention has been
fiscal stimulus,
applied by numerous states as a response to the
Great Recession
The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
. The IMF managing director
Dominique Strauss-Kahn
Dominique Gaston André Strauss-Kahn (; born 25 April 1949), also known as DSK, is a French economist and politician who served as the tenth managing director of the International Monetary Fund (IMF), and was a member of the French Socialist ...
advocated for global fiscal stimulus already in January 2008.
Gordon Brown built support for fiscal stimulus among global leaders at September's
UN General Assembly
The United Nations General Assembly (UNGA or GA; french: link=no, Assemblée générale, AG) is one of the six principal organs of the United Nations (UN), serving as the main deliberative, policymaking, and representative organ of the UN. Cur ...
, after which he secured George Bush's agreement for the first
G20 leaders summit. In late 2008 and 2009 fiscal stimulus packages were widely launched across the world, with packages in G20 countries averaging at about 2% of
GDP, with a ratio of public spending to tax cuts of about 2:1. The stimulus in Europe was notably smaller than in large G20 countries elsewhere. Other areas where opinion has shifted back towards a Keynesian perspective include:
*
Global trade imbalances. Keynes placed great importance on avoiding large
trade deficits or surpluses; following the Keynesian displacement, an influential view in the West was that governments need not be concerned about them. From late 2008, imbalances are once again widely seen as an area for government concern. In October 2010, the United States suggested a possible plan to address global imbalances, with targets to limit current account surpluses similar to those proposed by Keynes at
Bretton Woods Bretton Woods can refer to:
* Bretton Woods, New Hampshire, a village in the United States
**Bretton Woods Mountain Resort, a ski resort located in Bretton Woods, New Hampshire
*The 1944 Bretton Woods Conference, also known as the "United Nations ...
.
[
]
*
Capital control
Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account. These measure ...
s. Keynes strongly favoured the use of controls to restrain international capital movement, especially short term speculative flows; in the 1970s and 1980s, opinion among Western economists and institutions swung firmly against them. During 2009 and 2010 capital controls once again came to be seen as an acceptable part of a government's macroeconomic policy toolkit, though institutions like the IMF still caution against overuse. In contrast to stimulus policies, the return to favour of capital controls still had the momentum as of late 2012.
[
]
* Skepticism concerning the role of mathematics in academic economics and in economic decision making''.'' Despite his degree in
mathematics, Keynes remained skeptical about the usefulness of
mathematical models for solving economic problems. Mathematics became increasingly central to economics even during Keynes' career, and even more so in the decades following his death. While the Keynesian resurgence has seen no general reversal of opinion on the utility of complex math, there have been numerous calls for a broadening of economics to make further use of disciplines other than mathematics. In the practical spheres of
bank
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Becau ...
ing and
finance, there have been warnings against overreliance on
mathematical model
A mathematical model is a description of a system using mathematical concepts and language. The process of developing a mathematical model is termed mathematical modeling. Mathematical models are used in the natural sciences (such as physics, ...
s, which have been held up as one of the contributing causes of the 2008–2009 crises.
Among policy makers
In March 2008, leading free-market journalist
Martin Wolf
Martin Harry Wolf (born 16 August 1946 in London) is a British journalist of Austrian-Dutch descent who focuses on economics. He is the associate editor and chief economics commentator at the ''Financial Times''.
Early life
Wolf was born in ...
, chief economics commentator at the ''Financial Times'', announced the death of the dream of
global free-market capitalism, and quoted
Josef Ackermann, chief executive of
Deutsche Bank
Deutsche Bank AG (), sometimes referred to simply as Deutsche, is a German multinational investment bank and financial services company headquartered in Frankfurt, Germany, and dual-listed on the Frankfurt Stock Exchange and the New York Sto ...
, as saying "I no longer believe in the market's self-healing power." Shortly afterward, economist
Robert J. Shiller began advocating robust government intervention to tackle the financial crisis, citing Keynes. Macro economist
James K. Galbraith used the 25th Annual Milton Friedman Distinguished Lecture to launch a sweeping attack against the consensus for monetarist economics and argued that Keynesian economics were far more relevant for tackling the emerging crises.
Much discussion among policy makers reflected Keynes's advocacy of international coordination of fiscal or monetary stimulus, and of international economic institutions such as the IMF and World Bank, which he had helped to create at Bretton Woods in 1944, and which many argued should be reformed at a "new Bretton Woods"; this was evident at the G20 and
APEC
The Asia-Pacific Economic Cooperation (APEC ) is an inter-governmental forum for 21 member economies in the Pacific Rim that promotes free trade throughout the Asia-Pacific
Asia-Pacific (APAC) is the part of the world near the western Pac ...
meetings in Washington, D.C., and Lima, Peru in November 2008, and in coordinated reductions of interest rates by many countries in November and December 2008. IMF and
United Nations
The United Nations (UN) is an intergovernmental organization whose stated purposes are to maintain international peace and security, develop friendly relations among nations, achieve international cooperation, and be a centre for harmonizi ...
economists and political leaders such as British Prime Minister Gordon Brown advocated a coordinated international approach to fiscal stimulus.
World Bank's President
Robert Zoellick
Robert Bruce Zoellick (; ; born July 25, 1953) is an American public official and lawyer who was the eleventh president of the World Bank, a position he held from July 1, 2007 to June 30, 2012. He was previously a managing director of Goldman Sa ...
advocated that all developed countries pledge 0.7 percent of their stimulus package to a vulnerability fund for assisting developing countries.
Donald Markwell and others argued that the absence of an effective international approach in the spirit of Keynes would risk a return of economic causes of international conflict, which Keynes had identified back in the 1930s.
