Keynesian Policy Failure: Portugal Edition

For the mainstream, “austerity” has been a harmful, immoral or inhuman policy. And the popular prescription has been for "virtuous" government to keep spending money to pump up the “aggregate demand”.

However for the incumbent government of Portugal, tried Keynesian interventionist policies has signified an utter failure.

From the New York Times,

Defending austerity is not getting any easier for Europe’s politicians. And Vitor Gaspar, Portugal’s finance minister, has it harder than others. The country’s unemployment rate is 14 percent, and its economy, which has been stagnant for years, is expected to shrink another 3.3 percent in 2012.

Opponents of austerity may cite Portugal as a country that could benefit from economic stimulus and kinder budget cuts. But Mr. Gaspar, speaking to The New York Times last week, has a message for observers who say Europe needs to substantially relax its austerity approach: We tried stimulus and it backfired.

Like some other European countries, Portugal tried what Mr. Gaspar called “a Keynesian style expansion” in 2008, referring to a theory by economist John Maynard Keynes . But it didn’t turn things around, and may have made things worse.

“My country definitely provides a cautionary tale that shows that, in some instances, short-run expansionary policies can be counterproductive,” Mr. Gaspar said. “There are some limitations to the intuitions from Keynes,” arguing that the economist himself saw instances when demand-stoking policies might not lead to growth.

The tough line has yet to win markets over. The yield on Portuguese government bonds – more than 11 percent on longer-term bonds — is substantially higher than the yields on debt issued by Ireland, Spain or Italy. Mr. Gaspar says the yields are “not a reflection of the fundamentals.”

If interventionism caused the crisis, then it should be expected that further interventionism will worsen the crisis. So Portugal’s botched Keynesian experiment which “may have made things worse”, did what simple logic dictated.

However in the world of politics, the stereotyped approach for crisis management can be characterized as “doing the same thing over and over again and expecting different results”. In the world of politics, insanity has been the conventional policy.

It’s refreshing to know that Portugal’s government seem to have been awakened from a mental stupor.