Rebalancing the Global Economy
All In It Together
Masters of Money
This old east German television tower is a symbol of reunified Germany. But these days feelings of European unity are in short supply. Ministers here in Berlin want struggling euro zone countries to impose tough measures to get their economies into shape. The stronger countries have been willing to help by offering massive loans, but I don’t think John Maynard Keynes would have thought that was enough.
Keynes thought, for the global economy to work, it had to be a two-way street. So the weak countries, that had run up a lot of debt with the rest of the world, they did have to become more competitive, learn to pay their way.
But the rich exporters…
Well, they had to do their bit as well – spending more on other countries’ goods and exporting less, becoming a bit less competitive. Now that’s a bit of Keynesian advice that doesn’t go down well here in Germany at all.
Professor Gustav Horn “If you say Germany should export less become less competitive, the popular view is, ‘That’s mad!’ By getting us weak when others are already weak? And, certainly, that’s the wrong conclusion.”
There are signs of movement on Germany’s side of the street.
Domestic car sales have been going up. But exports are still a central plank of the countries economic policies. And car exports are up by almost a third in the past two years. German consumers have been spending more lately. But not enough to provide much of a selling opportunity for struggling countries like Greece.
Professor Gustav Horn “That’s a very popular approach, to tell German private households, ‘Please, spend more. Don’t be so greedy with your money.’ But I think that’s wrong. Because people look at their income and say, ‘I can’t afford it, simply.’ And that’s true. I mean we have had very weak wage increases during the past years. And that’s the point where you have to have higher wages. And these higher wages you could certainly spend. And then German consumption would be much stronger than it was in the past and that will help us.”
Memories of hyperinflation are still raw in Germany. Few want to put their hard-won economic stability at risk for their weaker European neighbours. The divisions between countries at a global level are even clearer. Leaders pay lip service to Keynes dream of a truly coordinated global economy, where the strong work with the weak for the benefit of all. But there is little sign of them actually doing it.
I think Keynes would look at our world the troubles in the Eurozone, the banking crisis and say it was a pretty scary place, without many of the checks and balances that he argued for at Bretton Woods. But he’d also say – he DID say – that a really global economy was tremendously exciting, with huge potential to improve all of our lives. If the government could only work out how to put into practice that basic insight that he kept coming back to. We really are all in it together.
Professor Kenneth Rogoff “Sure, it would be great to have better multinational institutions and Keynes was a pioneer in that. He was a big believer. In order to fix the international financial system that would be very helpful. And maybe somebody with the sort of magnetism and gravitas and stature of Keynes could somehow catalyse that. But he is a rare person indeed.”
Keynes left an extraordinary legacy. He didn’t just transform economics, he changed the lives of billions of people around the globe. There aren’t many people born in the 1880s whose name you hear as often as John Maynard Keynes in current debates. His ideas that countries shouldn’t beggar their neighbours, that economies were deeply unpredictable, could get stuck in slumps, have changed the way we think about the world. But what can Keynes actually do for us right now?
Back in Cumbria, it’s clear what Keynes has done for them. Government intervention will help keep Pirelli’s tyre factory open, and provide a lot of employment. In the political mainstream, there aren’t many who challenge Keynes basic message that you can’t leave economies to drive themselves.
Alistair Darling “John Maynard Keynes was a very dominant force in the 20th century and my guess is he will remain a dominant force in the 21st century, which is why I think he will go down as one of the greatest economists the world has produced.”
80 years ago, building the Hoover Dam eased the Great Depression. With the government borrowing more cheaply than ever before, we might think the case for New Deal-type investments was equally strong today. But given the sheer volume of public debt, no one can promise that piling on more borrowing will be a miracle cure.
Kenneth Rogoff “What is thought of as a typical Keynesian solution to get more debt, borrow money, spend, spend, spend and cut taxes. That needs to be used more judiciously here, because, at the end of the day, you’ve got to get rid of this debt. This is a very long haul. I don’t think anything just boosts your way and zooms your way out of this. There just is no magic bullet.”
And what of Keynes’ final big idea, that countries are all in it together? Since Bretton Woods, the world has grudgingly accepted that we have to cooperate to prosper. But we are struggling to make it work in practice.
Will Hutton “He’d be worried. He’d be very worried. He’d have been very concerned about the growth of inequality worldwide. He’d be very concerned that there was a return to beggar my neighbour policies. I have no doubt that he would be warning of regional war and all its dangers. He’d be very frightened that the circumstances that led to war in 1914 and 1939 were, on a slow-burn basis, unfolding in front of us again.”
Maybe the biggest thing Keynes could do for us now would be to remind us of the traits that gained him his life – imagination and optimism.
David Woolner “He came along and was willing to examine these profound problems in ways that no one had done before. His great legacy is that fundamental belief in humanity, that fundamental belief in the ability of government and society to dedicate itself to helping those that are less fortunate and need our help.”
In 1946, John Maynard Keynes suffered a fatal heart attack in his beloved Sussex Downs. Just 62, he left a legacy that changed the world. But he also left an enigma. He thought we should try to tame the power of money to make it work for us, but he also taught us that economies were fundamentally unpredictable. It’s a contradiction we are still grappling with today.
More than anyone, Keynes paved the way for activist government. He said we could and should make the world economy work better. The generation that rebuilt the global economy after the war really were children of Keynes. But when you read him today, there’s another equally powerful message that comes through, about the great unpredictability, uncertainty, of economic life. You should never think you got it covered, that you’ve abolished boom and bust. That’s the great paradox. The man who did most to make economists arrogant in their capacity to bend the world to their will, also gave them or should have given them the best reason for self-doubt.
Rebalancing the global economy requires unprecedented cooperation we really are ‘All in it together’ like it or not.
