Economics - Return to Keynes

Wall Street Journal : [See also WSJ here] [referred by Jersey Girl]

The U.S. and dozens of other nations are returning to massive government spending as a recession fighter. It's not because they're sure it'll do the trick. It's because they're running low on options and desperate for tools -- even old ones -- to fight the global downturn.

Around the world, interest rates have been slashed and trillions of dollars have been committed to bailouts. But the global recession is deepening anyway. So policy makers are invoking the ideas of British economist John Maynard Keynes (pronounced "canes"), who argued that governments should fight the Great Depression in the 1930s with heavy spending. With consumer and business spending so weak, he argued, governments had to boost demand directly.

Drama was a Keynes tool. During a 1934 dinner in the U.S., after one economist carefully removed a towel from a stack to dry his hands, Mr. Keynes swept the whole pile of towels on the floor and crumpled them up, explaining that his way of using towels did more to stimulate employment among restaurant workers.

Keynesian policies fell out of favor in the 1970s, as government spending was blamed for helping to spur inflation around the world. But with the global economic turmoil being compared to the 1930s, government spending is once again back in vogue.

"The situation is so severe that we're all Keynesians again -- Keynesians in the foxhole," says Martin Baily, a former Clinton White House economist at the left-leaning Brookings Institution. "It really is such a difficult time that we're going to need to use whatever ammunition we have." [...]