In the Long Run We Are All – What?!

by Dirk Ehnts, Econoblog101

The European policy makers continue their deadly embrace of Keynes, misusing his ideas, misinterpreting his ideas, omitting his ideas. Here is an extract of a speech by Benoît Cœuré, Member of the Executive Board of the ECB, at the European Conference at Harvard (kudos to Miguel for this quote and the fourth):

John Maynard Keynes famously said: “The long run is a misleading guide to current affairs. In the long run we are all dead”. ^[5] And yet societies live in the long run. Today’s choices influence tomorrow’s outcomes, just as yesterday’s decisions affect today’s situation. This is even truer in a low-growth, low- interest-rate environment, which increases the discounted value of tomorrow’s costs and benefits. The importance of the long run was widely shown by the crisis. It was doubt about the accumulation and sustainability of debt which caused Greece and then Ireland and Portugal to lose access to markets and which associated the same risk with other Member States. And it is doubt about the stability of the political system as well as its ability to adopt legitimate, effective and sustainable public policies that worries citizens in many euro area countries.

This is the worst economic quackery I have seen from a central banker in a long while. Have a look at the original quotation from Keynes in its context:

The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.

Now let us re-read the second half of the Benoît Cœuré quote from above:

The importance of the long run was widely shown by the crisis. It was doubt about the accumulation and sustainability of debt which caused Greece and then Ireland and Portugal to lose access to markets and which associated the same risk with other Member States. And it is doubt about the stability of the political system as well as its ability to adopt legitimate, effective and sustainable public policies that worries citizens in many euro area countries.

This has nothing to do with what Keynes said. Keynes pointed out that the long run was not important, that short-run problems need short-run solutions. Economists which solve short-run problems by pointing out that in the long run everything will be fine again are mistaken. This, however, is exactly what the ECB’s policies do: you need to fix your long-run debt problems and you will grow again. Keynes himself thought differently in the General Theory (ch. 10 – if you read carefully you will notice why people say that Keynes set out to save capitalism, not destroy it):

Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the “financial” burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them [the “financial burdens of posterity (ed.)] as an inevitable result of applying to the conduct of the State the maxims which are best calculated to “enrich” an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time.

I welcome the fact that the European institutions start to incorporate Keynes and his ideas into their speeches and policies (see Mr Rehn’s recent comments), but I have yet to read a single sentence in which someone from the troika makes sense of Keynes and his ideas. Until now, it all comes down to: “see, we are Keynesians, too, so there is no alternative.” The Spanish newspaper EL PAIS calls it smearing Keynes(ianism). And Europe continues to fall apart because its policy elite has lost its ability to discuss and evaluate ideas.