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Alain Boublil Blog


The Keynes great comeback

John Maynard Keynes went down in history, which is not frequent for an economist, because the remedies he had proposed during the great 1929 crisis had allowed Roosevelt to making the United States exiting from the deep depression which after extended itself to Europe. But it was not his first masterstroke. He had been the only one to denounce the economic risks the Versailles Treaty was carrying due to the extent he thought excessive of the reparations imposed to Germany. He, then, left the British delegation. History gave him he was right. The crisis which resulted from the consequences has favored the rise of extreme-right parties and provoked the Hitler ascension into power.

The New Deal he inspired was laying on the idea according to which the state, through the investments it would finance, at the price of an important budget deficit, would allow to making the economy to rebound and would put again the country on a growth trend. He did even invent the concept of the multiplier: the achieved investment would allow to generating more value added than the amount of money spent. The rebounding concept through the creation of a budget deficit was born. In reality, his analysis was going much further. What he had demonstrated and he will convince political leaders with that idea, was that market mechanisms did not always allow to reestablishing the major economic equilibriums and that the State intervention was needed. So Keynes had invented the concept of the economic policy, concept today unanimously recognized, even if its content has been and is still the purpose of intense debates.

The Keynesian remedy, the budget deficit, quickly found a rival, the monetary policy. It was abundantly used to fight against inflation. Through the restriction of money supply by high interest rates or by regulatory measures, it was weighted on demand and price stability was coming back. Pure monetarists, relaying the message of Milton Friedman whom history will show as the eternal Keynes rival, were supporting the idea according to which money supply growth rate even must be fixed once for all. The public indebtedness rise was giving arguments to all these who wanted to limit the influence of the State in waving the spectrum of the debt and the risks of default. So, the main economic policy tool has become the monetary policy, given to the central banks whose independence was guaranteed, there also to curb an eventual inclination of the political power to intervene. It is that independence which, for instance, was the condition of the creation of the euro and of the European Central Bank.

Monetary policies have not impeached the vertiginous increase of indebtedness and many are these who even think that it was at its origin. So, in the United States, the cumulated debt of the State, of non-financial enterprises and of household went from 120% of GDP during the 1962-1982 period when the ratio was almost stable, to 160% in 1990 and 170% in 2000. Then it has surged to 220% in 2008, which was at the origin of the sub-prime crisis. Banks had offered loans to household who were not able to reimburse them and, in the same time, had securitized the doubtful debts which had put in danger the international banking system and provoked the crisis. Since then, the indebtedness ratio had remained stable. It has just known a new jump to reach, at the end of 2020, 260% of the.GDP.

Some Keynesian episodes yet occurred during these previous decades. When, in France, the left creates the Major Works Special Fund or when it recapitalized newly nationalized enterprises, it gets its inspiration from the Keynesian thought, as Germany when re-unification occurs to allow the Eastern new territories to closing their backwardness. Donald Trump himself, in his electoral program, had included an investment expenditures plan financed by the State of more than 1000 billion dollars. It is true that American infrastructures with their roads, tracks or bridges, were in a deplorable state. But he will not obtain the Congress support and this plan will never be put into operation, as the full construction of the wall along the Mexican border.

The Covid-19 pandemic has changed everything. The parallel is frequently done with the 1929 crisis, even if the causes of these two events are completely different. The States have quickly put in place emergency measures dedicated to soften the consequences of the adopted restrictions to slow the pandemic. Many sectors have had to stop their activities. Huge amounts of public funds have been put at their disposal to allow them to going through that period and to restarting. In France, the State has put its guarantee on loans, has financed part-time unemployment and allowed delays for social and fiscal debts. The central banks accommodative policies has permitted to the states to increase their indebtedness without creating charges rise because interest rates, everywhere in developed countries, were near zero when they were not negative.

At that policy focused on the rescue of enterprises has succeeded a rebound policy with a Keynesian inspiration. France has presented for the 2021 and 2022 a 100 billion euro rebound plan. The European Union followed the same way with a 750 billion plan along with, for the first time, the acceptation of the principle of the sharing by tje States of reimbursing charges. Japan has decided to finance more than 500 billion euro new expenditures. In the U.S., the Congress is in the final discussions round to adopt an expenditures plan of near 1000 billion dollars. The Democrats even thought that it was necessary to go further.

But these plans, especially in France, carry a weakness which affects their capacity to deliver the expected results. First, they too much depend from priority granted to communication which tries to artificially inflate the amounts at stake. It is not possible to add the sums of all the European countries with the European plan because a share of this plan is dedicated to finance countries plans. Especially, the announced expenses do not correspond to precise actions or mature projects to be realized, which would have an immediate incidence and generate the expected growth. They largely consist in transfers to private agents who are submitted to get them to restrictions, as thermal renovation of buildings or they concern projects whose realization is highly unpredictable as the conversion to hydrogen of vehicles and planes.

Yet, real projects are not missing. The launch of the new generation nuclear power plants program has no reason to wait until 2023. The needs of the modernization of SNCF regional rail networks are obvious and the works could be accelerated. The State can also decide a large program of ordering electric vehicles for its administrations fleets. Then industrial would be reconciled with the objectives regarding environment.

Keynes is back for three reasons. Public action to cope with the crisis is indispensable. The monetary policy has not as a vocation to answer to the current challenges. It can only make public action less costly. The privileged tool is the increase of public expenditures. But to be efficient and reach the expected objectives, that one must be well focused. Failing that, it will only reach to a new increase of indebtedness. But, in this case, it will not be Keynes‘s fault.  




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