LONDON -

Robert Skidelsky Says More…

Last year, you lamented the reversion of contemporary policy discussions to “the age-old standoff between market-based supply-side economics and a supply-side approach rooted in industrial policy” because it leaves out a Keynesian focus on the “insufficiency of demand.” How would such a focus alter policymakers’ approach to key issues like climate change and energy security? Taking the United States Inflation Reduction Act (IRA) as an example, how could the US advance the Act’s stated goals using a Keynesian approach?

This is a really difficult opener! My main issue with the contemporary policy discussion is that it disregards Keynes’ insight that capitalist economies suffer from a chronic deficiency of aggregate demand. In other words, it assumes that economies have an in-built tendency toward full employment. But if that were true, there would be no case for expansionary fiscal policy.

The IRA - which includes USD800 billion in new spending and tax breaks to accelerate the deployment of clean-energy technologies - had to be dressed up as ‘modern supply-side policy’ aimed at reducing inflation by lowering energy costs. But fiscal expansion based on a model that denies the need for it is bound to come to grief, as markets push for a return to sound finance and sound money. In the United Kingdom, Labour has had to abandon its pledge to spend an extra GBP28 billion (USD35 billion) per year on green energy because it couldn’t answer the question “Where is the money coming from?”

The link between green investment and what UK Shadow Chancellor of the Exchequer Rachel Reeve