When, in 2 or 5 or 25 years, we look back on this strange, phony-war period of wasted economic opportunity, we will wonder why the lessons of the Great Depression – lessons that we know, and that we know that we know – are not being applied by those with the power to decide levels of Government spending: Congress in the USA, the ConDem coalition in the UK, austeritarians everywhere. The reasons for the drive to austerity cannot be ignorance, for we know full well that this policy is inappropriate in the present circumstances. Here is Robert Skidelsky, economist and Keynes’ biographer, writing in the Financial Times this week (2010-10-13) showing the wrong-headed-ness of a policy of cutting spending in a recession:
David Cameron, Mr Osborne, and Nick Clegg appear to believe in something called “crowding out”. This is the view that for every extra pound the government spends, the private sector spends one pound less. Jobs created by stimulus spending are jobs lost by the decline of private spending. Any stimulus to revive the economy is doubly damned: not only does it fail to stimulate, but, because government spending is less efficient than private, it reduces the economy’s longer term recovery potential.
Applied to the deficit, the “crowding out” thesis takes two forms. The first is “Ricardian equivalence’’. Government borrowing is simply deferred taxation, because it produces no revenue to pay for it. Households save more to pay the higher taxes they expect. This means that any extra income created by the deficit will be saved, not spent. Net stimulus: zero.
The other leg of the “crowding out” argument is that government borrowing causes interest rates to rise. There is a fixed lump of saving. The more the government borrows, the more private borrowers will have to pay for their loans.
A refinement of this argument is “psychological crowding out”. In this version it is not a shortage of saving, but a shortage of confidence in the government’s creditworthiness – due to a fear of default – which causes interest rates to rise. Either way the deficit “crowds out” private investment. Net stimulus: zero.
The supposed implication of this type of argument is that in the short-run the deficit can do no good; and that in the slightly longer term it harms the potential for recovery. What the cutters have to believe is that every pound of deficit reduction will be matched by an extra pound of private sector spending. That is, if the government weren’t spending this money, the private sector would be, and making much better use of it. Mr Osborne’s programme is a beautiful cure for recession, provided there’s no recession to cure!
Keynesians do not deny the possibility of “psychological crowding out”: markets are subject to all kinds of irrational hopes and fears. But what the cutters mean by “crowding out” can normally only happen at full employment. At full employment, extra public spending obviously subtracts from private spending. But this is not the position we are in today.
What Keynesians say is that when resources are unemployed, government borrowing is not deferred taxation: it brings resources into use that would otherwise be idle, and thus increases the government’s revenues without having to raise taxes. When the government borrows money for which there is no current business use, this increases people’s incomes and therefore the saving needed to finance the borrowing, without interest rates having to rise. And though confidence problems may occur even in an under-employed economy, the probability of the UK government defaulting on its debt is, if not zero, extremely low.
In short, the “crowding out” argument is false. The problem is not the expansion of the deficit but the shrinkage of the economy. The deficit is the stimulant the economy needs to start growing again: its withdrawal guarantees stagnation or worse.”
With such knowledge, what forgiveness? Ignorance of the appropriate macro-economic policy thus cannot be the reason for our political leaders adopting a policy of drastic cuts. The reason for cutting now can only be a desire to reduce the total levels of Government spending to further some ideological agenda, regardless of the deleterious economic and social consequences of the policy.
In Britain, the Conservative and Unionist Party has prepared for this ideological moment for some time, despite appearances to the contrary. In the period leading up to the June 2010 election, the Conservative party was awash with funds. The party paid to place enormous campaign posters in central Liverpool, in the constituency of Liverpool Riverside, a constituency that has been held by the Labour Party since the constituency’s creation in 1983. Liverpool Riverside was formed from constituencies which had been held by Labour since 1964 (Liverpool Toxteth, although for 2 years its MP was a Social Democrat), 1945 (Liverpool Exchange), and 1929 (Liverpool Scotland, before which it was held from 1885 by prominent Irish Nationalist, TP (aka “Tay Pay”) O’Connor). In the election of June 2010, the Labour MP, Louise Ellman actually increased her share of the vote to 59%, and the Conservatives placed 3rd, with a mere 11% of the vote. In other words, parts of Liverpool Riverside have not voted for the Conservative Party for more than 125 years, almost back to the time when the Party actively prevented Jewish emancipation.
Why would the Conservative and Unionist party waste large sums of money on campaign posters in a constituency it would never win? The answer is in the content of the posters: The posters were billboard size and showed a picture of Gordon Brown’s head with a slogan blaming him for increasing the national debt massively. What they did not do was thank Brown for steering the economy successfully through the worst recession for 80 years, nor for saving millions from unemployment, nor for leading the G20 nations in policies to ensure the world did not suffer worse, nor for leading global efforts to re-regulate the financial sector to prevent a repeat of the events leading to the crash. With such posters, the ground was being prepared for a push for austerity, even months before the election, and despite the warm and fuzzy noises of the Conservative leadership during the campaign itself.
These posters were the tendentious work of ideologues, intent on reducing the size of the state, regardless of any economic or social consequences, and undertaken with forethought. Given the consequences of a policy of large cuts at the present time, and our knowledge of them, adopting such a deleterious policy is malicious and immoral, and shames all those who have promoted it.