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If we talk about Keynes’ resurrection
we must first explain Keynes dead
And for this we will build on what were
the fundamental contributions of Keynes' economic policy
The Keynesian economic policy is based
on the consideration that the key variable that drives economic activity
is what he identified as the "global demand"
And that global demand is made by
the consumer demand of households
the demand for investment goods by companies
the public sector demand through public spending
and the demand of international markets, through of exports
This simple formula, from an economist born in 1883
curiously the same year another great economist, Schumpeter, was born
Curiosely, Keynes and Schumpeter were born on the same year
In 1936, a really bad year on our history, he writes his general theory
And that basic formula can be used to combat the two major problems of any economy
which are unemployment and inflation.
And what did Keynes say about dealing with unemployment?
Well, as unemployment comes mainly due to a failure in this global demand
what you have to do is raise the global demand
And how do you rise global demand? Stimulating consumption
And to stimulate consumption you have to lower taxes
lower interest rates -in this case direct taxes- so families have more money to consume
Or lower interest rates, lowering the cost of money for businesses to invest more
Or increase public spending through the government and the general state budget
so that they build more schools, hospitals, etc.
and promote exports through a lower exchange rate
These are, say, basic recipes to combat unemployment
How do you fight inflation? You do the opposite
inflation comes because the demand is excessive
prices rise because demand rises
And what you have to do is articulate measures
to control this global demand, to lower this global demand
And how do you lower the demand? Lowering consumerism
And how do you lower it? Rising taxes
Restricting the inversion, rising the interest rates
reducing public expenditure and promoting the exchange rate to rise
Keynes also argues that unemployment and inflation cannot coexist
because logically if unemployment is due to a lack of demand, prices tend to fall
So unemployment with deflation, that was the model of Keynes
If there is excess demand, demand pulls from the offer and the offer pulls employment
Therefore there can be no inflation with unemployment, it's an antunomical sutuation
These Keynesian recipes worked perfectly from 1945 to 1973
What happens in 1973? The oil crisis
And with the oil crisis what happens is that for the first time in modern history
inflation and unemployment coexist, which Keynes had not anticipated
And how is this possible? Because inflation in 1973 is inflation based not in demand, but in costs
Prices go up because energy prices, oil prices, rise
And those costs, which make a barrel of oil rise from $ 2 to over $ 35 a barrel
meaning costs pulling prices and, without demand or economic recession, prices keep rising
So demand inflation has become in costs inflation
which Keynes didn’t provide the answer for
and there are also coexisting problems of unemployment and inflation, so Keynes is cornered
Keynesian policies are replaced by liberal policies, mainly from Milton Friedman
the so-called supply-side policies, which consider the state budget must be neutral
only interest rates should be handled to improve the economy
and especially the emphasis should proceed from macro-economical to micro-economical
That is, if we are to combat cost overruns, production costs should be fight at a company level
We must fight the rise in wage costs, higher production costs through innovation
through productivity, improved competitiveness, improved quality, after sales services, etc.
We enter the economics of intangibles and the productive economy at the company level
therefore we find that the emphasis of economic policy changes from macro to micro
Milton Friedman becomes the reference of the economic and Keynes is cast aside
Keynes’ Death
But come 2008 and Keynes resurrects. Why does Keynes resurrect?
Because the new situation created makes unemployment
coexists not with inflation, but in a deflationary situation
Currently there is deflation with unemployment, unemployment coexists with lower prices
and deflation can be as dangerous as inflation, because deflaction
although it creates an expectation that prices will go down, it delays consumption
so it can lower prices to fall much below the production costs
companies come in losses, and there is an extraordinary economic risk
So as unemployment and deflation are the basis of the current problems
Keynes does have the answer to combat the two problems simultaneously: to stimulate global demand
So if we must stimulate the demand, lets lower taxes, lower interest rates, raise public spending
and reduce the exchange rate to make exports more competitive
This would be solving 2 problems at once
Keynes has resurrected
And finally, what are the limitations of the Keynesian model now?
We are seeing them in Spain
It really is not the same fight as in the previous Keynes’ era where the main problem was inflation
inflation as in the 50’s and 60’s there was a practical situation of full employment
because fighting inflation requires budgetary measures of tax increasing and public spend lowering
So we really need restrictive budgets
disciplining public spending and raising taxes. No deficit, no debt
But if we are to combat unemployment and inflation, the problem is that
with lower taxes and higher public spending we are generating deficits and public debt
And in the current situation countries like Spain and all members of the European Union
can no longer use monetary policy instruments used by Keynes, because Spain has no control
over interest rates, or on the exchange rate . Therefore, the only economical policy instruments
at the disposal now of a European Union Country are tax instruments: taxes and public spending
if we lived in an interdependent world and Spain was not in the Euro or the European Union
we could possibly maintain indefinitely a policy of lower taxes and higher public spending
increasing the deficit and public debt grow indefinitely. But we are in the Euro and we have signed a stability pact
and this means that the European Union obliges us to discipline our public spending and our public debt
And then we really cannot use expansionary policies from the fiscal point of view indefinitely
And this is the scenario where we are today
From the employment point of view, with 20% unemployment, Spain would need expansionary policies
sustained in time with tax cuts and higher government spending to stimulate the economy
But the European Union membership limits these possibilities and we are already seeing
hints of attention we are receiving from the European Union, as the next speaker will explain, saying
"hey, you can run expansionary policies during a given time, about 2 years, but they can’t really be maintained indefinitely"
because we must return to the discipline of economics and public deficit must not exceed
according to the Stability Pact, 3% and 60% for public debt
It turns out that this year we're almost at 12% deficit in Spain
So we have an unemployment that would require us to implement expansionary measures
in accordance with the Keynesian measure but where the economic waste in public expenditure
made during the previous years with measures like the 400€ one or "baby check"
have made public spending rise unstoppably and now we have to discipline ourselves
And then you observe that if we have to do according with the European Union
is raising taxes and lower public spending, we are generating more unemployment
And this is the Gordian world in which now the Spanish economy finds itself
and it’s difficult to solve because they according with economic orthodoxy, we should have expansionary policies
but according to our commitments to the European Union, we must have restrictive policies
And so much for the theory, it’s politics time now. Thank you very much.