The first nation to announce a substantial fiscal stimulus was Great Britain, with
Chancellor
Chancellor ( la, cancellarius) is a title of various official positions in the governments of many nations. The original chancellors were the of Roman courts of justice—ushers, who sat at the or lattice work screens of a basilica or law cou ...
Alistair Darling
Alistair Maclean Darling, Baron Darling of Roulanish, (born 28 November 1953) is a British politician who served as Chancellor of the Exchequer under Prime Minister Gordon Brown from 2007 to 2010. A member of the Labour Party, he was a Member ...
referring to Keynes as he unveiled plans for fiscal stimuli to head off the worst effects of recession. These measures were later described by
Ed Balls
Edward Michael Balls (born 25 February 1967) is a British broadcaster, writer, economist, professor and former politician who served as Secretary of State for Children, Schools and Families from 2007 to 2010, and as Shadow Chancellor of the Exc ...
as the first time a postwar British government had been able to meet a recession with a "classic Keynesian response". In his autobiography published in 2011, Darling recounts how his response to the crisis was "influenced hugely by Keynes's thinking, indeed, as were most other governments".
Darling's stimulus announcement was swiftly followed by a similar declaration from China, and over the next few weeks and months from European countries, the U.S. and other countries across the world. In a speech on 8 January 2009, President-elect
Barack Obama
Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party (United States), Democratic Party, Obama was the first Af ...
unveiled a plan for extensive domestic spending to combat recession, further reflecting Keynesian thinking. The plan was signed by him on 17 February 2009. There had been extensive debate in
United States Congress
The United States Congress is the legislature of the federal government of the United States. It is bicameral, composed of a lower body, the House of Representatives, and an upper body, the Senate. It meets in the U.S. Capitol in Washi ...
concerning the necessity, adequacy, and likely effects of the package, which was cut from $819 to $787 billion during its passage through the
Senate
A senate is a deliberative assembly, often the upper house or chamber of a bicameral legislature. The name comes from the ancient Roman Senate (Latin: ''Senatus''), so-called as an assembly of the senior (Latin: ''senex'' meaning "the e ...
.
On 21 January 21, 2010, the
Volcker Rule
The Volcker Rule iof the Dodd–Frank Wall Street Reform and Consumer Protection Act (). The rule was originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from ma ...
was endorsed by President Obama. It was a proposal by United States economist
Paul Volcker to restrict banks from making
speculative investments that do not benefit their customers. Volcker had argued that such speculative activity played a key role in the recent worldwide financial crisis. Plans for a new $180 billion stimulus plan were announced by Obama in September 2010.
A renewed interest in Keynesian ideas was not limited to Western countries and stimulus plans were a common response to the crisis from nations across the globe. Stimulus packages in Asia were on a par with those in Europe and America. In a speech delivered in March 2009 entitled ''Reform the International Monetary System'',
Zhou Xiaochuan, the governor of the
People's Bank of China
The People's Bank of China (officially PBC or informally PBOC; ) is the central bank of the People's Republic of China, responsible for carrying out monetary policy and regulation of financial institutions in mainland China, as determined by ...
, revived Keynes's idea of a centrally managed global
reserve currency
A reserve currency (or anchor currency) is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international tr ...
. Dr Zhou argued that it was unfortunate that Keynes's
bancor proposal was not accepted at
Bretton Woods Bretton Woods can refer to:
* Bretton Woods, New Hampshire, a village in the United States
**Bretton Woods Mountain Resort, a ski resort located in Bretton Woods, New Hampshire
*The 1944 Bretton Woods Conference, also known as the "United Nations ...
in the 1940s. He argued that national currencies were unsuitable for use as global reserve currencies as a result of the
Triffin dilemma and the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries' demand for reserve currency. Zhou proposed a gradual move towards adopting IMF
special drawing rights
Special drawing rights (SDRs, code ) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). SDRs are units of account for the IMF, and not a currency ''per se''. They represent a claim ...
(SDRs) as a centrally managed global reserve currency. Zhou's view was echoed in June 2009 by the IMF, and in September was described by the ''Financial Times'' as the boldest statement of the year to come from China.
In a widely read article on
dollar hegemony published in ''
Asia Times Online
''Asia Times'' (), formerly known as ''Asia Times Online'', is a Hong Kong-based English language news media publishing group, covering politics, economics, business and culture from an Asian perspective. ''Asia Times'' publishes in English and ...
'' on 11 April 2002, Henry C.K. Liu asserted that "The Keynesian starting point is that full employment is the basis of good economics. It is through full employment at fair wages that all other economic inefficiencies can best be handled, through an accommodating monetary policy." Liu also advocated denominating Chinese exports in Chinese currency (
RMB), as a step to free China from the constraints of excessive reliance on the dollar.
Efficacy
According to
Anatole Kaletsky
Anatole Kaletsky (born 1 June 1952) is an economist and journalist based in the United Kingdom. He has written since 1976 for ''The Economist'', ''The Financial Times'' and ''The Times of London'' before joining Reuters and ''The International ...
, Keynesian stimuli were rapidly followed by "revivals of growth in one country after another, roughly in proportion to the size of the various stimulus plans". China was one of the first nations to launch a substantial fiscal stimulus package, estimated at $586 billion spread over two years, and in February 2009 the ''Financial Times'' reported that both government officials and private investors were seeing signs of recovery, such as rises in commodity prices, a 13% rise in the Chinese stock market over a period of 10 days, and a big increase in lending, reflecting the government's success in using state-owned banks to inject
liquidity
Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include:
* Market liquidity, the ease with which an asset can be sold
* Accounting liquidity, the ability to meet cash obligations when due
* Liqu ...
into the real economy.
