Help! Keynes is back!
Nathalie Janson // 19.07.2016
Since early 2016, with the return of market turbulence and uncertainty over global growth, discreet calls for expansionary monetary policies have been proliferating. It was the OECD that set the tone in February with the publication of its Interim Economic Outlook. According to the OECD, “monetary policy has proven insufficient to boost demand and produce satisfactory growth…. [A] stronger fiscal policy response, combined with renewed structural reforms, is needed to support growth…. With governments in many countries currently able to borrow for long periods at very low interest rates, there is room for fiscal expansion to strengthen demand in a manner consistent with sustainability.” Germany is often singled out since it is one of the few countries in the European monetary union to have brought its public finances back into balance despite the crisis.
What a fine avowal of impotence! Even after trillions in cash injections, growth is still not happening. This supposedly makes it urgent to bring fiscal policy back to centre stage, especially since it can be done cheaply, with interest rates firmly anchored close to zero. This gives governments a unique opportunity: no need to feel guilty about accumulating deficits and compromising the well-being of future generations. Zero or even negative interest rates in some cases call for pain-free public spending. This is a real incentive to crime when we consider the propensity of European governments – led by France – to increase public spending.
Why public spending is not the right answer
The stagnation we are seeing is not the result of inadequate demand. As proof of this, despite historically low or even negative interest rates, credit recovery in the private sector has been slow. The problem, aggravated by monetary policy that has lost all sense of proportion, lies elsewhere. It can be found in poor profit outlooks in the private sector, burdened by the weight of rules and regulations whether on business itself or on the labour market. Obviously, it was a poor choice of words to speak of “fiscal austerity” when referring to policies aimed at freeing up private activity and holding back public spending.
Opting for further boosts in public spending is problematic since the choice of spending is arbitrary and does not aim to meet profit maximisation. Beyond problems of corruption and collusion, the fact remains that a public administration cannot identify the optimal use of resources in the absence of prices, profits or losses. Their existence is a key indicator in determining if a project is viable. This is how a company knows whether its choices are the right ones. If losses persist, the company will necessarily have to review its initial project so that it can find its market. Such mechanisms are absent in the allocation of public spending, and it is impossible for a public administration to place itself under market conditions as a way of testing its decision-making process.
The matter of efficiency in public spending is not intended to involve all items such as spending on defence or individual security. But the idea defended by advocates of public spending is not obviously to confine increases to so-called regal areas. Faithful to Keynes, an idea that has lately become fashionable again is that spending is all that is needed for the magic to take hold!
When confusion leads to error
The old demons are returning because of the reigning confusion. It is true that the current economic situation is unprecedented in history. Central banks have never injected funds quite as massively, visible inflation has never been as low, the economic environment is still in a slowdown and there are rumblings in China. The authorities in charge seem disoriented. Messages are scrambled. Debate on public spending is never put in clear terms, and it remains hard to defend the idea that spending cuts are nevertheless a sign of hope!
Nathalie Janson is an Economist, Associate Professor at the NEOMA Business School and Researcher at the Institut économique Molinari. This is a translations of an article first published in L’Opinion on 07.07.2016.