Thursday, June 21, 2012


Time to Start Keynsian Spending Mr Osborne

Simon Jenkins is a former editor of The Times so his appearance in the pages of The Guardian should not associate his views with the likes of Polly Toynbee and company. I'm saying this to disarm Tory critics who abominate the very name of what I believe is the best newspaper by far in the UK. His piece yesterday I thought quite the best thing I've read on the economy for a while. He was maybe inspired by Nobel Laureate Paul Krugman's new book: Stop This Depression Now!. Krugman (pictured) is also interviewed at length by a high powered panel in the current issue of Prospect Magazine.

Jenkins begins by stating 'It's not working is it?'; by which he means the austerity policies of Cameron and Osborne. Krugman's plea for 'immediate, universal demand expansion is unanswerable' says Jenkins. Bailouts do not solve the problem but merely prop up the 'dud loans' of German and other banks. The accompanying cutbacks in spending enforced on the bailout nations merely accentuates the problem; debtors have no means of escaping their debt and people are thrown out of work unnecessarily. Cash needs to be injected into these collapsed economies: even Friedman agreed with Keynes on the need for this remedy.

The IMF has studied 173 cases of austerity packages since the 1970s and all led to recession not growth. Each bailout to "boost confidence" in Greece and Spain further collapses the bond markets. Confidence is best served by the prospect of growth, and not the dilatory growth of government-controlled infrastructure projects, but the crude printing and distribution of money – whether through social benefits, tax cuts or dropped by Friedman's famous "helicopters".

Some, like Niall Ferguson, say you can't solve a debt problem by borrowing yet more money but Krugman demurs. He insists in Prospect this is the only way to kick-start growth and that 'when growth returns debts melt away very quickly, as the years of Bill Clinton showed'. It also has to be said that loans for regeneration are currently available at very low rates, as Osborne has boasted. Jenkins concludes by invoking the responsibility Britain has to the rest of Europe:

Rising deficits create bubbles during expansion, but during recession the planning of controlled and transparent deficits holds the key to economic rescue. Membership of the euro denies this rescue to Greece or Spain, but it remains open to Britain. London has a responsible government with sound credit and a floating currency. There is no need for enforced short-term austerity in Britain. There is every need to reflate demand. That is the best way for Cameron to set an example to the rest of Europe.

Bond holders would crucify any government that tried to do this, especially once with the fiscal dynamics of the UK. Even the prospect of a Labour victory in 2015 would have them running for the hills now. Our absence from EMU (which the the likes of The Guardian would have signed us up for without a second thought) does give us the only credible way out of this, which is QE. We are well down the path. Weakens our exchange rate, makes exports more competitive, gradually diminishes the debt. Of course it solves the debt problem, but not the deficit problem. Hence fiscal consolidation (ie spending cuts) is still necessary. Very few economists with any reputation differ this approach, and very few governments have deviated from it. What is wrong with living within our means?
You say 'very few economists deviate from this approach. Well, one does and he's the Nobel Prize laureate at the subject. Moreover, I agree 'few governments have deviated' from it but no government has solved the problem of no growth. Banking on austerity is to invest in failure long-term- surely you must see that....?
The alternative is impossible for the UK. Failure to convince the markets that discipline will be restored...and let's be clear, it was lost long before the crisis hit in 2008...will make current UK debt absolutely unaffordable to finance. The choice is not austerity or not. The choice is default, bailout, or austerity. The problem is that we disagree about the nature of government spending. You see it as 'investment'. I believe much of it has been wasted, and indeed even created a society warped by false incentives. Governments are having to live as responsible families have been living for generations. No bad thing.
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