Come back, Keynes

Senator McCain and the Republicans over the water, and the Tories over here, bear-led (the appropriate term in present circumstances) by Cameron, a rather battered Osborne, and Hague, are demanding cuts in government spending — for example, the Tories' advocacy of a freeze on local council spending, and the GOP calling for a freeze in all federal government spending — as a proper response to the recession.  The Tories denounce Gordon Brown for having failed, when Chancellor of the Exchequer under, or alongside, Blair, to "put money aside for a rainy day" when the going was good, implying a condemnation of the extent of government spending on public services in the past decade which made a start in making up for the scandalous lack of investment in them during the Tory years that preceded it.  They talk about the UK's budget deficit and borrowing as if these were evidence of profligacy — in a recession!  John McCain calls Barack Obama a 'socialist' (shock, horror!  swoon!) for advocating tax cuts for 95 per cent of Americans and increased taxes on the remaining 5 per cent of rich individuals and corporations;  he seems to think that only the rich, provided that they don't have to pay much tax, "create jobs".

It's as if Keynes had never existed.  Are the Republicans and the Tories genuinely unaware that the way out of recession is increased, not deferred or frozen, public spending on projects which will generate jobs, put money in the hands of ordinary working people which they will spend and thus generate further demand which in turn stimulates investment, borrowing and spending?  That to finance increased public spending by increasing overall taxation can only deepen and prolong the recession by damping down ordinary spending, so that it's essential to finance the additional expenditure out of more borrowing instead?  That because the less well-off have a higher propensity to spend than the rich (who save a higher proportion of their incomes and thus contribute less to re-inflating the economy in a recession), re-distributing money from the rich to the less rich, including the poor, is an excellent anti-recession policy?  That public borrowing to finance a budget deficit in a recession is absolutely essential, the very antithesis of profligacy?

If William Hague is aware of any of these elementary truths, he showed no sign of it in his BBC television interview this morning with Andrew Marr, ably backed up by the appalling Amanda Platell, even more than usually serpentine and partisan in her review of the press (to the evident annoyance of the equally partisan Alastair Campbell, also on the programme). 

So there are two possible interpretations of the line being taken by these siren voices on the far right in the US and here in the UK:  either they understand the elementary economics of dealing with recession, but pretend not to for the sake of damning the political opposition — in which case they are hypocritical frauds;  or they don't, in which case they are economically illiterate.  Either way, they should not be entrusted with the responsibilities of government in the hard times that lie ahead — "moving forward", as everyone now seems to say when they mean "in the future".  Fortunately Senator Obama and Gordon Brown seem to understand these not-very-obscure realities and to be ready to apply them to the present discontents — if their respective electorates allow them to do so.

PS:  Of course a policy of increased government spending on projects likely to create jobs quickly need not rule out cuts in non-productive public expenditure, such as on ID cards and the giant national data-base, aircraft carriers, the renewal of the Trident missile programme, and the insane profligacy accompanying much of the programme for the 2012 London Olympics, all cuts that could release funds for much more useful projects with much more short-term benefits for employment.  These could usefully include spending on green projects designed to support the battle against global warming. But such cuts should clearly not be used to reduce government borrowing or the budget deficit.


9 Responses

  1. Patrick says:

    Oh dear, so who will be paying for this Keynesian priming?  Me? People like me who, during these times of the greatest asset-priced bubble and debt-based consumer spending, saved like mad, paid off their mortgages and eschewed credit-card debt?

    No thanks.  Those who had the good times can pay for the bad times.

  2. amk says:

    "Come back, Keynes"
    Krugman and Stiglitz are publicly active.

    Patrick: Keynesian recession programmes are debt funded.

  3. Patrick says:

    amk wrote:

    Patrick: Keynesian recession programmes are debt funded.

    Oh dear.  Does that mean you believe that somehow our government has sufficient resources — currency or precious metal reserves — to fund these programmes?  Do you believe that governments generally can take on debt without their people having to pay for it eventually, either through decreased government spending, increased taxation, printing money or a combination thereof?  I'll give you a clue: the last two options tend to devalue monetary savings either through direct taxation on savings or by devaluing the value of such savings.

