Days of 'borrow and spend' are over in great race to austerity
YESTERDAY'S events in Washington mark the beginning of the end of a great experiment.
That experiment saw President Barack Obama follow the advice of John Maynard Keynes and try to inflate the economy out of the latest recession.
In the 1930s, Keynes recommended that governments borrow and spend their way out of the Great Depression. Since the fall of Lehman Brothers, the Americans have tried to do much the same thing.
Those dreams now lie shattered on the floor of the House of Representatives.
Soon the United States will follow the well trodden path of retrenchment and cuts.
The British government is already two years down this path and Germany has just come out the other end.
Ireland is certainly cutting spending but the situation is so hopeless that we see little sign of real austerity yet.
This is a return to the policies of men such as Ronald Reagan but without the same enthusiasm or ideological beliefs.
While the Tea Party may hate big government, men such as Michael Noonan and Barack Obama do not appear to have read 'The Road to Serfdom', the seminal text that guided politicians such as Reagan and Margaret Thatcher.
While Noonan will not have the luxury to decide his own policies for some time, other leaders can adopt a more nuanced approach and won't be rejecting all of Keynes's teaching.
The UK's George Osborne has indicated that he may begin borrowing again and won't rely on a pre-Keynesian world of constant cuts.
Even the International Monetary Fund's Ajai Chopra (familiar to almost everybody here for his role in the Irish bailout) urged Britain to resume borrowing yesterday if the present cuts don't work.
Yesterday's agreement appears to give Obama and his Democrats some scope to pick and choose, but there is little doubt that spending is going to fall quite quickly in the US over the next few years which will have a knock-on effect for Ireland.
The first signs of this knock-on effect could be seen yesterday when shares in CRH -- which is the biggest Dublin-based company on the Irish stock exchange -- tumbled 6.1pc because investors fear the Irish company will make less money in the US in the years ahead.
With so many people in Ireland employed by US multinationals, any decline in spending across the Atlantic is not good news in the short term.
In the longer term, the austerity measures will help us as well as the US by restoring the world economy's health.
The jury is still out on whether the policies of Keynes do work.
Anybody who lived through the 1980s here in Ireland or elsewhere in the West knows that Thatcherism had some success in turning around the British economy -- but at enormous social cost.
Until yesterday, the only thing Obama shared with Reagan was a gift for rhetoric. From today, he will also share similar economic policies.
They will be much more brutal than the attempts to spend the US out of recession. But they also stand a good chance of working eventually.