Niall Ferguson is the champion of anti-Keynesian economists. Last week, he explained why America’s pursuit of Keynesian policies is leading to disastrous consequences.
Ferguson gave four symptoms of U.S. degeneration as evidence that Keynesian policies have created underlying weaknesses.
Ferguson, a professor at Harvard, gave the opening talk at last week’s Strategic Investment Conference in San Diego, hosted by Altegris Investments and John Mauldin. His remarks were based on his newly released book, The Great Degeneration: How Institutions Decay and Economies Die.
Keynes, who famously said, “In the long run, we are dead,” argued for aggressive policy interventions to address short-term economic needs. But those monetary and fiscal policies have served to justify an unacceptable expansion of the deficit, according to Ferguson.
“Short-run fixes, regardless of the long-run consequences, got us to where we are,” he said.
We face deeply-rooted troubles, and misguided fiscal and monetary stimuli are merely a symptom of a more profound structural malaise, Ferguson said.
Ferguson drew an analogy between the U.S. and 19th-century China. In the 1800s, the average U.S. citizen was 22 times wealthier than the average Chinese. But over the next century, China closed the gap to a 5-to-1 ratio. The Organization for Economic Co-operation and Development (OECD) projects the ratio will be 2-to-1 in a few decades.
China fell behind in the time leading up to the 19th century because it had become what Adam Smith called a “stationary state.” Ferguson said that the guarantee of justice and the rule of law distinguished Europe and the U.S. from China at that time. Chinese reforms to its institutions helped it close that gap in the ensuing years.
“Institutional problems explain low growth and why countries are poor,” Ferguson said, and the west now faces the danger of becoming a stationary state.
Let’s look at the four symptoms of institutional failure that Ferguson said imperil the U.S. – and pose a far greater threat to Europe. Ferguson was optimistic about the future of America, and I’ll conclude with his reasons for why we will ultimately succeed.