Keynes vs Friedman (Part Two), How This Economic Debate Is Currently Impacting Europe & Will Soon Impact The U.S.

An economic commentary by George Cappannelli

In this ‘monkey see, monkey do” world of ours, the heated argument between proponents of the Keynesian and Friedman economic schools that has been going on for decades may have been settled (at least for the foreseeable future) as one European country after another seem, like dominos, to be abandoning government stimulus efforts in favor of major budgetary cutbacks and betting the farm that the free market will right the ship.

Because of the significance this argument can have on the future of our world for decades to come, we thought it would be helpful to take a look as some of what is happening in Europe and consider the implications this trend may soon have for America.

Here, at home, of course, we appear have, at least for the last 21 months, been taking a course that is a blend of both schools of thought.  The deficit spending approach certainly motivated our bailout of the financial sector, TARP,  loans to auto manufacturer, the ‘cash for clunkers’ program, special homeowner  rebates and more.  On the other hand these efforts have been balanced by substantial budget cuts in a number of major areas.  For some this hybrid approach does not contain enough of the ‘free market’ philosophy.  For others, it contains far too much.   As with all hybrid efforts some believe it is a wise course to follow, while others believe it leaves us in the awkward position of straddling the boat and the pier.

In an article published in the NY Times by Landon Thomas, Jr entitled, “Europe Seen Avoiding Keynes’s Cure for Recession,” the author provide us with some valuable insight into a current trend we would all be wise to watch. “The British,” he reports, “are currently turning their back their native son, economist John Mayard Keynes.”  And according to Thomas, “they may be doing so at their own peril.”

Here is a few other highpoints from the Thomas article:  “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.”

From our perspective, the events in other parts of Europe tell a somewhat less settled story about how this argument between these titans of economic theory is playing itself out.  In Greece, plagued by severe economic challenges – sever enough to require a substantial bailout by other European nations – dock workers recently protested proposed budget cuts and are concerned about the impact these cuts may have on pensioner rights and the retirement age.  In France, the government is experiencing significant pushback from unions, retirees and other segments of the population as it tries to raise the retirement age there.  Italy and Spain both have their economic challenges, although there are, as of this writing, no final decisions on which way they will go.

According to Landon Thomas,

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

Landon goes on to report that according to  Brad DeLong, a liberal economist and blogger at the University of California, Berkeley, “ Everything Keynes established about the primacy of maintaining demand at a steady pace is gone.”   And according to DeLong, “it appears that Europe thinks it can focus on sound finances while the U.S. manages world demand, but unfortunately we are not doing that.”

In the coming weeks and months as this story plays out across Europe and as the dust settles from the mid-term elections in the U.S., we may well find also find ourselves throwing John Maynard Keynes under the bus or over the rail in favor of Milton Friedman ‘free market’ doctrine.

It is because Keynes’ beliefs don’t work and Friedman’s do?  Not necessarily.  What it means is that at this time in America the pain, economic distress and fear experienced by the many and fanned by the few, and in this instance, that few is the less than 20% of our population according to some and as few as 5% according to others who control 90% of America’s financial wealth and all or most of our mainstream media – is causing pretty serve and dramatic reactions.   As a result, Americans may well, as they say, look to ‘throw the baby out with the bathwater.”

If we do abandon Keynes in favor of Friedman we will, of course, be returning to the policies that dominated our economics during the George W. Bush years, policies some believe are, in large part, responsible for our current economic crisis.  But no matter what we chose it is now becoming increasingly clear the coming months will find us moving into course adjustments that will most certainly impact our economy for decades to come.

For those of us who are near or approaching retirement age; those who are responsible for running our school systems, executing public works project, funding arts council and more; for those who support the preservations of what are revered to as ‘the commons’, (public police and protection services, waste disposal, public water, public works projects and more) it could be a time of great testing.  And, of course, hanging in the balance – even for the 20% – will be the economic stability of the first half or more of the 21st Century.

You can read the whole article at:
http://www.nytimes.com/2010/10/21/world/europe/21britain.html?_r=1&emc=eta1

We’d love to hear what you think. Would you be willing to live without many of the services we take for granted? Will we have to? What do think are the implications of following either path? Comment below and share your thoughts.

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