Morning Must-Read: Anatole Kaletsky: Keynes Was Right

…The main lesson is that government decisions on taxes and public spending have turned out to be more important… than the monetary experiments…. Fiscal policies have been very different and the divergence in outcomes… has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks. Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth…. The six years since 2008 have provided strong empirical support for the supposedly outmoded Keynesian view that government borrowing is more powerful than monetary policy in stimulating severely depressed economies and pulling them out of recession….

The underlying reason… is a matter of simple arithmetic… should not be open to debate…. [With] ‘deleveraging’… in the private sector… arithmetic shows that economic balance can only be restored if some other sector of the economy spends more than its income…. Monetarism… assum[ed]… interest rates could always be reduced sufficiently to stimulate private investment, discourage private savings…. In the era of high inflation when monetarism was introduced, the idea… was reasonable enough…. Ironically… the very success of monetarism and central banking in conquering inflation now means that the era of monetary dominance is over…. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening…. Conversely, fiscal expansion now provides an unqualified economic stimulus because there is no risk of interest rates rising significantly… perhaps not until the end of the decade…