Europe Seen Avoiding Keynes’s Cure for Recession

Europe Seen Avoiding Keynes’s Cure for Recession
By LANDON THOMAS Jr.
Copyright by The New York Times
Published: October 20, 2010
http://www.nytimes.com/2010/10/21/world/europe/21austerity.html?_r=1&th&emc=th


LONDON — The British economist John Maynard Keynes may live on in popular legend as the world’s most influential economist. But in much of Europe, and most acutely here in the land of his birth, his view that deficit spending by governments is crucial to avoiding a long recession has lately been willfully ignored.

In Britain, George Osborne, chancellor of the Exchequer, delivered a speech on Wednesday that would have made Keynes — who himself worked in the British Treasury — blanch.

He argued forcefully that Britons, despite slowing growth and negligible bank lending, must accept a rise in the retirement age to 66 from 65 and $130 billion in spending cuts that would eliminate nearly 500,000 public sector jobs and hit pensioners, the poor, the military and the middle class because of what he insisted was the overwhelming need to reduce the country’s huge budget deficit.

In Ireland, where the economy is suffering through its third consecutive year of economic slump, Keynes is doing no better. Devastated by a historic property crash and banking bust, the Irish government is preparing another round of spending cuts and tax increases.

Combined with what Dublin has already imposed, the cuts could add up to as much as 14 percent of Ireland’s gross domestic product, an extraordinary amount for a modern industrial country. Ireland’s budget deficit reached 32 percent of total economic output this year.

Indeed, across Europe, where the threat of a double-dip recession remains palpable, governments from Germany to Greece are slashing public outlays. But even as students and workers in France clash with the police and block fuel shipments to protest a rise in the retirement age, the debate in Europe is more on how fast to cut government spending rather than whether such reductions are the right thing to do under the circumstances.

“Everything Keynes established about the primacy of maintaining demand at a steady pace is gone,” Brad DeLong, a liberal economist and blogger at the University of California, Berkeley, said mournfully.

“Europe obviously thinks it can focus on sound finances while the U.S. manages world demand,” he said in a telephone interview, “but unfortunately we are not doing that.”

Joseph E. Stiglitz argued that the British government’s plan was “a gamble with almost no potential upside” and that it would lead to lower growth, lower demand, lower tax revenues, a deterioration of skills among the unemployed and an even higher national debt.

“We cannot afford austerity,” he wrote in The Guardian.

Mr. DeLong and others on the left have long argued for more stimulus spending in the United States and abroad to lift growth, even if deficits rise temporarily as a consequence.

While that notion may have its adherents in the White House and among many American and European academics, in Europe there is hardly a policy maker to be found who is making the argument that governments need to spend more, not less.

This is particularly true in Britain, where a combination of collapsing tax revenues and government spending to prop up banks and support the unemployed during the financial crisis has contributed to a budget deficit equal to 11 percent of gross domestic product, second highest in Europe after Ireland.

“Keynsians are regarded here as heterodox, not orthodox,” said Andrew Lilico, an economist at the London-based research institute Policy Exchange, which has close intellectual ties to the Conservative Party. “And it goes back to one thing: we have this internal fear of losing control of our deficits and having foreigners telling us what to do. There is also a sense that deficits of this scale are morally lax.”

The stiff upper lip with which Mr. Osborne delivered his call for sacrifice on Wednesday in the House of Commons reinforces that point. It is grounded in memory of Britain’s economic collapse in the 1970s, when the International Monetary Fund had to come to the rescue just as it has done recently in Greece.

Even the previous Labour government of Prime Minister Gordon Brown proposed substantial budget cuts before losing office in May, many of them incorporated by Mr. Osborne into his four-year spending plan.

“There is nothing fair in running huge deficits that we are not prepared to repay,” Mr. Osborne said in his speech, responding to arguments that cuts would fall hardest on the country’s poorest.

It is this institutional memory — combined with the widely accepted view that bond market demands to follow through on promised austerity plans cannot be ignored — that underpins not only Mr. Osborne’s approach but also that of his European peers.

That contrasts sharply with the United States, where White House policy makers are urging caution in reducing deficits too quickly, fearing that ending stimulus efforts before the economy is clearly on the road to recovery risks making a mistake similar to President Franklin D. Roosevelt’s budget cutting in the middle of the Great Depression, which extended the downturn.

“In the U.S., central bank memory is ingrained in the Depression, while in the U.K. it is being bailed out by the I.M.F.,” said Michael Saunders, an economist with Citigroup in London. “That gives policy makers different sets of priorities.”

To be sure, the prospect of the once munificent British state sharply cutting benefits for children of middle-class families, making students pay much more for their schooling and cutting jobs and the pay of public sector workers has led to a backlash from the country’s labor unions.

“Today, the fight begins,” David Prentis, the general secretary of Unison, the country’s largest union, exhorted participants at a rally on Tuesday. “Hands off our public services.”

Mr. Prentis, whose union represents public sector workers, received plenty of support from the conference hall where 2,000 union activists congregated.

But the number attending was small and the restrained action stands in contrast to the large protests and spasms of street unrest in Greece, Spain and, most recently, in France, where strikers have cut into train and subway service and truckers and others have blocked refineries and fuel depots in a bid to cripple the transportation network.

And outside the hall, the scattered calls by union stalwarts — many bused in from cities like Bristol and Liverpool — were relatively lackluster.

“Come on,” shouted one union organizer to a silent gathering of placard bearers. “What happened to your chanting?”

For the British public, of course, the austerity now being experienced in countries like Ireland, Greece and Lithuania has yet to hit home.

In Britain, and throughout the rest of Europe, policy makers hope that by the time it does, a private sector recovery will be well under way, helping to compensate for the tighter government budgets. If not, however, they may be tempted to call upon the spirit of Keynes after all.