    Brian writes:  "The people" — us — will of course have to pay in the end, not mainly for the additional debt taken on by the government, but for the projects funded by the extra borrowing.  The fact that the projects are funded from borrowing and not from current revenue or reserves will of course tend to make them more expensive in the end, but isn't that true of almost all capital expenditure, by firms as well as governments?  The additional cost is amply justified by the beneficial effects of using expenditure on capital projects to create jobs and stimulate demand and private spending, as a means of accelerating progress out of the recession.  If the eventual repayment of the government debt is made from progressive taxes, with the rich paying significantly more than the poor, this is not only in accordance with social justice but also additionally beneficial in combating recession, since (as noted in the original post) the rich have a higher propensity to save than the poor, and by taxing them more heavily we reduce that dampening effect on the economy.  Spend, baby, spend! 

  4. John Miles says:

    One, isn't Patrick  a bit of a dreamer if he really thinks that those who had the good times are about to pay for the bad ones.

    The prudent more or less routinely pay the bills for the feckless, the strong for the weak, the healthy fof the malingerers, the law-abiding for the crooks, the pullers-of-their-weight  for the freeloaders – in a word, the goodies for the baddies.

    This is partly because the baddies are normally skint – apart maybe from some of the crooks, out of whom it's seldom easy to prise any money.

    'Twas ever thus – just one more cross for the goodies to bear!

    And, of course, —                                                                                                                     

    The rain it raineth every day
    Upon the just and unjust fella;
    But more upon the just because
    The unjust hath the just's umbrella.

    Two, I can't help wondering if it makes sense for the taxpayer to underwrite savings held in entrepreneurial banks.  If you want your spare cash to be safe what's wrong with National Savings?   If you choose to chase higher returns it stands to reason that the higher the rate the dodgier the bank; and if the banks know that whenever it goes pear-shaped we're happy to bail them out, won't they be tempted to try the game again, and perhaps even be forced to do so by the competition?

    So I think perhaps we should make it absolutely clear that while current savings accounts are guaranteed, anyone mug enough to put his his spare cash into a private enterprise bank after, say November first, is on his own.

    Three, is it really a good idea to bail out lame-duck banks?  The free market is a bit like nature  – "heartless, witless nature" – an environment in which the fittest survive and the rest go to the wall.  It differs from nature in that we can decide whether we have it or not. As far as I can see we have it because we think it encourages enterprise and efficiency and gets rid of incompetent lame ducks. But if we decide interfere by baling out the incompetent, what's the point of having it?

    Perhaps I should declare a couple of interests:

    First, I've worked for two firms that have gone bust – the eventual fate of the majority of firms under the free market system. We had no help from the taxpayer – why should the banks?

    Second, I've current accounts with three different banks – if all three were to go bust all I would lose is three interest-free overdrafts.

    Four, I don't altogether buy your argument that reducing tax for the poorly paid would necessarily mean they spent more. Many of them would simply try to work shorter hours and opt for less overtime, and who can blame them?

    I do agree though that the poorly paid should be taxed more fairly even if it doesn't produce the economic results you seem to expect.

  5. Tony says:

    I’m confused.
     Do your "entrepreneurial banks" include Northern Wreck and Bradford and Bingley, presently 100% owned by HMG?  All their retail deposits are guaranteed 100% by the government.
     Assuming your  entrepreneurial banks are those  largely owned by shareholders -Lloystsb, Barclays RBS etc,  by removing the limited guarantee from retail depositors  you are skewing the market towards those, including National Savings,  owned by the state? I’m not sure the EU Competition bods would look kindly  on that proposition.   They may sniff State Aid?
    Who  will risk their savings, even if the risk is minute, in such an organisation.After all, the punters could also invest in EU/US banks in the UK whose deposits are guaranteed by their respective governments.
    I’m not sure that’s the result I’d want

  6. Patrick says:

    Please don't take this personally Brian, but when you wrote the words 'progressive taxes' & 'social justice' I instinctively grabbed for my wallet.

