Keynesian vicissitudes

Since the crisis that began in 2008, the economist whom Robert Skidelsky calls “the master” has made a dramatic comeback among Anglo-Saxons. Many British and American economists think we are in a Keynesian moment – a depression similar to the one in response to which Keynes wrote his General Theory in 1936. For example, in his book End This Depression Now!, published earlier this year, Paul Krugman writes that we are in “essentially the same kind of situation that John Maynard Keynes described back in the 1930s”. The fundamental problem in the world economy, Anglo-Saxon economists such as Krugman argue, is the same as at that time: a lack of aggregate demand. Measures are therefore needed to stimulate demand – in particular, expansionary fiscal or monetary policy. We are all Keynesians again.

However, at precisely the moment Anglo-Saxons rediscovered Keynes,Germans seem to have turned against him. Apparently most Germans, who now seem to have nothing but derision and contempt for Keynesian economists such as Krugman, have drawn the opposite conclusion from the crisis as Anglo-Saxons. As one senior German Christian Democrat politician put it bluntly at a talk last year when asked whether it was necessary to take measures to stimulate demand, “the old Keynesian paradigm is not valid”. Germans fear inflation much more than deflation (see for example this week’s Spiegel cover story) and  reject the idea of expansionary fiscal or monetary policy. What the economic historian Adam Tooze calls the “anti-debt” consensus in Germany is epitomised by the Schuldenbremse, or debt break, that Germany introduced in 2009 and has now exported to the rest of the eurozone. 

Nor is it just the German right that has turned against Keynes since the crisis began. In December 2008, Peer Steinbrück, then the Social Democrat finance minister (i.e. the job Lafontaine held in 1999) in Merkel’s Grand Coalition, attacked the “crass Keynesianism” of the British government under Gordon Brown. (That in turn prompted an angry response from Krugman, who called the German government “boneheaded”.) For Steinbrück the crisis was caused by “credit-financed growth”; the solution, therefore, could hardly be more credit-financed growth. Steinbrück will be the Social Democrat candidate for chancellor in next year’s election in Germany.

Perhaps part of the reason why even Germans such as Steinbrück dislike Keynes so much is that, according to him, surpluses as well as deficits are a problem. In 2012 Germany is expected to have a trade surplus of $220 billion - bigger than any country in the world, including China. To Keynesians, this is unsustainable. As George Soros has arguedno country can run a chronic trade surplus without others running deficits.” Even the Conservative British Prime Minister David Cameron has urged Germany to reduce its huge trade surplus. This is a rather odd situation: a centre-right British politician such as Cameron using a Keynesian argument that the centre-left German politician such as Steinbrück would presumably see as “crass”.

We generally think of the German right as being to the left of the Anglo-Saxon right on economic questions. The German right has always stood for the social market economy rather than the ruthless neo-liberalism of the American and British right: it was more "social". And it is still true that the German right is to the left of the Anglo-Saxon right on some economic questions: it talks about the primacy of politics over markets, is suspicious of rating agencies and wants regulation such as a financial transactions tax (FTT), which Cameron sees as “madness”. But the Keynesian vicissitudes I have described suggest that the differences between Anglo-Saxons and Germans on economic questions are now more complicated than they used to be.

In fact, whether because the German right has moved to the right or the Anglo-Saxon right has moved to the left, or both, it now sometimes seems as if the German right is actually to the right of the Anglo-Saxon right. On some issues, it even seems as if the German left is to the right of the British right. For example, you now hear Germans on both the left and right talking openly about using the markets to discipline deficit economies in the eurozone. What is remarkable about this is not just their apparent indifference to the social costs of such measures but also the almost Reaganite faith they seem to have in the efficiency and rationality of markets. They almost seem to believe in a kind of European version of “trickle down” economics: they hope growth will flow from the rich north of Europe to the poor south.

The World’s Opinion Page

Help support Project Syndicate’s mission

subscribe now

It seems that there is now a complex (or multi-dimensional, as my colleague Sebastian Dullien puts it) split between Anglo-Saxons and Germans on economic questions. Anglo-Saxons are still much more liberal in microeconomic terms than Germans. For example, both sides of the political spectrum in the Anglo-Saxon world are more sceptical of financial market regulation than both sides in Germany. In that respect, Germans are still to the left of Anglo-Saxons. But in macroeconomic terms, Germans now seem to be to the right of Anglo-Saxons. Perhaps this is part of the reason why Anglo-Saxons and Germans seem to be talking past each at the moment on economic issues: while we are focusing on macroeconomic issues, they are focusing on microeconomic issues.;
  1. Television sets showing a news report on Xi Jinping's speech Anthony Wallace/Getty Images

    Empowering China’s New Miracle Workers

    China’s success in the next five years will depend largely on how well the government manages the tensions underlying its complex agenda. In particular, China’s leaders will need to balance a muscular Communist Party, setting standards and protecting the public interest, with an empowered market, driving the economy into the future.

  2. United States Supreme Court Hisham Ibrahim/Getty Images

    The Sovereignty that Really Matters

    The preference of some countries to isolate themselves within their borders is anachronistic and self-defeating, but it would be a serious mistake for others, fearing contagion, to respond by imposing strict isolation. Even in states that have succumbed to reductionist discourses, much of the population has not.

  3.  The price of Euro and US dollars Daniel Leal Olivas/Getty Images

    Resurrecting Creditor Adjustment

    When the Bretton Woods Agreement was hashed out in 1944, it was agreed that countries with current-account deficits should be able to limit temporarily purchases of goods from countries running surpluses. In the ensuing 73 years, the so-called "scarce-currency clause" has been largely forgotten; but it may be time to bring it back.

  4. Leaders of the Russian Revolution in Red Square Keystone France/Getty Images

    Trump’s Republican Collaborators

    Republican leaders have a choice: they can either continue to collaborate with President Donald Trump, thereby courting disaster, or they can renounce him, finally putting their country’s democracy ahead of loyalty to their party tribe. They are hardly the first politicians to face such a decision.

  5. Angela Merkel, Theresa May and Emmanuel Macron John Thys/Getty Images

    How Money Could Unblock the Brexit Talks

    With talks on the UK's withdrawal from the EU stalled, negotiators should shift to the temporary “transition” Prime Minister Theresa May officially requested last month. Above all, the negotiators should focus immediately on the British budget contributions that will be required to make an orderly transition possible.

  6. Ksenia Sobchak Mladlen Antonov/Getty Images

    Is Vladimir Putin Losing His Grip?

    In recent decades, as President Vladimir Putin has entrenched his authority, Russia has seemed to be moving backward socially and economically. But while the Kremlin knows that it must reverse this trajectory, genuine reform would be incompatible with the kleptocratic character of Putin’s regime.

  7. Right-wing parties hold conference Thomas Lohnes/Getty Images

    Rage Against the Elites

    • With the advantage of hindsight, four recent books bring to bear diverse perspectives on the West’s current populist moment. 
    • Taken together, they help us to understand what that moment is and how it arrived, while reminding us that history is contingent, not inevitable

    Global Bookmark

    Distinguished thinkers review the world’s most important new books on politics, economics, and international affairs.

  8. Treasury Secretary Steven Mnuchin Bill Clark/Getty Images

    Don’t Bank on Bankruptcy for Banks

    As a part of their efforts to roll back the 2010 Dodd-Frank Act, congressional Republicans have approved a measure that would have courts, rather than regulators, oversee megabank bankruptcies. It is now up to the Trump administration to decide if it wants to set the stage for a repeat of the Lehman Brothers collapse in 2008.