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IMF Managing Director Dominique Strauss-Kahn delivered what was almost a bombshell of an announcement in a speech at the World Economic Forum in Davos in January, when she admitted there were limits to dealing with the global economic crisis by monetary policy alone and that each country must boost fiscal spending even if that entails budget deficits. Former U.S. Treasury secretary Lawrence Summers, who was among the speakers at the forum, expressed his surprise at the comment, saying it was the first time in 25 years that the IMF had called on world governments to expand fiscal deficits.
During each global economic emergency, the IMF has invariably pushed for fiscal tightening as a cure-all. Strauss-Kahn's comments were a signal that the era of unfettered neoliberalism, which for the past 30 years urged "small government" led by privatization and deregulation, was coming to an end. From that perspective, her speech also marked a revival of the precepts of John Maynard Keynes, once seen as the greatest economist of the 20th century.
During the Great Depression of the 1930s, Keynes prescribed more fiscal spending to reinvigorate economies. He called on governments to fill large pots with money, bury them in abandoned mines and make businesses dig them out. Those were revolutionary comments in an age when balanced fiscal spending was considered sacrosanct. Keynesian economics did not play a major role in resolving the Great Depression, but ended up becoming the representative economic philosophy in the capitalist world after World War II. Even Richard Nixon, else a staunch conservative, said everyone had become a follower of Keynes.
But during the 1970s, Keynesian economics began to lose its influence because of its inability to resolve stagflation, where consumer prices rise amid economic stagnation. Many felt that fiscal spending stoked inflation while government intervention hindered the efficiency of the market. U.S. president Ronald Reagan said the government was not a part of the solution but the problem itself. For a considerable time since then, Keynes had been regarded as a symbol of a bygone era.
Now the pendulum is swinging back toward Keynes. Led by the United States, governments around the world are pursuing aggressive pump-priming policies. But there are voices of warning. Germany's finance minister said the policy would leave mountains of debt for future generations. Yet the general trend is that inflation and fiscal deficits are things to worry about later, while economic resuscitation comes first. Keynes said economists should be as realistic and pragmatic as dentists. In other words, different situations call for different prescriptions. Ours is exactly the type of situation he was referring to.
The column was contributed by Chosun Ilbo in-house columnist Kim Ki-cheon.
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