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Consolidators versus Stimulators

LONDON – All intellectual systems rely on assumptions that do not need to be spelled out because all members of that particular intellectual community accept them. These “deep” axioms are implicit in economics as well, but, if left unscrutinized, they can steer policymakers into a blind alley. That is what is happening in today’s effort, in country after country, to slash spending and bring down budget deficits.

The chief task that John Maynard Keynes set himself in writing his General Theory of Employment, Interest, and Money was to uncover the deep axioms underlying the economic orthodoxy of his day, which assumed away the possibility of persistent mass unemployment. The question he asked of his opponents was: “What must they believe in order to claim that persistent mass unemployment is impossible, so that government ‘stimulus’ to raise the employment level could do no good?” In answering this question, Keynes reconstructed the orthodox theory – and then proceeded to demolish it.

Today, despite the Keynesian revolution, the same question demands an answer. What do people who demand rapid “fiscal consolidation” amid heavy unemployment need to believe about the economy to make their policy coherent?

This question is not trivial, because the fiscal hair shirt has become the favored article of policy clothing among those who now dictate economic affairs. Prestigious bodies like the G-20, the IMF, and the OECD join the “markets” and economic columnists in demanding that governments liquidate their deficits. Any other course, they say, spells disaster; balancing budgets as soon as possible is the only way back to prosperity.