Give Keynes a Chance!

19 Jan

george osborne dartboard Wicked as those extortionate loan companies are, they are right when they say in their adverts that it’s always when you’ve got no money that something breaks. My electric shower has just gone caput, in the middle of the skintest month of the year.

At times like this I find myself wailing, “Will this recession ever end?” Not if George Osborne had his way, it wouldn’t. Of course, it will end eventually, but it will be in spite of him, not thanks to him (although I expect that is what he will say at the time, if he’s still in goverment). Why is this? Because it is basic economic theory that you don’t make cuts in a recession – it only makes things worse, and prolongs the recession.

It was John Maynard Keynes who first explained this, a long time ago. I know it sounds a bit paradoxical, but it does actually make sense. I’ve explained it in more detail on Suite101 but in a nutshell, when times are tight, everyone sits on their money, and the economy stagnates. (That includes banks, by the way – the reason why they’re not lending.) If the government cuts, everyone clings on to their money tighter, and businesses close, and people lose their jobs. If the government uses monetary policy (giving banks money, or reducing interest rates) then the banks sit on the money, and everything is awful. However, if they increase people’s income by increasing benefits and, most importantly of all, creating jobs, money starts flowing around the economy again, and everything gradually gets back to tickety-boo status.

George Osborne should know this. If he doesn’t, he shouldn’t be Chancellor of the Exchequer. I suspect that he does know, and that he is just pretending not to for his own nasty ideological aims. The Conservatives believe in small goverment – not much taxation, not much spending – and if the easiest way to get there is to demonise the poor, blow smoke in the public’s eyes and, yes, extend the recession, that is what they will do. At least, that’s what they appear to be doing. (They are also picking on the disabled in a nefarious manner – another example of why the Tories are sometimes known as “the nasty party”.)

It doesn’t have to be like this. Iceland, which was hit particularly badly by the global crunch, is now doing quite nicely, thanks to keeping welfare, education and health spending high, and writing off ordinary people’s debt rather than banks’. Meanwhile, in Greece, austerity continues to wreck the economy so that there seems to be no prospect of it ever paying off its bail-out loans.

Mr Osborne says that we are in a “debt crisis” and the most important thing is to pay off our debts as quickly as possible. He thinks that borrowing in order to invest in the economy would be ridiculous, downright criminal, when we are in such a “debt crisis”. But we are not in a debt crisis, we are in a recession. Borrowing to stimulate the economy would be exactly the right approach. Avoiding borrowing through austerity measures has actually led to us, ahem, borrowing more – but without doing anything useful with the money, like creating jobs.

Take this analogy: A woman has a lot of credit card debt but she is managing to meet the repayments. George Osborne would have her sell her car, which she needs for her work, so that she can pay off the debt quicker, since that’s the most important thing. She will then have no way of working and have to borrow money just in order to live, but hey, you need to make tough choices in a “debt crisis”.

Yes, Mr Osborne, you do, but the ones you are making aren’t just tough. They’re wrong.

(Economics rant over. Normal service will be resumed in the next blog post, which will hopefully be about something much lighter and fluffier.)

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One Response to “Give Keynes a Chance!”

  1. southsidepets McLean January 19, 2013 at 5:54 pm #

    If only economics was so simple…one of the big problems for any government associated with Europe (and the UK is) is that it will find it increasingly difficult to borrow, and thereby not be able to afford the public sector bill. The recession in Europe, alas, is unsolvable while the Euro exists. Whether the UK will find a way round that because it’s not actually part of the Euro, only time will tell. But in the meantime, the UK government is faced with the reality that nobody is going to be rushing to lend to it so it can boost public spending…
    Jackie

    PS time will also tell how optimistic Icelands’ investors have been…

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