Reviewing events from 2010, economics commentator
John Authers
John Authers (born 1966), is a British financial journalist and finance author, who spent almost three decades reporting at the ''Financial Times'' (including becoming Chief Markets Commentator and global head of the ''Lex Column''), before movin ...
found that the stimulus and associated expansionary monetary policy had a dramatic effect in reviving the Chinese economy. The
Shanghai index had been falling sharply since the September 2008
bankruptcy of Lehman Brothers
The bankruptcy of Lehman Brothers on September 15, 2008, was the climax of the subprime mortgage crisis. After the financial services firm was notified of a pending credit downgrade due to its heavy position in subprime mortgages, the Federal R ...
, but the decline was halted when news of the planned stimulus leaked in late October. The day after the stimulus was officially announced, the Shanghai index immediately rose by 7.3%, followed by sustained growth.
Speaking at the 2010
Summer Davos
The World Economic Forum (WEF) is an international non-governmental and lobbying organisation based in Cologny, canton of Geneva, Switzerland. It was founded on 24 January 1971 by German engineer and economist Klaus Schwab. The foundation, w ...
, Premier
Wen Jiabao
Wen Jiabao (born 15 September 1942) is a retired Chinese politician who served as the Premier of the State Council from 2003 to 2013. In his capacity as head of government, Wen was regarded as the leading figure behind China's economic polic ...
also credited the stimulus for good performance of the Chinese economy over the past two years.
As late as April 2009,
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a centra ...
ers and finance ministers remained cautious about the overall
global economy
The world economy or global economy is the economy of all humans of the world, referring to the global economic system, which includes all economic activities which are conducted both within and between nations, including production, consumpti ...
; by May, the ''Financial Times'' was reporting that according to a package of
leading indicators
An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles. Economic in ...
there were signs that recovery was imminent in Europe too, after a trough in March. The United States was one of the last major economies to implement a major stimulus plan, and the slowdown there looked set to continue for at least a few more months. There was also a rise in business and consumer confidence across most of Europe, and especially in the emerging economies such as Brazil, Russia and India.
In June, the
Organisation for Economic Co-operation and Development
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organization, intergovernmental organisation with 38 member countries ...
(OECD) reported improvements in global economic outlook, with an overall growth forecast for 2010. The OECD gave the credit to stimulus plans, which they warned should not be rolled back too swiftly. The IMF also reported a better than expected global economic outlook in July, though warning that the recovery is likely to be slow. They credited the "unprecedented" global policy response and echoed the OECD in urging leaders to avoid complacency and not to unwind recession fighting fiscal and monetary policies too soon.
In a widely
syndicated
Syndication may refer to:
* Broadcast syndication, where individual stations buy programs outside the network system
* Print syndication, where individual newspapers or magazines license news articles, columns, or comic strips
* Web syndication, ...
article published in August 2009,
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was t ...
announced that the world had been saved from the threat of a second great
depression, thanks to "
Big Government
Big government is a pejorative term for a government or public sector that is considered excessively large or unconstitutionally involved in certain areas of public policy or the private sector.
The term may also be used specifically in relatio ...
". The United States economy emerged from
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
in the third quarter of 2009, which the ''Financial Times'' credited to the stimulus measures. In November, the managing director of the IMF Dominique Strauss-Kahn repeated the warning against terminating the stimulus measures too soon. The ''Financial Times'' reported that significant differences had emerged even within Europe, with senior members of the
European Central Bank
The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...
expressing concern about the risk of delaying the exit for too long.
On 8 December 2009, President Obama unveiled what the ''Financial Times'' described as a "second stimulus plan" for additional job creation
using approximately $200 billion of unused funds that had been pre-approved for the
Troubled Asset Relief Program
The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by Congress and signed into law by President ...
. In the same speech he expressed the view that the initial stimulus had already saved or created 1.6 million jobs. In an article looking back at 2009, economist
Arvind Subramanian
Arvind Subramanian is an Indian economist and the former Chief Economic Advisor to the Government of India, having served from 16 October 2014 to 20 June 2018. Subramanian is currently a Senior Fellow at the Watson Institute for International ...
wrote in the ''Financial Times'' that economics had helped to redeem itself by providing advice for the policy responses that successfully prevented a global slide into depression, with the fiscal policy stimulus measures taking their "cue from Keynes".
In July 2010, economics journalist Robin Harding wrote for the ''Financial Times'' that most American economists are in agreement regarding the large influence of the United States stimulus on the economy, although he mentioned high-profile dissenters such as
Robert Barro and
John B. Taylor. Barro's arguments against the effectiveness of the stimulus have been addressed by Keynesian economics professor
J. Bradford DeLong
James Bradford "Brad" DeLong (born June 24, 1960) is an economic historian who is a professor of economics at the University of California, Berkeley. DeLong served as Deputy Assistant Secretary of the U.S. Department of the Treasury in the Clin ...
.
A July 2010 paper by
Moody's Investors Service
Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internation ...
's chief economist Mark Zandl and former Federal Reserve Vice Chairman
Alan Blinder predicted that the United States recession would have been far worse without the government intervention. They calculate that in the absence of both a monetary and fiscal response, unemployment would have peaked at about 16.5% instead of about 10%, the peak to trough
GDP decline would have been about 12% instead of 4%. Despite the lack of
deficit spending
Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
, without the intervention the 2010 and 2011
United States federal budget
The United States budget comprises the spending and revenues of the U.S. federal government. The budget is the financial representation of the priorities of the government, reflecting historical debates and competing economic philosophies. T ...
deficit was forecast to be almost two times larger, due to the predicted collapse of tax receipts.
