There is a funny story about a mechanic who tended to repair everything with a hammer. Whatever defect there was he simply used the hammer to bang against the machine, hoping that this will make it work again. Sometimes it works sometimes not. Similarly monetary and fiscal policy is currently misused to address structural problem. By running excessively high fiscal deficit and an ultra-light monetary policy numerous governments and central bankers believe they can heal ailing economies suffering from structural rigidities and lack of innovation. The latter are however essential to regain a sustainable international competitiveness.and long-term economic stability Using a hammer does not cure a machine with broken parts. One can bang on it indefinitely with a hammer but you cannot fix it this way.
There has emerged a strange believe in macroeconomics that unorthodox monetary and fiscal policy of huge deficits could do the trick to fix economies suffering structural impediments by using the wrong instruments. More helps more is the ideology. Higher deficits and more excess-liquidity solves problems even if the past tracking record shows that previous attempts have failed.
Keynes recommended fiscal stimulus for pump priming the engine of economic growth, it was meant by him to kick-start the economic engine. You can use the starter to start the engine to get the motor running again. It is even essential to start the engine, but it is not meant to be used to substitute the running of the engine by using the starter again and again. The outcome is obvious, if I use the started to run the engine which probably lacks gas, the battery is discharged and the car will never will be running on normal. Current ultra-light monetary policy and high-fiscal deficits building up cumulative higher and higher sovereign debt are a similar useless strategy when the defect has nothing to do with pump priming of kick-starting an engine. There are deeper causes.
To cure them you need different instruments, e.g. structural reforms of defunct markets. If an economy is suffering from a structural slump and institutional failures of markets and government institutions, e.g. financial and labor markets, you cannot heal this by excessive monetary and fiscal policies.
Instead you act like a quack banging a hammer against a machine in the futile hope it might start accidentally again. Since more than five years after the global fiscal and economic crisis policymakers are trailing a dead-end of policy mix. They shy away from major structural reforms in their countries and hope they can substitute these painful restructuring by loose fiscal and monetary policies. What they have accomplished is that they steadily are losing time urgently needed to implement necessary structural reforms.
Meanwhile the battery is getting weaker and weaker because it is discharging. This kind of false policy therefore is a policy flirting with disaster. Probably current policy makers got stuck in a false ideology always singing the same song of Pete Seeger, “If I had a hammer, …”. To get their economies running again they need no hammer but a knife to cut off those obstacles which bloc their economies. The tragedy is that they don’t have realized this until it might be too late. Pump priming is a necessary ingredient to pump prime or kick-start an engine. But before you kick-start it again, you have to fix it not the other way round.
Leijionhufvud knew quite well the difference between Keynes and the Keynesians. Probably current macroeconomists should rethink what he has really said again. Then it will be time of the return of the master.
Misinterpretations of Keynes have already led to a dangerous situation. Let us hope that a well tuned policy of short-term pump priming is supplanted by the essential and necessary structural reforms to reestablish long-term economic stability. Without both of them pump priming is just a flash in the pan. Japan has now to make its choices. Abenomics will not work without major structural reforms. Same, same for China and the PIIGS-countries plus France. Remember Kindleberger’s Law, you have to do both of it. Pump priming and strucutral reforms are complenents no substitutes. You need both oif them.