Why Larry Summers was right to give Osborne’s economic policy a kicking

We should welcome Larry Summers showing how incoherent this chancellor’s economic policy really is.

At Davos yesterday, former US treasury secretary Larry Summers launched a blistering attack on George Osborne’s economic policy.

While pointing out that there was no logic in the government’s policy of massive spending cuts and government support for the mortgage market, his main point was to highlight that chancellor Osborne had failed to promote growth through investment.

Summers said:

“It’s several years since the US exceeded its peak GDP before the crisis – that still hasn’t happened in the UK.”

Simply put, injections of cash by a central bank will lead to hoarding of the cash rather than expenditure if the government doesn’t step in. In other words, the liquidity trap.

We can clearly see this liquidity trap working in the UK with the Bank of England’s £375 billion spending on Quantitative Easing (QE), as well as low interest rates leading to spending ‘not by’ companies but only ‘on’ companies, with the FTSE up 15 per cent on the year in 2013.

This has led to the FTSE 100 companies having more cash in their accounts than anytime in their history but, unbelievably, business investment not growing at all.

History has warned us of this: from the 1930s depression to the ‘lost decade’ experienced by Japan.

The policy of non government intervention on investment is also destroying our ability to innovate our way out of this recession, with the UK woefully short of competitors in research and development spending (see below chart).

Again, history points to the importance to government’s role in innovation: Mariana Mazzucato in her book The Entrepreneurial State shows how the greatest innovation of our time, the internet, could not have existed if government had not put in place the very backbone that all that innovative industry sits on.

Further examples of government-backed technological advances include the Google Search algorithmic (funded by the US Public Sector National Science Foundation) and the discovery of molecular antibodies that provide the foundation of bio-technology (funded by the UK’s Medical Research Council).

This trend will continue – it is not by chance that the countries making the most of the advances in the green revolution industries (Germany, China and Denmark), are the ones with greatest government investment.

In contrast, our inability to take advantage of the British invention of Graphene clearly illustrates how our cuts in government research and development are hurting industry. By not having a proactive government policy on investment and innovation, George Osbourne has not only assigned us to a longer and protracted downturn, but has missed the chance to re-invigorate our infrastructure and boost our productivity by innovation.

With our chancellor being deaf to history and blind to the damage done, we should welcome Larry Summers showing how incoherent this chancellor’s economic policy really is.

Larry Summers graph-JPEG

3 Responses to “Why Larry Summers was right to give Osborne’s economic policy a kicking”

  1. treborc1

    Well if I was labour I’d be worried that this chap who comes over here and tells us what is wrong did not see the same issues in his own country, must be on an exchange visit he comes here and Brown goes to America.

  2. Daley Gleephart

    “… this chap who comes over here”. Over here being Davos, Switzerland.
    Summers, in his statement, said that the USA Government has done something effective in raising its GDP post 2008 but the UK Government hasn’t.

  3. Matthew Blott

    Excellent points. Now we just need someone in the Labour Party’s leadership who can articulate this properly.

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