In August 2010, a report from the non-partisan
Congressional Budget Office
The Congressional Budget Office (CBO) is a federal agency within the legislative branch of the United States government that provides budget and economic information to Congress.
Inspired by California's Legislative Analyst's Office that manag ...
found the United States stimulus to have boosted growth by as much as 4.5%.
House of Representatives
House of Representatives is the name of legislative bodies in many countries and sub-national entitles. In many countries, the House of Representatives is the lower house of a bicameral legislature, with the corresponding upper house often c ...
Minority Leader
John Boehner expressed skepticism about the report's accuracy. In March 2011, citing studies on the effectiveness of fiscal stimulus from several dozen economists and international bodies,
David Romer
David Hibbard Romer (born March 13, 1958) is an American economist, the Herman Royer Professor of Political Economy at the University of California, Berkeley, and the author of a standard textbook in graduate macroeconomics as well as many infl ...
told the IMF that "we should view the question of whether fiscal stimulus is effective as settled."
[
]
Calls for further extensions
In 2009, there were several books published by economists advocating a further shift towards Keynesian thinking. The authors advocated further reform in academic economics, policy making, and even the public's general ethics.
Theoretical arguments regarding the relative merits of
free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any o ...
versus
mixed economy policies do not always yield a clear conclusion. In his 2009 book ''
Keynes: The Return of the Master'', economic historian
Lord Skidelsky
Robert Jacob Alexander, Baron Skidelsky, (born 25 April 1939) is a British economic historian. He is the author of a three-volume award-winning biography of British economist John Maynard Keynes (1883–1946). Skidelsky read history at Jesus ...
has a chapter comparing the performance of the world economy between the "
golden age" period of 1951–1973, when Keynesian policies were dominant, with the
Washington Consensus period of 1981–2008, when free market policies were adopted by leading governments.
Samuel Brittan
Sir Samuel Brittan (29 December 1933 – 12 October 2020) was an English journalist and author. He was the first economics correspondent for the ''Financial Times'', and later a long-time columnist. He was a member of the Academic Advisory Council ...
of the ''Financial Times'' called this part of the book the key chapter for the practically inclined reader. Using data from the IMF, Skidelsky finds superior economic performance on a whole range of
metrics, except for inflation where he says there was no significant difference.
Skidelsky suggests the high global growth during the golden age was especially impressive given that during that period Japan was the only major Asian economy enjoying high growth; the exceptional growth of China and other Asian emerging economies, raising the global average, happened later. He also comments that the golden age, compared with other periods, was substantially more stable.
Martin Wolf
Martin Harry Wolf (born 16 August 1946 in London) is a British journalist of Austrian-Dutch descent who focuses on economics. He is the associate editor and chief economics commentator at the ''Financial Times''.
Early life
Wolf was born in ...
found that in 1945–1971 (27 years) the world saw only 38 financial crises, whereas in 1973–1997 (24 years) there were 139. Skidelsky also reports that inequality was generally decreasing during the golden age, whereas since the Washington Consensus was formed it has been increasing. He notes that South America has been an exception to the general rise in inequality; since the late 1990s, inequality has been falling there, which
James K. Galbraith explains as likely due to the region's early
"retreat from neoliberal orthodoxy".
In his 2009 book ''The Keynes Solution'',
post-Keynesian
Post-Keynesian economics is a school of economic thought with its origins in '' The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidne ...
economist
Paul Davidson makes another historical case for the effectiveness of Keynesian policy, referring to the experience of the United States during the
Great Depression. He notes how economic growth and employment levels increased for four successive years as the
New Deal
The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs agencies included the Civilian Con ...
policies were pursued by President Roosevelt. When government spending was cut back in 1937 due to concerns about the budget deficit, all the gains were lost in one year, and growth only resumed after spending increased again from 1938, as a response to growing acceptance of deficit spending in a recession and later due to
World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the World War II by country, vast majority of the world's countries—including all of the great power ...
. For Davidson, this experience validates the view that Keynesian policy has the power to deliver
full employment and prosperity for a government's entire labor force. Davidson also wrote that both price stability and employment in the Keynesian age were superior even to the classical
gold standard
A gold standard is a Backed currency, monetary system in which the standard economics, economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the ...
era that was terminated by
World War I
World War I (28 July 1914 11 November 1918), often abbreviated as WWI, was List of wars and anthropogenic disasters by death toll, one of the deadliest global conflicts in history. Belligerents included much of Europe, the Russian Empire, ...
.
On 8 November 2008, Paul Davidson and Henry C.K. Liu co-authored an open letter to world leaders attending the November 15
White House
The White House is the official residence and workplace of the president of the United States. It is located at 1600 Pennsylvania Avenue Northwest, Washington, D.C., NW in Washington, D.C., and has been the residence of every U.S. preside ...
summit on financial markets and world economy, urging reconsideration of Keynes' analytical system that contributed to the golden age of the first quarter century after World War II. The letter, signed by many supporting economists, advocates a new international financial architecture based on an updated 21st century version of the Keynes Plan originally proposed at
Bretton Woods Bretton Woods can refer to:
* Bretton Woods, New Hampshire, a village in the United States
**Bretton Woods Mountain Resort, a ski resort located in Bretton Woods, New Hampshire
*The 1944 Bretton Woods Conference, also known as the "United Nations ...
in 1944.
The letter ends by describing this new international financial architecture as aiming to create (1) a new global monetary regime that operates without currency hegemony, (2) global trade relationships that support rather than retard domestic development and (3) a global economic environment that promotes incentives for each nation to promote full employment and raise wages for its labor force.
