Keynes’s ghost continues to haunt George Osborne

That George Osborne should hail the loss of the UK’s AAA credit rating as evidence that yet more of the same cuts and austerity are needed is an alarming example of Orwellian “doublethink.” What is needed is Keynesian government pump priming, to fill the potholes, build houses, improve local rail networks (not HS2), invest in renewable energy sources etc, and so create employment, restore growth, increase tax revenues, eliminate the current deficit and bequeath to future generations a spanking economic infrastructure and a healthy society.

Peter Wrigley blogs at Keynesianliberal

That George Osborne should hail the loss of the UK’s AAA credit rating as evidence that yet more of the same cuts and austerity are needed is an alarming example of Orwellian “doublethink.”

We learned our lessons on how to deal with depressions in the 1930s. Here’s a simple explanation. Because national income fell government revenues fell.

Economic orthodoxy at the time (before Keynes’s “General Theory” became accepted doctrine) was that the prudent chancellor should balance the budget.  So when revenues fell, government expenditure was cut to compensate.

Unfortunately that expenditure was a significant t part of demand so national income fell further, revenues fell further and we entered into a downward spiral which, essentially, was reversed only by the public expenditure necessary to arm and fight the war.

So we come to the market collapse of the noughties. Labour’s last chancellor took some tentative Keynesian steps and cut VAT rates to sustain demand. When he left office there were some signs of resumed growth.

Unfortunately George Osborne acted, and continues to act in spite of the clear evidence of the last three years, as though the 30s had never happened and Keynes had never written. His excuse was that, due to Labour’s profligacy, British government debt was so high that unless he raised taxes and cut expenditure “the markets” would lose confidence and refuse to buy British government stock.

It is impossible to say with certainty that this is untrue, but we had been told that, unless the electorate gave a clear mandate to one of the two larger parties (preferably the Conservatives) the markets would lose confidence. It didn’t and they didn’t.

The “profligacy” of the Labour government is only partly true. The standard limit for accumulated government debt is 60% of GDP.  After the financial crisis the Debt/GDP ratio was still  around 68 %, and below those of Germany (73%)France, (77%), and poor old Greece (165%).

What was high in the UK was the rate of current debt accumulation, or deficit, for which the accepted limit is not more than 3% of GDP per year.

Britain’s, at 10%, was over three times above the limit. However, it can reasonably be argued that if you don’t  a high level of accumulated debt you can sustain a higher level of current borrowing  in the relatively short run if it helps get you out of trouble.

What is causing our current deficit is not profligate expenditure but falling tax revenues resulting from the economic collapse.

Ignoring the lessons of the1930s, Osborne’s policy has been to cut government expenditure, in the fond hope that the private sector will take advantage of the alleged confidence of the markets and low interest rates to move in, invest and restore prosperity.

But they  haven’t and wont unless and until they can be sure that there is a reasonable level of demand.

What is needed is Keynesian government pump priming, to fill the potholes, build houses, improve local rail networks (not HS2), invest in renewable energy sources etc, and so create employment, restore growth,  increase tax revenues, eliminate the current deficit and bequeath to future generations a  spanking economic infrastructure  and a healthy society.

Osborne’s “more of the same” will achieve the opposite.

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13 Responses to “Keynes’s ghost continues to haunt George Osborne”

  1. dvhjghgbgfgg

    Osborne has no idea what he is doing. The trouble is Labour will be no better because they are all clueless. Give UKIP a chance

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    Nearly 69,000. At 100,000 it goes to Parliament

  2. Mark Moore

    How can you say the profligacy of Labour is only ‘partly true’? There is a rather nice story that goes around about Labour lowering debt, but that is because they take 1997 as the starting point and neglect to mention they followed Tory spending plans for those first four years.

    What happened from 2000-2007 was spending increasing by 44% in real terms while revenue went up by 21%, a little more than the 17% the economy grew. That is profligate pretty much however you look at it. Keynes supporters (at least, the modern ones) always say we should get the pumps primed now, but then fail to criticise Labour for running a pro-cyclic deficit from 2000-2007.

    Now, I don’t want to get partisan about this. The Tories decided that this pro-cyclic deficit was fine too when they accepted Labour’s spending plans. Together, the UK government left us in a terrible fiscal position. We had debts of 68% GDP when we should have had debts of maybe 10-20%. This isn’t just being smart after the fact. This is just common sense economic management.

  3. Stephen Wigmore

    You are totally clueless. In the 1930’s the treasury ignored Keynes’ advice, cut spending, lowered interest rates, came off the gold standard, and the monetary stimulus caused a booming recovery boosted by private sector investment, Long before re-armament boosted government spending. We recovered faster than the US with lower unemployment, despite the National Government’s austerity and despite Roosevelt’s ‘New Deal’.

    Please stop falsifying history.

  4. Newsbot9

    Yes, keep on using the financial crisis as excuse to compare things in a way which attempts to skew the picture. And keep defending the Tories economic record since.

    Your “common sense” looks like pre-Adam Smith partisan nonsense.

  5. Newsbot9

    And it’ll be dismissed. You’re simply a spammer, determined to sabotage the country. And of course UKIP spams, it’s your level.

  6. Newsbot9

    You first.

  7. Mark Moore

    Skewing the picture? We were running a deficit after 15 years of unbroken growth and record tax revenues. Keynes would have been appalled.

    And when did I defend the Tories record? Perhaps you could quote that part of what I wrote back to me.

  8. LB

    150 bn a year of borrow and spend. Pure Keynes.

    End result – bugger all growth.

    We’ve had the big experiment to see if Keynes was right and he’s wrong.

    You can’t cure a problem caused by borrow and spend with more. That’s voodoo.

  9. LB

    2005-2010, the pensions debt increase by over 700 bn a year

  10. JC

    Can someone remove this tory troll from this site. He spends his time trying to stifle discussion and make personal attacks on other posters. I know he’s a tory because he get payed (note, not earns) about 3 times what I get payed).

  11. Newsbot9

    No, I’m not quoting your entire post. And a 3% deficit, before the crisis, was bad but not catastrophic. Your partisan hackery of using the figure from after the crisis is clear.

  12. Newsbot9

    You’re describing yourself there. I’m a mutualist.

  13. Mark Moore

    I didn’t ask you to quote the whole post, just the part about defending the Tories record. Would be interested to know what I said that makes you think I’m defending what Osborne is doing.

    I’ll concede that I used the 68% figure though. That came from the original post. The actual figure for 2007 was 36%, which was nevertheless up from the 31% that debt stood at in 2001. From 1996-2001 debt had come down nearly 12% GDP. Continue that same discipline up to 2007, and you would have been looking at debt of 10-20% and a surplus of 2-3%, giving lots more room for Keynesian pump priming.

    Of course you can always say we couldn’t see the crisis coming and you would be right, of course we can’t predict the future. But that’s no excuse for not being prepared for it.

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