Resurrection of Keynes again
A few years ago, almost everybody was afraid of inflation in spite of stagnant demand and weak job creation. The European Central Bank (ECB) had been criticizing the Federal Reserve Bank for not following tight monetary policy. On the other hand, the Bank of Japan (BoJ) preferred not to change interest rates in spite of the deflation risk. In Turkey, the Central Bank was also cautious when announcing interest rate changes.
Projections on foodstuffs, raw material end energy price increases alerted main central banks about the emergence of a probable new inflationary period. This was the main reason why the ECB decided to raise interest rates and the ECB president signaled that it might be the start of a series of rate hikes. China and India also aimed to implement tight monetary policy to control the rising inflation.
Some European countries preferred to follow the same way, as the eurozone inflation jumped to 2.6 percent.
Then, a short time ago, this attitude began to change; first slowly then rapidly. The Bank of England and the Federal Reserve Bank held the main interest rates near zero percent, aiming to stimulate private expenditures in order to fight against economic stagnation and unemployment in spite of inflation risk. Finally, one of the most conservative central banks, the BoJ, decided to widen its stimulus efforts after Prime Minister Shinzo Abe recently urged the Bank to ease monetary policy further.
The Japanese government has decided to induce growth through public spending in spite of huge public debt that is already over twice the size of the gross domestic product. In addition, the Government announced that the BoJ set a 2 percent inflation target instead of 1 percent. All these indicate a sharp and maybe surprise change in economic policy decisions that are normally expected but not so soon. In another surprise from the U.S.A., the House of Representatives, which is controlled by the Republicans, approved a higher limit on government borrowing in spite of the huge accumulated debt volume of $16.5 trillion.
What are the reasons behind these recent policy changes, when some European countries are still forced to implement austerity measures in spite of record unemployment figures? It is known that these countries also have record levels of deficit and debt. But these figures are more discouraging in the U.S.A and Japan. Then why were austerity measures not implemented first in those countries to reach reasonable debt and deficit figures as is advised to other countries that have the same problems?
There are so many reasons. International Monetary Fund chief Christine Lagarde has recently warned that more efforts were needed for the global economic recovery. The recently published World Bank report, which predicts limited global growth in 2013 and 2014, supports her warning. These warnings were addressed, of course, to the most important actors of the world economy – in short, the United States, China, Japan and maybe Germany in Europe. Only these countries have the capacity to implement stimulus policies despite their deficit-debt problems and the risk of probable inflation that they face. In addition, they are the most vulnerable countries, not only in the economic but also the political sense, if worldwide stagnation continues for many more years.
This makes Keynesian policies an almost eternal truth, at least in fighting recessions. It is generally accepted that his practical advice is more important than their theoretical content. However, especially after the Second World War, his policy advice that was used for the salvation of Western economies made him the most famous economist of the last century. Maybe for that reason some prominent economists whose contributions to theory are more important than Keynes’ have always been resentful.