What Have We Learnt?
Edited by Steven Kates
Chapter 5: Policy in the Absence of Theory: The Coming World of Political Economy without Keynes
Steven Kates Although not yet translated into our economic texts, the one lesson we appear to have learned during the Global Financial Crisis and the recession that followed is that Keynesian policies do not work. We have learned that increased public spending during recessions does not lead to recovery. We have learned that it instead leads to large increases in public sector deficits, massive increases in debt and stagnation in the private sector. Nor have these policies been accompanied by much, if any, recovery in the labour market whose improvement had been their main justification. And so, even while unemployment remains high, public policy has now moved towards cutting the level of public spending and attempting to return national budgets towards surplus, the exact reverse of the policies of the first two years following the GFC. Yet so far as the mainstream of economic theory is concerned, everything is as it was before. Nothing has changed. We still teach that amongst the most useful measures to take when unemployment is high are those that will increase the level of aggregate demand with particular emphasis on increasing the level of public spending. But after only two years of the stimulus, virtually no one in a policy-making role any longer believes a word of this. In reversing the policies of the first two years of recession, where high levels of public spending were almost universally adopted, economic policy has now moved sharply away from the only macroeconomic theory most economists have ever...
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