The insight that the fiscal policy stance in the periphery prior to this crisis was insufficiently countercyclical
Talkin’ about Spain and Ireland although the same was true of our own G. Brown in smaller measure.
Let us, for a moment, accept the basic Keynesian premise, that we should run great big stonking deficits to provide fiscal stimulus in the middle of a recession/depression.
That also means that we should run great big stonking budget surpluses in the middle to end periods of the largest and longest economic booms in advanced country history.
They don’t quite have to be symmetrical given the effect of growth and inflation upon debt levels. The surpluses and the deficits that is.
But there does have to be, or at least there ought to be, some connection between the general size of them.
Now, look around you, we’ve got countries that are, or have been, running deficits of 5, 10, 15% of GDP in those recessionary years. This implies (but for the above reasons of asymmetry not quite proves) that countries, back in that boom time or the next time a boom comes along, should be running surpluses of 5, 10, 15% of GDP.
And no, it’s not just to save up the money to leave room to blow out the deficit again in the next recession. It’s that this is what you’re supposed to be doing to manage the economy: temper the booms just as you temper the recessions through fiscal policy.
OK, hands up, who can imagine anyone running a 2 or even 3% budget surplus consistently for some years, let alone 5 or 10%?
We actually had this ourselves: debt repayment in 2000, 2001 wasn’t it? Before Brown splurged after the second election to “invest” in public services? To the great cheers of all at The G?
Quite: it’s the politics of Keynesianism that clearly does not work. Doesn’t in fact matter whether it actually works as economics, the incentives to politicians mean that it never will work in practice. Simply because the body politic would never let anyone get away with running the appropriate surpluses that are a necessary part of the complete theory.
Keyens may even have been right in his economics but that’s not the appropriate argument. It’s just not possible to make it work in this real world.