Given the sheer brilliance of John Maynard Keynes, it is not
surprising that the term ‘Keynesian’ is omniscient. Today, as
governments led by the USA pump hundreds of billions of dollars
to save the global financial system from total collapse,
commentators are speaking of the shift in policy from
supply-side economics to Keynesian demand and liquidity
The present financial intervention may be the greatest in global
economic history. If you add to the US Treasury’s bailout the
lifelines thrown by the UK, the European Central Bank,
Switzerland, India and other nations, we are looking at a kitty
of over $1.75 trillion that is already committed to injecting
liquidity and saving banks and financial institutions from
Is this the return of Keynesian economics? In some sense it is.
Nothing fuels demand more than liquidity. Equally, nothing
contracts demand more than the lack of it. The US, UK and Europe
were seeing a growth slowdown before this financial crisis. From
early 2007, household spends were not rising fast enough;
manufacturing and retail sales growth were declining; and
aggregate demand was under pressure. With a 25 per cent fall in
home prices from January 2006 to December 2007, there were
serious uncertainties in the US. The UK, Italy, France and Spain
were not far behind. The growth engine had, therefore, seriously
started sputtering by the end of 2007.
What has happened since, especially from the second half of
2008, is a rapid breakdown of public confidence thanks to the
failure of one major financial institution after the other. It
has gummed up all the liquidity in the world and, with it, put
the brakes on aggregate demand. Any institution that is lucky to
have cash will not spend it. Forget about borrowing. Forget
about spending. Forget about lending. Forget about
entrepreneurial animal spirits. Forget about growth. Just pray
to survive. It is as if we were in the middle ages and the
plague had hit the next village.
Had this continued without any state intervention, the global
financial system would have already collapsed. The huge
intervention is Keynesian in the sense that it is trying to pump
the stuff that makes transactions happen — and thus induce
greater demand leading to greater supply. It isn’t real
investment in the traditional Keynesian sense. But it is
autonomous financial injection with the hope that it will
restore confidence and bring with it a milieu that can fund real
investments, create demand and hence, growth.
Will it be the beginning of a long era of government sponsored
pump priming as we saw from the 1960s to the early 1980s? I
think not. Crude Keynesian economics encourages fiscal
profligacy and state spending on consumption rather than
investment. It also bestows extraordinary powers on bureaucrats
— people who are least equipped to handle such challenges. Every
sensible government today, including India, believes more in the
positive powers of fiscal rectitude than ever before. Besides,
supply-side economics has taught us that, in most cases, with
correct incentive structures the markets do the right things.
So, I see this as a massive one-shot Keynesian intervention for
a Black Swan event. It is absolutely essential and needs even
greater global coordination. But I don’t see this as the
beginning of widespread fiscal profligacy in the name of Keynes.
He doesn’t deserve such opprobrium.