In academia
A marked shift towards Keynesian thinking took place among prominent economists. Some, such as Paul Krugman, James Galbraith and Brad Delong, were already Keynesians but in 2008 began to get considerably more attention for their advocacy of Keynesian policy. Others, such as
Richard Posner
Richard Allen Posner (; born January 11, 1939) is an American jurist and legal scholar who served as a federal appellate judge on the U.S. Court of Appeals for the Seventh Circuit from 1981 to 2017. A senior lecturer at the University of Chicag ...
and
Martin Feldstein, had previously been associated with anti-Keynesian thinking, yet by 2009 publicly converted to Keynesian economics, which made considerable impact on other economists. Posner's 2009 book, ''
A Failure of Capitalism'', was a critique of
laissez-faire
''Laissez-faire'' ( ; from french: laissez faire , ) is an economic system in which transactions between private groups of people are free from any form of economic interventionism (such as subsidies) deriving from special interest groups. ...
capitalism and its ideologues.
["Seven questions for Richard Posner," Interview with Richard Posner, '']The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Econ ...
'', 6 June 2009, found a
''The Economist'' website
Accessed September 30, 2013.
This shift towards Keynesian thinking was widely shared by many politically active economists across the world. In the years leading up to the resurgence, Germany had been home to some of the most outspoken critics of Keynesianism, yet according to economist Sebastian Dullien writing in December 2008, "important voices in the German economic profession are now calling for a large stimulus package, passed as quickly as possible".
''
The New York Times
''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid ...
'' reported that in the March 2008 annual meeting of the
American Economic Association, economists had remained hostile or at least sceptical about the government’s role in enhancing the market sector or mitigating recession with fiscal stimulus. But already during the January 2009 meeting virtually everyone voiced their support for such measures.
There were a few high-profile known dissenter economists, such as Robert Barro and
Eugene Fama
Eugene Francis "Gene" Fama (; born February 14, 1939) is an American economist, best known for his empirical work on portfolio theory, asset pricing, and the efficient-market hypothesis.
He is currently Robert R. McCormick Distinguished Servic ...
, but in 2008 and early 2009 their objections had little influence on the mainstream debate. A dissenter from Germany had been
Stefan Homburg, who in January 2009 complained "I simply cannot understand how so many economics professors have done a complete U-turn. Have they all gone mad?" Among the less publicly prominent economists, who tend to debate only with their fellows and write mainly in technical journals, a substantial shift in opinion was less obvious. Speaking in March 2009, Galbraith stated that he had not detected any changes among academic economists, nor a re-examination of orthodox opinion in the journals.
Until 2008, the consensus among most mainstream economists was that fiscal stimulus did not work.
New Keynesians and
New Classical economists had previously agreed
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often ...
was sufficient for most downturns and the two schools of thought debated only technicalities. The extent of the recession made the New Keynesians re-evaluate the potential of large stimulus, and their debates with New Classical economists, who often opposed stimulus entirely, became substantive. Some economists (primarily
post-Keynesians
Post-Keynesian economics is a school of economic thought with its origins in '' The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney ...
) accused the New Keynesian system of being so integrated with pro-free market neo-classical influences that the label 'Keynesian' in this case could be considered a misnomer.
The 2008 financial crisis has led economists to pay greater attention to Keynes's original theories. In February 2009, Robert Shiller and
George Akerlof
George Arthur Akerlof (born June 17, 1940) is an American economist and a university professor at the McCourt School of Public Policy at Georgetown University and Koshland Professor of Economics Emeritus at the University of California, Berkeley. ...
argued in their book ''
Animal Spirits'' that the current United States stimulus package was too small, because it did not take into account loss of confidence or do enough to restore the availability of credit. In a September 2009 article for ''The New York Times'', on the lessons economists should learn from the crisis, Krugman urged economists to move away from
neoclassical models and employ Keynesian analysis, writing:
By mid-2010, interest in Keynes' ideas was still growing within academia, even though the apparent consensus among prominent economists had fractured and the revival in Keynesian policy making had to some degree stalled.
[
]
In October 2011, journalist
John Cassidy noted the large number of new books that had recently come out about Keynes, including from leading universities such as
Cambridge
Cambridge ( ) is a university city and the county town in Cambridgeshire, England. It is located on the River Cam approximately north of London. As of the 2021 United Kingdom census, the population of Cambridge was 145,700. Cambridge beca ...
and
MIT, with more books due to come out towards the end of that year.
[
]
Criticism
Keynesian ideas also attracted considerable criticism in this time period. While from late 2008 to early 2010 there was broad consensus among international leaders concerning the need for coordinated stimulus, the German administration initially stood out in their reluctance to fully embrace Keynesian policy. In December 2008, Finance Minister
Peer Steinbrück of Germany criticised Gordon Brown's advocacy of Keynesian stimulus, saying "The switch from decades of
supply-side politics all the way to a crass Keynesianism is breathtaking." By the end of January 2009, Germany had announced a second stimulus plan which, relative to GDP, was larger than Britain's.
George Osborne
George Gideon Oliver Osborne (born Gideon Oliver Osborne; 23 May 1971) is a former British politician and newspaper editor who served as Chancellor of the Exchequer from 2010 to 2016 and as First Secretary of State from 2015 to 2016 in the ...
, at the time
shadow
A shadow is a dark area where light from a light source is blocked by an opaque object. It occupies all of the three-dimensional volume behind an object with light in front of it. The cross section of a shadow is a two-dimensional silhouette ...
British chancellor, opposed a return to Keynesian policy from as early as October 2008, saying "even a modest dose of Keynesian spending" could act as a "cruise missile aimed at the heart of recovery."
