In an interview with the Browser, Niall Ferguson describes the borrow-and-spend policies of the left as “vulgar Keynesianism” – because “Keynes would be rather appalled at the way his name is used these days to justify policies that are reckless.”
Ferguson would, no doubt, approve of the conclusions – and historical sweep – of Raghuram Rajan’s essay for Foreign Affairs (.pdf). Rajan deserves our attention. In 2005, he was one of the few economists to warn the world about the dangers facing the financial system. Furthermore, he did it in style – by delivering what was then a controversial argument at a celebration honouring Alan Greenspan (the soon-to-retire chairman of the Federal Reserve Bank and chief architect of the doomed pre-crash consensus).
So, who does Rajan blame for our economic troubles?
- “Bankers obviously deserve a large share of the blame for the crisis. Some of the financial sector’s activities were clearly predatory, if not outright criminal. But the role that the politically induced expansion of credit played cannot be ignored; it is the main reason the usual checks and balances on financial risk taking broke down.”
Rajan explains what he means by “politically induced expansion of credit”:
- “For decades before the financial crisis in 2008, advanced economies were losing their ability to grow by making useful things. But they needed to somehow replace the jobs that had been lost to technology and foreign competition and to pay for the pensions and health care of their aging populations. So in an effort to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same. The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.”
Given that Rajan’s essay is entitled ‘The True Lessons of the Recession’, what are the lessons that he wants us to learn here? Basically, there are two: Firstly, that unsustainable borrowing is what got us into this mess; and, secondly, that our underlying economic problems are about our inability to produce wealth, not our incapacity to consume it.
The "vulgar Keynesians" should stop pretending otherwise.