    We have had 'the good times' and our esteemed Prime minister, formerly Chancellor of the Exchequer, should have been paying down debt during those times — unless you think he really believed he had abolished 'boom and bust' — to be able to borrow enough and at decent rates to allow a counter-cyclical Keynesian policy during the 'bad times'.But no, he didn't.  So we are now entering a recession — we are lucky if we escape a depression — with Government debt of 37.9% of GDP according to Brown (excluding the Enron accounting of PFI etc) when it was only 26% of GDP in 1991.  Government borrowing is going to be expensive and the money likely to be wasted if this government's previous policies are anything to go by.

    Brian writes:  As I'm currently packing in readiness for ten days in New York (two birthdays and an election) I don't have time to research the matter for confirmation, but my understanding is that (a) Gordon Brown as Chancellor did pay off quite a lot of the national debt during his time as Chancellor, and (b) UK national (not government) debt as a proportion of GDP is one of the lowest in the G8, the EU, etc.  His golden rule of borrowing only for investment (i.e. on improving the nation's capital stock of schools, hospitals, roads, railways, etc.) and not for current expenditures was plainly sound, and the large sums spent, some of them out of borrowings, have gone some way to make up for the scandalous neglect of our public infrastructure and public services under Thatcher and Major (remember him?  and her?).  Few private companies ambitious to expand would be able to survive without borrowing, and governments are no different, in this respect, anyway.  The sudden difficulty that companies are now experiencing in finding money to borrow, because of the credit crunch, is having the malign consequences that we all know about.  The reason that governments can, and need to, step into the breach and pump precious credit into the system is that by and large governments have good credit ratings, rarely go bust, and can generally borrow — as those rushing out of equities and into government bonds can testify.  A recession threatening to segue into a depression is no time to knock government borrowing, whatever the paleolithic practitioners of Thatchereaganomics might say!

  7. John Miles says:


    I’m confused too, and I daresay we’re not the only ones

    State-run banks competing against independent ones is at best untidy, and could well pose more problems as time goes by.

    One answer might be to nationalise the lot – and of course its’s quite on the cards that’ll end up happening anyway.

    If foreign governments choose to underwrite deposits made in foreign banks, that’s OK by me; but I don’t see why our taxpayers should bale out punters who shop around for high interest rates.

    Not any more anyway.

    Most of my spare cash’s in National Savings, but I’m not above doing a little punting myself – "When the streets of Paris are running with blood, I buy," and all that.

    But if  I get it wrong, surely that’s my pigeon?

  8. John Miles says:

    If you're right to say "UK national (not government) debt as a proportion of GDP is one of the lowest in the G8, the EU, etc." how come the pound has lost so much of its value against the dollar and the Euro?

    Brian writes:  Presumably because the hysterical halfwits, some of whom make a lot of money gambling on future currency movements at our expense, think:   that UK interest rates are going to come down more sharply than elsewhere, that the UK economy is going into a deeper and longer recession than other countries', that because we have a Labour government its measures to minimise the effects of the recession might hit the rich harder than those taken by more right-wing governments elsewhere (if only!), that we are in for a nastier winter than countries further south, that the UK economy has become more sharply over-reliant on the financial sector (which is the sector most severely damaged by the current crisis) than other countries — since the UK's manufacturing sector was destroyed by Mrs T (as she then was) and Sir G Howe (as he then was)…  and no doubt because of other gut feelings, instincts, perusals of daft articles in the Daily Telegraph and the Daily Mail, examinations of tea-leaves and positions of the planets, and so forth.   And these buffoons with their panics and fads and greed have the power to wreck the lives of perfectly innocent, rational people.  Borrowing as a percentage of GDP hardly comes into it.

    I'm going to be away for the next couple of weeks or so, so I'm afraid I shan't be responding to blog comments for a bit.

  9. John Miles says:

    Very eloquently put.

    But I can’t help thinking that quite a few hard-nosed professionals are getting out of sterling because they think that for various reasons – including borrowing as a percentage of GDP – Mr Brown and Co will be less able to cope with whatever may be coming than are many other economies.