Critics argued that Keynesian policy would be counter-productive for the reasons of being inflationary, creating more income disparity, and causing consumers to rein in their spending even more as they anticipated future tax increases. In 2009, more than 300 professional economists, led by three
Nobel laureates in economics,
James M. Buchanan,
Edward C. Prescott
Edward Christian Prescott (December 26, 1940 – November 6, 2022) was an American economist. He received the Nobel Memorial Prize in Economics in 2004, sharing the award with Finn E. Kydland, "for their contributions to dynamic macroeconomics: ...
, and
Vernon L. Smith, signed a statement against more government spending, arguing that "Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth."
Robert Barro, an economics professor at
Harvard University
Harvard University is a private Ivy League research university in Cambridge, Massachusetts. Founded in 1636 as Harvard College and named for its first benefactor, the Puritan clergyman John Harvard, it is the oldest institution of high ...
(author of the 1974
Ricardian equivalence hypothesis postulating that government stimuli are inefficient in a perfect market), argued that the United States stimulus spending might be unwise because of one of the factors the
American Recovery and Reinvestment Act of 2009
The American Recovery and Reinvestment Act of 2009 (ARRA) (), nicknamed the Recovery Act, was a stimulus package enacted by the 111th U.S. Congress and signed into law by President Barack Obama in February 2009. Developed in response to the Gr ...
depended on for its effectiveness, the "multiplier effect"; the
fiscal multiplier
In economics, the fiscal multiplier (not to be confused with the money multiplier) is the ratio of change in national income arising from a change in government spending. More generally, the exogenous spending multiplier is the ratio of change i ...
, required to be over the value of one for the effect to take place, was in practice close to zero, not 1.5, as he said the Obama team were assuming, which means the extra employment generated by the stimulus would be cancelled out by less output and investment in the private sector. A group of German economists had also argued that the size of the multiplier effect was overestimated, while the Memorandum Group of German Economics Professors claimed the opposite and demanded a larger stimulus.
Economist Edward Prescott (author of the
real business-cycle model that post-Keynesians hold failed to forecast the crisis) and economist Eugene Fama argued that stimulus plans are unlikely to have a net positive effect on employment, and may even harm it. Economist
Jeffrey Sachs
Jeffrey David Sachs () (born 5 November 1954) is an American economist, academic, public policy analyst, and former director of The Earth Institute at Columbia University, where he holds the title of University Professor. He is known for his work ...
doubted a positive effect because the stimulus and associated policies "may work in the short term but they threaten to produce still greater crises within a few years". In a June 2010 article, referring to the cooling of enthusiasm for further stimulus found among policy makers at the
2010 G-20 Toronto summit
The 2010 G20 Toronto summit was the fourth meeting of the G20 heads of state/government, to discuss the global financial system and the world economy, which took place at the Metro Toronto Convention Centre in Toronto, Ontario, Canada, during J ...
, Sachs declared that Keynesian economics is facing its "last hurrah".
There have also been arguments that the
Great Recession
The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
of the early 21st century was caused not by excessively free markets but by the remnants of Keynesian policy.
Luigi Zingales
Luigi Zingales (; born 8 February 1963 in Padua, Italy) is a finance professor at the University of Chicago Booth School of Business and the author of two widely-reviewed books. His book ''Saving Capitalism from the Capitalists'' (2003) is a stu ...
of the
University of Chicago
The University of Chicago (UChicago, Chicago, U of C, or UChi) is a private university, private research university in Chicago, Illinois. Its main campus is located in Chicago's Hyde Park, Chicago, Hyde Park neighborhood. The University of Chic ...
argued that "Keynesianism is just a convenient ideology to hide corruption and political patronage".
[
] In February 2009,
Alan Reynolds, senior fellow at the
Cato Institute
The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of Koch Industries.Koch Indus ...
, acknowledged the Keynesian resurgence but stated that evidence from various studies suggest Keynesian remedies will be ineffective and Keynesian advocates appear to be driven by blind faith. In 2009, historian
Thomas Woods, an adherent to the
Austrian school of economics
The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian school ...
, published the book ''
Meltdown
Meltdown may refer to:
Science and technology
* Nuclear meltdown, a severe nuclear reactor accident
* Meltdown (security vulnerability), affecting computer processors
* Mutational meltdown, in population genetics
Arts and entertainment Music
* ...
'', which places blame for the crisis on government intervention and points to the Federal Reserve as the primary culprit behind the financial calamity.
Professor
John Bellamy Foster, a sociologist, questioned whether the resurgence had been truly Keynesian in character. He suggested those few economists he regards as genuinely
progressive
Progressive may refer to:
Politics
* Progressivism, a political philosophy in support of social reform
** Progressivism in the United States, the political philosophy in the American context
* Progressive realism, an American foreign policy par ...
, such as James Galbraith, were now far from the centre of government. He also asserted that it is
Karl Marx
Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
, not Keynes, that society should look to for a full solution to economic problems.
Aftermath: 2010 and later
According to
Henry Farrell and
John Quiggin
John Quiggin (born 29 March 1956) is an Australian economist, a professor at the University of Queensland. He was formerly an Australian Research Council Laureate Fellow and Federation Fellow and a member of the board of the Climate Change Au ...
, the previous apparent consensus for Keynesian policy among prominent economists by late 2009 began to dissolve into dissensus. There was no reversal to the previous free-market consensus, but the apparent unity of the previous year had gone. In part this was due to objections from anti-Keynesians like Robert Barro attracting wider attention, in part to the intervention of elite economists who had previously kept out of the debate, specifically from the
ECB but also others, including Jeffery Sachs. The lack of consensus among expert opinion made policy makers vulnerable to calls for abandonment of Keynesian policy in favour of fiscal consolidation.
