During 2009 there was a lot of smug talk among academic and political liberals of Keynesianism enjoying a triumphant revival. But in the real world of jobs, wages and productionas opposed to the imaginary one of the chattering classesthe evidence shows that John Keynes' notion of being able to spend your way out of recession has not worked this time, if it ever did. It's important to note that ordinary voters are more sharply aware of this idea's failure than are the Western governments that have put their trust in Keynes.
The Obama Administration and British Prime Minister Gordon Brown's government both chose to meet the credit crisis and subsequent recession with huge increases in public spending and debt. Brown even boasted that by doing so he had "saved the world."
However, the European Union, led by Germany, proved reluctant to tread the Keynesian road and shoulder vast burdens of government debt. The result of this decision can be seen in the rise of the euro against the dollar and the pound and in the fact that Germany and France are now pulling out of recession.
China and India declined to go for a full-bloodied Keynesian solution. Their economies have continued to expand, if more slowly than before the crisis, and both are in a strong position to exploit the new decade's opportunities. China has notably narrowed the gap between its economy and that of the U.S.
Meanwhile, the U.S. and Britain are still deeply mired in recession, having acquired a vast amount of new government debt to no constructive purpose. No amount of juggling with unemployment figures can obscure the fact that in both countries real jobs are still being lost and that the creation of phony government ones is not altering the drop in family incomes. The public senses the truth, and the signs point to voters taking a fearful revenge on the Keynesian "miracle workers."
Sometime this spring Brown's New Labour government will be forced to hold an election, and it will almost certainly go down in catastrophic defeat. What kind of government will succeed is uncleara homogenous regime under David Cameron and the Tories or a coalition with the Liberal Democrats. But either way, after a dozen disastrous years in power, New Labour will disappear as an experiment in ultraliberalism, with half its MPs losing their seats.
In the U.S. the Democrats' loss of the Massachusetts Senate seat that had been theirs for more than 50 years is a harbinger of doom. Unless Obama radically changes his approach to government the portents are for the Democrats to be decisively defeated in the midterm congressional elections and for Obama himself to follow the hapless Jimmy Carter as a one-term President.
One of the great modern myths taught in some university economics departments is that government treasuries can be run in a fundamentally different way from the finances of private families. This mythology includes the belief that adding to public debt is a form of investment and that spending the taxpayers' money on a colossal scale and in a wanton manner may have positive economic virtues.
There's no evidence that ordinary men and women, who have to make their own way and support their families in harsh reality, have ever swallowed these nostrums. Unlike governments, they do not have the legal right to print money and, therefore, do not entertain the self-deception that goes along with that. For them the penalties of foolishly acquiring debts they cannot repay are certain and disastrous, often involving ruin from which they may never emerge. Sensible people observe the basic rules of financial prudence: Expenditure must not exceed income, if possible; debt should be acquired reluctantly and liquidated as soon as can be; and, above all, there should be a continual and indefatigable effort to save and to invest sensibly.
The West became rich and powerful following these rules. Despite the profligate examples recently set by their governments, many people still wish to follow the path of financial prudence. For instance, in Britain the savings of average-income families, despite low interest rates and small returns, have increased since the crisis of 2008. And there is some evidence of a similar pattern in the U.S.
As for India and China, the propensity of their 2 billion inhabitants to save has never been stronger or more persistent. In both West and East true financial leadership has been provided not by the sophistries of liberal leaders but by the invisible masses of the poor.
It is important that we studyand learn fromthe political lessons of recent events. Since the Democrats' debacle in Massachusetts, Republicans have begun to entertain positive hopes of recapturing the White House. Those who form Republican opinion should weigh carefully this new factor of popular financial probity.
It would be a welcome change to see a serious contender put forward a basic proposition of economic and financial policy such as the following axiom: "There is nothing essentially different between running government finances and those of a family. The same penalties for recklessness and folly apply to both. And, in both, the same prudence, integrity and self-sacrifice will bring success. Anyone who tells you different is deceiving you."
It is clear that such an approach would bring electoral dividends and, more important, national solvency and prosperity.