We need internationalist spirit – and a plan for global growth
The world must reject the complacent isolationism of the 1930s and follow Keynes's lead: global problems need global solutions
The Observer, Sunday 4 September 2011
A Republican-supporting economics professor, with a dog called Keynes, whose other economics hero was Milton Friedman? As I sat in my first Harvard economics lecture, listening to Greg Mankiw introduce himself to his new graduate class, my head was in a spin.
Could he really be a Republican Keynesian? And a Keynesian disciple of Milton Friedman? For a young Brit, just graduated from Oxford, this was revolutionary; what I thought was the conventional economic wisdom was being turned upside down.
Because, as with every other PPE graduate – including my contemporary, David Cameron – I was well-schooled in the ideological economic debates of 1980s Thatcherite Britain. Were you a Keynesian or a monetarist? A follower of Willem Buiter or Friedman? Fiscal activist or PSBR hawk? Would you trade a little more inflation for a little less unemployment? Did you read Bill Keegan in the Observer or Samuel Brittan in the FT?
Of course, the serious economic debate was more sophisticated than that. But the divides were real, and reflected in the political debate. So much so that in Conservative circles the label Keynesian became a dirty word – profligate, irresponsible, statist, inflation-loving, not to be trusted.
And listening this summer to right-of-centre politicians and commentators, I have regularly been transported back to those 1980s myths that were exploded in that first Harvard economics class 23 years ago. Because the old caricatures are back with a vengeance, on both sides of the Atlantic.
We have all seen financial markets crashing as governments have rushed to embrace fiscal austerity. But warn about the risks of deflationary fiscal policy and that makes you a deficit denier. Worry about the dangers of all countries trying to cut deficits at once and you are a deluded Keynesian. Counsel that the world needs a plan for growth as well as deficit reduction and you are an irresponsible Keynesian deficit denier.
Keynes himself must be turning in his grave. For – as that Greg Mankiw class highlighted to me, and has now been fully documented in Lord Skidelsky's biography – the real Keynes was no profligate tax-and-spender. His seminal 1930 Treatise on Money was as hawkish on inflation as Friedman decades later. His attitude to irresponsible wage bargaining in the 1920s was as unforgiving as Thatcher in the 1980s.
Central bank independence? I think Keynes would have backed it, though not if Montagu Norman was the governor. The irresponsible and inflationary profligacy of the 1970s Barber boom? He would have abhorred it. But – and this was his great insight – Keynes also knew that economies could occasionally get stuck in a deflationary rut. Although he called it The General Theory, it was actually a special case: when interest rates are so low that they can't be cut any further; when the "animal spirits" of companies and consumers are so depressed that private spending stagnates; when governments crudely cutting spending risks make deficits worse.
Of course, there will be naive Keynesians who will think it is always a special case – time to let rip. And that is what gave Keynesianism a bad name. Jim Callaghan was right to tell the Labour party conference in 1976 that you can't just spend your way to full employment. And while you can argue about her methods, Margaret Thatcher was right in 1979 to say it was a priority to get inflation down.
But, as I argued a year ago in my Bloomberg speech, the global economy is sliding into that rare and dangerous "special case" that Keynes identified in the 1930s and Japan suffered in the 1990s. And,as Ed Miliband argued this week, our world economic leaders need a global plan B for growth.
Yes monetary policy and quantitative easing can help, and progress on banking and trade reform are important, but fiscal policy is now the key. With growth stagnating around the world, every country pressing ahead with deep cuts risks being a catastrophic mistake. As the International Monetary Fund's Christine Lagarde has warned, "slamming on the brakes too quickly will hurt the recovery" – as we have already seen in Britain.
It's time that G7 countries led the way by agreeing revised deficit reduction plans, making them steadier and more balanced to support growth and jobs. Yes, have clear medium-term plans to get deficits down, but have clear plans to avoid a global slump, too.
This time the world must reject the complacent isolationism of the 1930s and follow Keynes's lead. Because, of course, the other distinguishing feature of Keynes was that he believed in global solutions to global problems. And we could do with a bit of that internationalist spirit now from our prime minister and chancellor, who have been noticeably lacking from the global economic debate.
I remember hearing a great story about Keynes making a wartime trip to Washington to meet the US treasury. Apparently, at the first meeting, treasury secretary Morgenthau asked Keynes: "Where is your lawyer?" When Keynes looked puzzled, Morgenthau exclaimed: "Well, who is going to do your thinking for you?"
I sincerely hope George Osborne will soon recant, follow Keynes's lead and take a flight to Washington to make the case for a global plan for growth. And George, don't take a lawyer; an economist will do.
Ed Balls is the shadow chancellor.
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