These are strange times, even for economists. Fearmongers are urging governments to pump up their spending in order to maintain economic activity.
They worry that central banks have done about as much as they can to stop economic decline. Interest rates are pathologically low, even negative in some countries.
Where do such ideas come from? Why think that government profligacy will do more good than harm?
Economists trace these fears and notions to John Maynard Keynes (1888–1947), the brilliant and influential English economist who lived through the Great Depression in the 1930s.
The Great Depression produced an unholy mix of deflation, bankruptcies and dreadful unemployment. Falling tax revenues crippled government budgets.
Keynes proposed vigorous, even extreme, government action to re-employ idle capital and labour. A central idea was government deficit spending – governments should increase spending even if they had to print money or borrow money to do so.
He envisaged a kind of chain letter effect where each dollar of government spending would eventually increase national income by several dollars. The quality of the spending did not matter; the key was to get people to spend money.
The idea of deficit spending was subversive of notions of fiscal prudence, which is surely the main reason for its enduring popularity.
Keynes was alert to this danger. He prescribed fiscal surpluses when unemployment was low in order to prevent spiralling public debt and curb inflation.
Nor was Keynes a fan of big government. He considered that government spending should not exceed 25% of GDP. Today, he would be dismissed by non-economists as a neo-liberal.
The proscribed remedy unequivocally failed in the 1970s. Fiscal pump priming produced stagflation. Economic growth did not take off, inflation did. New Zealand’s unemployment rate rose progressively from 1.9% in 1975 to 6.8% by 1986. Major capital spending on energy projects and chronic government borrowing produced a public debt nightmare rather than the promised job growth nirvana.
Nor has enormous monetary expansion and deficit spending in Europe and the United States sustainably addressed the 2008–09 global financial crisis. Their legacy is ongoing fragility and enormous public debt.
New Zealand’s economic situation is roughly the opposite of that in the 1930s. There is no good reason for repeating the painful mistakes of the 1970s and 2000s.