I have to admit to being a Bill Keegan fan, ever since I was a little boy in the late-1970s and worked in the Economics Division of the Bank of England and Bill was brought in as a Special Advisor to the Governor to bolster the (minority) Keynsian faction within the Bank. He is in magisterial form in this morning’s Observer.
He tells us that:
“Lately I have been especially worried by all these inspired reports that Messrs Cameron and Osborne are deep into the study of how the Thatcher team of 1979 approached government. It seems that for the Cameron Conservatives, the big new idea is an old idea. After a brief flirtation with Caring Conservatism, the emphasis is on cuts, cuts and more cuts. Meanwhile our beleaguered prime minister is being attacked on all sides for resisting the cuts that so many commentators regard as not only inevitable but also desirable.”
And goes on to remind us that:
“But let us be clear that the first years of the 1979-83 Thatcher period were an almost unmitigated disaster. The new government inherited an inflation rate of around 10%, promising to reduce it by means of an alchemist’s formula known as monetarism, and within a year, thanks to obeisance to that false god and other errors of policy, the inflation rate was more than 20%. The fashion for “cuts” during that period was determined by the obsession with lowering tax rates, although the overall tax “burden” continued to rise well into the 1980s. Unemployment went up, and up, and up.”
In a few short paragraphs he spells out why the current terms of debate on economic policy are just plain wrong:
“But let us return to that wider economy to which the financial system has administered so much collateral damage. Things are rough. Consumers who were encouraged by the financial system to become overindebted are drawing in their horns. Businesses that have been hit by the credit crunch are not investing, and hardly a day goes by without our being told that a major company has, if not actually announced more redundancies, then put part of its workforce on short time or leave and/or demanded pay cuts as an economy measure to ensure its survival.
Cutting the wage bill may sound sensible for the individual firm, but across the board it does not exactly boost what economists call “effective demand”. On the contrary, it makes the overall economic situation worse, at a time when there are growing doubts about the prospects for early economic recovery.
Which brings us back to those “cuts” in public spending that are so fashionable, to deal with “the problem of the deficit”. Unless and until there are sure signs of recovery, even the Cameronian Conservatives should stop losing sleep over the government deficit.
At a seminar earlier this year Dick Sargent, a distinguished former government and bank economist, put it well: “Some people think that the national debt is like a company debt, owed to people outside the company. But most of our national debt is owed to ourselves, ie to UK residents (individuals, pension funds, trusts, banks, charities and so on). Since the government has the power to raise taxes to pay the interest, there can never be a question of default (‘the country going bankrupt’, as the media like to say).”
Another veteran economist, Professor Max Corden, pointed out in a recent paper that there is a flaw in what he calls “the Conservative allegation” that the current fiscal stimulus is bound to have adverse effects later.
As he says, this does not take into account the asset side – “the total value of the bonds [and equities] acquired by savers as a result of the rise in incomes brought about by the stimulus”. These constitute “a set of assets that exactly offsets the liabilities on which conservative critics of stimulus policies have focused”. Moreover, “one must allow for the reasonable possibility that some of the extra public investment that took place in the first period as part of the fiscal stimulus turned out to be socially productive”, thus becoming a “positive legacy”, not a future drag on the economy.”
Labour politicians may find these paragraphs helpful in stiffening their resolve that Government economic policy is unequivocally in the right direction. And maybe others in the commentariat ought to read Bill Keegan’s words and stop feeding a consensus in favour of the “voodoo economics” (the description used by George Bush Snr to describe his predecessor’s monetarism) espoused by Cameron and Osborne.