In April 2010, a communiqué from the
Washington meeting of finance ministers called for continuation of the stimulus policies until the recovery is firmly entrenched with strong private sector activity, though it accepted that some countries had already begun to exit from the policies. By mid-2010, the earlier global consensus for ongoing Keynesian stimulus had fractured, mirroring the "dissensus" that had emerged among prominent economists. Especially in Europe, there was an increase in rhetoric calling for immediate fiscal tightening, following events such as the
Greek debt crisis
Greece faced a sovereign debt crisis in the aftermath of the financial crisis of 2007–2008. Widely known in the country as The Crisis (Greek: Η Κρίση), it reached the populace as a series of sudden reforms and austerity measures that l ...
and the displacement in Britain of the
Labour government with a coalition dominated by the
Conservatives
Conservatism is a cultural, social, and political philosophy that seeks to promote and to preserve traditional institutions, practices, and values. The central tenets of conservatism may vary in relation to the culture and civilization i ...
after the
May 2010 elections. While some high level officials, particularly from the United States and India, continued advocating sustained stimulus until the global recovery is better established, a communiqué from the G20, issued after their June 2010 meeting of finance ministers in
Busan
Busan (), officially known as is South Korea's most populous city after Seoul, with a population of over 3.4 million inhabitants. Formerly romanized as Pusan, it is the economic, cultural and educational center of southeastern South Korea ...
, welcomed the trend towards fiscal consolidation rather than further deficit financed stimulus. The G20 did reiterate that forceful government intervention had been the correct response in 2008 and 2009. Then IMF managing director Dominique Strauss-Kahn, who had been a leading advocate for stimulus spending from as early as January 2008, said he was comfortable with the reversal.
European political leaders embarked on substantial
austerity
Austerity is a set of political-economic policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both. There are three primary types of austerity measures: higher taxes to fund spendi ...
drives. In July 2010, leading European economic policy maker
Jean-Claude Trichet
Jean-Claude Trichet (; born 20 December 1942) is a French economist who served as President of the European Central Bank from 2003 to 2011. Previous to his assumption of the presidency he served as Governor of the Bank of France from 1993 to 20 ...
, president of the ECB, stated that it was time for all industrial nations to stop stimulating and start tightening. Keynesian economists and Keynes biographer Lord Skidelsky contested the move to implement cuts given the still fragile economy.
In a July 2010 article, ''Financial Times'' columnist
Philip Stephens argued that recent events show the markets to have re-established themselves as leading influences on western economic policy, while Brad DeLong wrote that he considered himself and fellow Keynesians to have lost the argument for fiscal stimulus.
In April 2011, Professor
Patrick Dunleavy wrote that the resurgence has caused a "backlash against the State", starting in America with movements like the
Tea Party and later spreading to Europe. He also stated it is likely that ideological wars between rival economic world views have returned for good. In September,
Steven Rattner opined that the
2012 United States presidential election
The 2012 United States presidential election was the 57th quadrennial presidential election, held on Tuesday, November 6, 2012. Incumbent Democratic President Barack Obama and his running mate, incumbent Vice President Joe Biden, were re ...
was shaping up to be a contest between the economic policies of Keynes and Friedrich Hayek, or "a clash of ideologies the likes of which America has not seen in decades." Republican candidates openly praised Hayek and
Ludwig von Mises
Ludwig Heinrich Edler von Mises (; 29 September 1881 – 10 October 1973) was an Austrian School economist, historian, logician, and sociologist. Mises wrote and lectured extensively on the societal contributions of classical liberalism. He is ...
. According to Rattner, while the Democrats economic strategy remained largely based on Keynes, the economist's name was now rarely mentioned; ''Keynes'' had become an almost politically toxic word due to the extensive criticism of the 2009 Keynesian stimulus. Rattner refers to the work of Alan Blinder and
Mark Zandi, which determined that the 2009 United States stimulus saved about 8.5 million jobs, and with Obama's third stimulus, a $450 billion ''Jobs plan'' was projected to create 1.9 million jobs in 2012. Also in September, President of the
European Commission
The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
José Manuel Barroso
José Manuel Durão Barroso (; born 23 March 1956) is a Portuguese politician and university teacher, currently serving as non-executive chairman of Goldman Sachs International. He previously served as the 11th president of the European Commi ...
called for additional fiscal policy to boost
economic growth, while recognizing many European countries did not at that time have the capability to launch a substantial stimulus program. German Chancellor
Angela Merkel
Angela Dorothea Merkel (; ; born 17 July 1954) is a German former politician and scientist who served as Chancellor of Germany from 2005 to 2021. A member of the Christian Democratic Union (CDU), she previously served as Leader of the Op ...
rejected the idea of further stimulus.
By November 2011, efforts to pass Obama's
American Jobs Act had been rejected by the United States Congress. In Britain,
David Cameron
David William Donald Cameron (born 9 October 1966) is a British former politician who served as Prime Minister of the United Kingdom from 2010 to 2016 and Leader of the Conservative Party from 2005 to 2016. He previously served as Leader o ...
made a speech in which he recognized a deteriorating economic outlook but said those arguing for traditional fiscal stimulus were "dangerously wrong". Simon Cox, Asia economics editor for ''The Economist'', predicted that while China might face future economic challenges, the incoming leaders expected to take over the top positions in late 2012 (
Xi Jinping
Xi Jinping ( ; ; ; born 15 June 1953) is a Chinese politician who has served as the general secretary of the Chinese Communist Party (CCP) and chairman of the Central Military Commission (CMC), and thus as the paramount leader of China, ...
and
Li Keqiang
Li Keqiang (born 1 July 1955) is a Chinese politician who is the outgoing premier of China. An economist by profession, Li is head of China's executive branch as well as one of the leading figures behind China's Financial and Economic Affai ...
