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The unfolding global economic debacle has led many governments, including our own, to reach into their policy toolkits for fiscal stimulus measures. In doing so, they have revived fiscal policy as a counter-cyclical tool, which was so much in vogue until the early 1970s that Richard Nixon famously declared 'We are all Keynesians now.'
Are we all Keynesians again? At first sight, fiscal pump priming might appear to have a lot going for it in current conditions: inflation is receding; spare capacity is increasing, at least in the major developed economies; and the crisis in the banking system is weakening conventional monetary policy.
Even so, the revival of activist fiscal policy ought to be highly controversial because the 1970s and 1980s saw a new consensus emerge that it was ineffective or even damaging. The lessons from that era remain valid today but are being ignored by governments desperate to prop up sagging economies. There is a debate on these issues in the United States, but they have received much less scrutiny in Australia.
