The European Budget Cutters versus John Maynard Keynes

The essence of Keynes is that in bad times it is vital that governments spend to increase demand, not cut. This, to some extent, is still the approach of the White House and of all others – in Canada and elsewhere – who believe in stimulus spending.

In Europe, however, there is a race to cut government spending, Keynes notwithstanding. In fact, governments compete with each on which one can achieve the most spectacular austerity measures. The British government may well have won the race when it announced this week:

• Average 19% four-year cuts in departmental budgets
• Structural deficit to be eliminated by 2015
• £7 billion in additional welfare budget cuts
• About 490,000 public sector jobs likely to be lost
• Police funding cut by 4% a year

The American Nobel laureate, Joseph E. Stiglitz, a Keynesian, immediately wrote a letter to The Guardian, arguing that the British government’s plan was “a gamble with almost no potential upside” and that it would lead to lower growth, lower demand, lower tax revenues, a deterioration of skills among the unemployed and an even higher national debt.

A story in Wednesday’s New York Times asked what happened to Keynesians in the U.K. It quoted Michael Saunders, an economist with Citigroup in London: “In the U.S., central bank memory is ingrained in the Depression,” he said, “while in the U.K. it is being bailed out by the International Monetary Fund. That gives policy makers different sets of priorities.”

After the economic collapse in the 1970s, the I.M.F. had to come to the rescue of the U.K., just as it had of Greece this summer.

The New York Times also quoted Andrew Lilico, an economist at the London-based research institute Policy Exchange: “Keynsians,” he said, “are regarded here as heterodox, not orthodox. This goes back to one thing: we have this internal fear of losing control of our deficits and having foreigners telling us what to do. There is also a sense that deficits of this scale are morally lax.”

In Britain, and throughout the rest of Europe, policy makers hope that by the time the austerity measures hit home, a private sector recovery will be well under way, helping to compensate for the tighter government budgets. If this does not happen they may eventually be tempted, after all, to call upon the spirit of Keynes.

At this stage, the focus is not on the spirit of Keynes but on protesting unions that are driven by economic need, not economic theory. French unions were aroused by their government’s decision to raise the pensionable age from 60 to 62. The unions considered this to be the slippery slope and decided to make a stand. Their actions have cut into train and subway service, and truckers and others have blocked refineries and fuel depots in a bid to cripple the transportation network.

In the U.K., the unions are beginning to act, but it seems unlikely that their actions will be as virulent as those of their French counterparts.

The New York Times reports: “Today, the fight begins,” David Prentis, the general secretary of Unison, the country’s largest union, exhorted participants at a rally on Tuesday. “Hands off our public services.”

Mr. Prentis, whose union represents public sector workers, received plenty of support from the conference hall where 2,000 union activists congregated.

But the number attending was relatively small. Outside the hall, the scattered calls by union stalwarts – many bused in from cities like Bristol and Liverpool – were lackluster.

“Come on,” shouted one union organizer to a silent gathering of placard bearers. “What happened to your chanting?”

Keynesians don’t chant.