What sort of advice would John Maynard Keynes give to Western governments if he were alive today? According to British historian of economics Niall Ferguson, he would tell them to ignore his own theories about government spending, because today’s post-financial-crisis problems cannot be solved that way.
Ferguson, who spoke at the Israel Democracy Institute’s Caesarea Economic Policy Planning Forum in Rishon Lezion on Monday, said the only escape route for the United States and Europe from their economic troubles was to look toward Asia; in particular, to emerging economic powers China and India.
“The world is engaged in a massive shift after 500 years of Western ascendancy,” Ferguson said. As China moves closer to overtaking the US as the world’s largest economy, and India continues to accelerate, “economies around the world will prosper or not prosper according to their degrees of exposure to these Asian economies,” he said.
Referring to the massive financial stimulus packages launched by the US and most European countries to tackle the effects of the recent global financial crisis, Ferguson said: “If Keynes were able to answer my question, if I could summon him from the dead, he would say: ‘Don’t listen to the people in the Western economies who call themselves Keynesians, because their problems can’t be solved that way.’” “Most countries in the developed world – and [Israel] is one of the exceptions – responded to the financial crisis by running very large fiscal deficits,” he said.
“When we look at the results of financial stimulus” in the US, it looks “disappointing,” he said, because growth is stalling, unemployment is at around 9 percent, and “US federal debt is going in exactly the opposite direction from the Israeli federal debt.”
Ferguson, a professor at Harvard University and the London School of Economics and the author of 11 books, said Keynes would also have some special advice for Israel: “Beware the economic consequences of the Arab Spring.”
The revolutions were widely misunderstood by Western governments, he said, who are ignoring that once the “euphoria phase” of revolutions is over, economic disaster such as higher prices, greater uncertainty and capital flight always follows. “And the magnitude of capital flight from Egypt right now is roughly 10 times the aid promised to Egypt by the United States and Europe combined.”
David Morse, Citigroup Global’s head of commodities research, who sat on a panel alongside Ferguson, spoke positively about the massive natural-gas finds made in Israel and the US in the past two years. But he said public policy toward energy supply provides the only obstacle to the full harnessing of those resources.
“Democracies give leaders ideas based on domestic politics that are out of whack with international reality,” Morse said. “One word about Israeli gas from an outside perspective is that it’s puzzling to me as to why there is so much debate as to what to do to harness this gas. I posit that the debate is impeding resource development, and that it is now time to develop an international market as rapidly as possible to secure very high prices on long-term contracts.”
Turning to oil, he said since the outbreak of armed conflict between Libyan dictator Muammar Gaddafi and armed rebels, Saudi Arabia had raised oil production from 8 million barrels to 10 million barrels a day and was putting 1.5 million barrels a day in the marketplace to keep down prices, “to keep discipline within OPEC.”
But he warned that this had lowered the kingdom’s spare oil capacity from around 4.5 million barrels a day to “closer to 1.8 [million barrels],” and “if there is another Libya they will barely have enough capacity.”
In addition to this, the attack by Iran and Venezuela on Saudi Arabia and the gulf monarchies at OPEC’s June meeting was unusual he said, and could have “reverberations on oil prices.”
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