Crisis resuscitates Keynes, state spending
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aAFP
Oluşturulma Tarihi: Şubat 09, 2009 00:00
PARIS - The rise of globalization was accompanied by unregulated markets and a trust in ’the invisible hand,’but the crisis is changing everything. Both the United States and Western European countries are unveiling massive stimulus packages, based on state spending.
Huge state spending to prop up economies threatened by the financial crisis contrasts with the doctrine of market forces in vogue in recent years and carries with it a resurgence of Keynesian regulation or even economic planning.
European governments have launched stimulus plans which, in the case of Germany, exceed 100 billion euros ($129 billion), and lawmakers in the U.S. are conisdering a plan worth roughly $800 billion.
These programs, particularly the proposals of U.S. President Barack Obama, involve investment in infrastructure, research, new technologies and "green" energy, and are redolent of big public works programs launched under the New Deal for the U.S. in the 1930s.
Keynesianism also dates from that period, as a result of the lessons drawn, and theory developed, by British economist John Maynard Keynes.
Lender of last resort
His main finding was the state must act as the provider of funds, or lender of last resort, when the economic system is under severe stress, in order to avert the risk of domino failures throughout the system. In this way, the state must stimulate and guide the economy until it recovers, when the state can recover the exceptional funding it has provided.
At the beginning of the 1930s, governments responded by doing the opposite because tax revenues were falling: they cut back on expenditure in the interest of sound public finances, thereby helping to turn downturn into slump.
The other central lessons of misjudged policies then are to avoid protectionism and competitive devaluations, which also greatly worsened economic conditions.
Absorbing deficits
"We are in a Keynesian moment," said Jean Pisany-Ferry, the head of the Bruegel Institute, a policy think tank in Brussels. But he said "there has not really been any change in the intellectual approach" because the U.S. has always made use of budgetary policy. "It is more in Europe that there was the idea that attention had to be focused on absorbing deficits," he said.
Since the financial crisis began, U.S. and European authorities have also put in place schemes amounting to hundreds of billions of dollars to rescue banks. European governments have provided capital to several banks or have even nationalized some of them.
Even in the U.S., the idea that the authorities should assert authority over the sector is under consideration, marking a reversal of the free-market approach given a new lease of life by Ronald Reagan 30 years ago.
In terms of market rules and regulations, countries which took part in a G20 crisis meeting in Washington in November undertook to work for greater clarity and transparency and said they wanted to harden their line against so-called tax-havens.
The auto sector is receiving state help which, in the U.S., has assumed huge proportions.
But in return, the state is putting pressure on manufacturers to speed up the development and production of vehicles with low fuel consumption and low carbon emission levels.
All this amounts to central planning, in the view of Eloi Laurent, the deputy director of the French Observatory of the Economic Outlook, or OFCE.
"In the auto sector, we are seeing the return of industrial policy on a national basis, which we haven't seen since the steel plan in Europe in the 1980s," Pisany-Ferry.
Doctrine stays the same
At the French Center for Prospective Studies and International Information, or CEPII, economist Benjamin Carton said "we are going back on the period opened by Reagan" but he did not believe that there was a fundamental change in doctrine.
"It is not certain that we are seeing a long-term movement to a return of state (intervention) or regulation, beyond two to three years," he said. "Take the example of the rescue of banks in Norway in the 1990s. The government intervened strongly and then withdrew. It is not the role of states to be bankers."
"There will not be a change (in the type of) capitalism but there will be efforts to improve regulation," Carton said. "After the crisis of 1929, a guarantee for bank deposits came into being and this prevents people from withdrawing their deposits massively. The question is, where will the next financial crisis arise?"
European governments have launched stimulus plans which, in the case of Germany, exceed 100 billion euros ($129 billion), and lawmakers in the U.S. are conisdering a plan worth roughly $800 billion.
These programs, particularly the proposals of U.S. President Barack Obama, involve investment in infrastructure, research, new technologies and "green" energy, and are redolent of big public works programs launched under the New Deal for the U.S. in the 1930s.
Keynesianism also dates from that period, as a result of the lessons drawn, and theory developed, by British economist John Maynard Keynes.
Lender of last resort
His main finding was the state must act as the provider of funds, or lender of last resort, when the economic system is under severe stress, in order to avert the risk of domino failures throughout the system. In this way, the state must stimulate and guide the economy until it recovers, when the state can recover the exceptional funding it has provided.
At the beginning of the 1930s, governments responded by doing the opposite because tax revenues were falling: they cut back on expenditure in the interest of sound public finances, thereby helping to turn downturn into slump.
The other central lessons of misjudged policies then are to avoid protectionism and competitive devaluations, which also greatly worsened economic conditions.
Absorbing deficits
"We are in a Keynesian moment," said Jean Pisany-Ferry, the head of the Bruegel Institute, a policy think tank in Brussels. But he said "there has not really been any change in the intellectual approach" because the U.S. has always made use of budgetary policy. "It is more in Europe that there was the idea that attention had to be focused on absorbing deficits," he said.
Since the financial crisis began, U.S. and European authorities have also put in place schemes amounting to hundreds of billions of dollars to rescue banks. European governments have provided capital to several banks or have even nationalized some of them.
Even in the U.S., the idea that the authorities should assert authority over the sector is under consideration, marking a reversal of the free-market approach given a new lease of life by Ronald Reagan 30 years ago.
In terms of market rules and regulations, countries which took part in a G20 crisis meeting in Washington in November undertook to work for greater clarity and transparency and said they wanted to harden their line against so-called tax-havens.
The auto sector is receiving state help which, in the U.S., has assumed huge proportions.
But in return, the state is putting pressure on manufacturers to speed up the development and production of vehicles with low fuel consumption and low carbon emission levels.
All this amounts to central planning, in the view of Eloi Laurent, the deputy director of the French Observatory of the Economic Outlook, or OFCE.
"In the auto sector, we are seeing the return of industrial policy on a national basis, which we haven't seen since the steel plan in Europe in the 1980s," Pisany-Ferry.
Doctrine stays the same
At the French Center for Prospective Studies and International Information, or CEPII, economist Benjamin Carton said "we are going back on the period opened by Reagan" but he did not believe that there was a fundamental change in doctrine.
"It is not certain that we are seeing a long-term movement to a return of state (intervention) or regulation, beyond two to three years," he said. "Take the example of the rescue of banks in Norway in the 1990s. The government intervened strongly and then withdrew. It is not the role of states to be bankers."
"There will not be a change (in the type of) capitalism but there will be efforts to improve regulation," Carton said. "After the crisis of 1929, a guarantee for bank deposits came into being and this prevents people from withdrawing their deposits massively. The question is, where will the next financial crisis arise?"