THINK ACT

THINK: BAILOUTS
ACT
Keynes is back, but
probably not for long.
In a recession, fi nancial
decision-makers should
realize that:
1/ Monetary policy and
the stabilizing role of
tax and transfers are the
best way to smooth
the economic cycle.
2/ Few governments
are able to reduce debt
created by defi cit spending
once the good times
return.
3/ Structural problems
need structural solutions.
Nils aus dem Moore
Columnist
Nils heads the policy and communications
department at the
Berlin offi ce of the economic
research body RWI Essen.
He was formerly an associate
of the Stiftung Neue Verant-
wortung, and worked with
RWI president Christoph M.
Schmidt on the Bundestag’s
commission of inquiry on
growth, prosperity and quality
of life. From 2005 to 2007, aus
How does debt add value?
Similar analysis of other countries’ economic programs has
also been positive. In spite of all the imponderable variables
involved, the bottom line is that without government intervention,
the collapse in output would have been even more
dramatic, and the job losses even greater. So what does this
conclusion mean for future economic policy? In 2009, the
historian and Keynes biographer Robert Skidelsky published
an I-told-you-so tome, “Keynes, the Return of the Master,”
proclaiming a new era of Keynesian government intervention.
Economist Jeffrey Sachs, of Columbia University, contends that
the success of recent bailouts was “the last hurrah of Keynesianism.”
In the foreseeable future, he says, the huge increase in
government debt will limit fi scal room for maneuver.
Sachs may well be right. Many OECD economies are in an
abysmal state, and there are three other reasons why Keynesianism
is unlikely to make a lasting comeback:
First, empirical research indicates that cyclical highs and
lows can be smoothed out by a combination of monetary
policy and the stabilizing effects of tax and transfers. Bailouts
can be counterproductive if they’re slow to take effect, and
in some cases they can actually make the troughs deeper.
Second, during the postwar decades, Keynesian policies
(2)
usually failed in good times to reduce debt caused by defi cit
spending in bad times. Third, current and future challenges Getty
like emissions and demographic change are primarily struc- (2),
tural, and structural problems need structural solutions.
So the message is a nuanced one. During the normal eco- Akhtar
nomic cycle, governments should rely on monetary policy, tax Amin
and transfers to improve their fi nances. Big bailouts should
be an absolute last resort for serious recessions. Photo:
dem Moore edited the business
section of the political
magazine Cicero, and this year
he won the Ludwig Erhard
business journalism prize for
his columns in the magazine.