) were far less likely than their predecessor to respond with Keynesian policies. Also in November, ''The Courageous State'' book was released by the anti-tax evasion campaigner
Richard Murphy, calling for a revival of the Keynesian resurgence, which he argues is the best economic policy for the interests of ordinary people. Murphy sees the resurgence as having faded out by late 2009. Influential figures that had come out against Keynesian policy, even from left of center politics, include the UK Labour Party's
Maurice Glasman
Maurice Glasman, Baron Glasman (born 8 March 1961) is an English political theorist, academic, social commentator, and Labour life peer in the House of Lords. He is a senior lecturer in Political Theory at London Metropolitan University, Directo ...
, whose favorite economist is Hayek, and the diplomat
Carne Ross
Carne Ross (born 1966) is the founder and executive director of Independent Diplomat, a diplomatic advisory group.
Career
After graduating from Exeter University, Ross joined the British Foreign Office and worked at the UK embassy in Bonn, ...
, who asserted that no form of centralized authority can meet the problems of the modern world, arguing for an anti-statist form of
participatory democracy
Participatory democracy, participant democracy or participative democracy is a form of government in which citizens participate individually and directly in political decisions and policies that affect their lives, rather than through elected rep ...
instead.
In January 2012, Philip Stephens repeated his earlier view that the markets once again have decisive influence on economic policy making, also noting a decline in the public's trust in government in both Europe and the US, along with greater concern over
public debt.
In March however, while accepting that the resurgence had stalled, Paul Krugman expressed optimism about the long term prospects of achieving a lasting shift towards Keynesianism in both mainstream economics and policy making.
In May, Krugman published the book ''End this Depression Now!'', where he repeated his calls for greater use of fiscal stimulus, though according to the ''Financial Times'' his proposals were both "modest" and "cautious", reflecting the resistance to such measures since the end of resurgence.
In June, Krugman and
Richard Layard launched ''A manifesto for economic sense'', where they call for greater use of stimulatory fiscal policy to reduce unemployment and boost growth. By mid-2012, with the ongoing
Euro crisis and persistent high unemployment in the US, there had been renewed consideration of stimulus policies by European and American policy makers but no return to the pro-stimulus consensus that existed in 2009. After the
2012 G8 summit, leaders issued a statement recognising the range of opinions concerning the best measures to strengthen their economies.
In January 2013, Japan's recently elected conservative government announced a ten trillion
yen Keynesian stimulus package, which was to include public works and create an expected 600,000 new jobs. At the same time, the ''Financial Times'' published Wolfgang Münchau's article "US joins misguided pursuit of austerity", as the United States was abandoning the relatively stimulatory policy it had adopted prior to 2013, repeating, in the author's view, Europe's mistake. In July 2013,
Philip Mirowski wrote that not only had the Keynesian resurgence subsided but the rival economic orientation of
neoliberalism
Neoliberalism (also neo-liberalism) is a term used to signify the late 20th century political reappearance of 19th-century ideas associated with free-market capitalism after it fell into decline following the Second World War. A prominent ...
had emerged from the financial crisis stronger than ever.
In May 2016, three IMF economists published new research findings and criticized some of the fundamental assumptions of the neoliberal doctrine. They warned that austerity policies could do more harm than good because of their social costs, such as increased inequality, which "in turn hurts the level and sustainability of growth". Speaking of capital account liberalization, that is unrestricted movement of capital across international borders ("openness") and fiscal consolidation, meaning policies to reduce fiscal deficits and debt levels ("austerity"), they wrote: "Since both openness and austerity are associated with increasing income inequality, this distributional effect sets up an adverse feedback loop. The increase in inequality engendered by financial openness and austerity might itself undercut growth, the very thing that the neoliberal agenda is intent on boosting. There is now strong evidence that inequality can significantly lower both the level and the durability of growth".
Additionally, they recommended actively combating inequality by redistributing wealth via taxes and government spending, noting "the evidence of the economic damage from inequality suggests that policymakers should be more open to redistribution than they are" and "the fear that such policies will themselves necessarily hurt growth is unfounded".
By October 2016, there had been recent increases in fiscal stimulus for many countries, along with calls for this return to fiscal stimulus and demand management policies to increase further, or at least for further research into clarifying the scope for such policies to be effective. Among these who made such calls were the IMF,
Janet Yellen
Janet Louise Yellen (born August 13, 1946) is an American economist serving as the 78th United States secretary of the treasury since January 26, 2021. She previously served as the 15th chair of the Federal Reserve from 2014 to 2018. Yellen is t ...
, and senior White House economist
Jason Furman. While some economists and government policy makers remain sceptical, Martin Sandbu for the ''Financial Times'' said a return to Keynes original positive views about demand management is underway. Sandbu calls this "paleo-Keynesianism" to differentiate from "new Keynesianism" thinking which had relatively little to say in favour of state intervention in the economy.
See also
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History of macroeconomic thought
Macroeconomic theory has its origins in the study of business cycles and monetary theory. In general, early theorists believed monetary factors could not affect real factors such as real output. John Maynard Keynes attacked some of these "class ...
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Volcker Rule
The Volcker Rule iof the Dodd–Frank Wall Street Reform and Consumer Protection Act (). The rule was originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from ma ...
Citations
References
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Further reading
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External links
A global survey of stimulus plansby
Salon Magazine
Keynes and International Economic and Political Relationsby
Donald Markwell
{{DEFAULTSORT:2008-2009 Keynesian Resurgence
Keynesian economics
2000s economic history
Keynesian
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output ...