But the other side of this coin is also important: in years when economic conditions are favourable, when the private sector is at full speed, the government should hold back and put aside reserves to boost its financial strength so that it can provide support when the economy needs it.” Nicolai Rygg (1948), “I økonomisk stormvær” [In stormy economic weather], festschrift for Joh. H. Andresen, also published as an annex to the periodical Statsøkonomisk tidsskrift nr. 3/4 1948, p. 23. In this article, Rygg highlights his assertion that government budgets must balance over the business cycle. 15  Governments consistently overestimate growth in their forecasts (Frankel 2011). But this is difficult; in summer 2008, the average OECD country overestimated the budget situation in 2007 – the year prior to the forecast – in an amount equivalent to 2 percent of GDP (National Budget 2013). 16  In his 1933 pamphlet “Saving and Circulation Regulation”, Frisch proposed the establishment of an advisory committee on the business cycle, composed of economics experts. 6  BIS central bankers’ speeches  In retrospect, we can acknowledge that simple rules of thumb can often be useful. For my own part, many years’ experience of economic policy have led me to notice the prevalence of the figure 4.17 A current account deficit exceeding 4 percent of GDP is often a harbinger of future problems. Spain is a case in point: government finances were fairly healthy, but deficits were building up in the private sector.
Although history never repeats itself exactly, some key features recur: one recurring feature is that boom periods are confused with an increase in the economy’s growth capacity. Good times are mistakenly interpreted as perfectly normal.15 When times are good, it is difficult to gain acceptance for setting aside funds. There are always unsolved tasks in a society, and these tasks attract attention. In the 1930s, Ragnar Frisch understood that it is difficult for politicians to recognise good times at the time. He believed that it was the task of economists to ascertain the cyclical situation.16 When the crisis arrived in 2007, government finances were in disorder. Deficits and debt rose to such high levels that it was difficult for many countries to borrow money. When credibility is lost and lenders draw the line, Keynesian policy has reached its limit. These countries now have no other choice than to cut welfare schemes and public spending. The political fury we are now witnessing in Athens, Madrid and Rome is being directed at today’s political leaders. Perhaps their rage should be directed at those who were in positions of responsibility in the good times, instead of at those who are now left with the washing-up. We have furthered our understanding of economics over the many decades since Keynes, Frisch and others laid the basis of modern economics after the 1930s crisis. Theories have become more advanced, and methods and calculations far more complex. We have reams of regulations.