Deathbed of Keynesian Economics Will Be in U.K.
http://www.bloomberg.com/apps/news?pid=20601039&sid=a5t.xQdllnbo
"Stimulating the economy isnât working.
In fact, itâs only making it worse. Consumers and businesses donât want rising taxes. A falling currency pushes up the cost of everything the U.K. imports, stoking inflation. Savers get decimated, and yet the banks remain reluctant to lend because they rightly believe the economy is in the doldrums.
Recipe for Recovery
Whatâs needed is a total change of direction. Get the deficit under control. Raise interest rates to restore confidence in the pound, and reward saving. Cut taxes to stimulate enterprise and investment.
And yet the real lesson of the U.K. in 2010 will be of wider significance. A country canât spend its way out of a recession. And it canât fix what was at root a problem of too much debt by just borrowing more and more.
In the country of its birth, Keynesian economics is being tested. If the economy isnât growing at a healthy clip again by the end of 2010, its failure will be obvious to everyone."
--------------
"On Feb. 14, a group that included the former Bank of England policy makers Tim Besley, Howard Davies, Charles Goodhart and John Vickers published a letter to the Sunday Times calling on the government of Prime Minister Gordon Brown to control the ballooning deficit. If it didnât, the stability of the economic recovery would be threatened, and there would be a run on the pound, they warned.
Keynesian Backlash
That brought a stinging response from the Keynesians, who are urging the U.K. to spend its way out of recession. Nobel laureates Joseph Stiglitz and Robert Solow were among the signatories to letters written by a group of 67 economists insisting that deficit spending was the only way to salvage the economy. The letters, published in the Financial Times, argued that a âa sharp shockâ now âwould be positively dangerous.â
So who is right, and who is wrong? Itâs a debate that matters to the rest of the world. After all, if demand management doesnât work here, it wonât work anywhere.
The U.K. has some experience of mass letter writing from Keynesâs devotees. In 1981, a group of 364 economists wrote an open letter ripping into the policies of then Prime Minister Margaret Thatcher. They turned out to be totally wrong, of course. With hindsight, no one can now dispute that her policies led to a long and durable economic revival.
Budget Blowout
And just as the Keynesians were wrong three decades ago, they are wrong now. "
