(WRITTEN FOR GUARDIAN COMMENT)
I am asked if we can spend our way out of a recession? I write against a silly political background, where the left are trying to annex Keynes again, as if he were a left wing figure whose views had been buried by Conservative monetarists and deregulators. The truth is very different.
Margaret Thatcher kept her copy of the 1944 White Paper on employment, which incorporated some of Keynes’s perceptions. She used it in one of her big party conference speeches. Conservative economists working since Keynes have usually drawn on his insights as well as the views of others. It was a Labour Prime Minister, James Callaghan, who officially incorporated monetarist thinking into UK government economic policy making, when he recognised that more public borrowing in an inflationary era would make matters worse.
Of course in one sense you can only overcome a recession by more spending. A recession is insufficient demand chasing too many goods and services , leading to job losses, falling prices and cuts in output. The issue is not whether we need more demand or not, but how you bring that about. Confidence is a precious flower, and can be easily damaged if governments take the wrong decisions.
The priority is to encourage more private sector demand, because it is private sector demand which is falling sharply. You do that by cutting interest rates substantially. I have been calling for cuts to head off recession for many months. The authorities are far too slow, persisting wrongly in thinking inflation is next year’s problem when recession is next year’s problem. Lower interest rates feed through immediately to borrowers whose rates are linked to MLR, and later will benefit others as money markets start to function better.
We need more confidence and cash in the system. That is why the Conservative leadership has backed the banking package in its entirety, to give it the best possible chance of succeeding. Until there is more confidence there will be insufficient private sector demand. The gap will be too large for an overborrowed public sector to be able to fill, even if the government took the risk of expanding public borrowing even more than they are already doing.
If the government presses ahead with borrowing ÂŁ37 billion for bank capital its scope for further borrowing to undertake counter cyclical works will be even more limited. I think they should spend some time amending the package, to get as much of the new banking capital from private sources as possible. This would leave them with a little more flexibility.
As it is, we are facing a huge overrun on borrowing compared with budget. The downturn itself and other policy changes announced so far have probably boosted borrowing by £20 billion this year, on top of the £37 billion for the banks. This means a borrowing requirement forecast at £43 billion could exceed £100 billion. Government needs to keep confidence in its own powers to raise money. These figures are large. Given the delay in trying to get new larger capital projects off the shelf and into action, and given the high borrowing requirement, I do not see a lot of scope for the government on its own to spend us out of recession on this year’s budget. It has to find other ways of allowing the private sector to pick up.
October 21, 2008
John I have just looked at some of the responses to this on the Guardian. It is just ridiculous the people that are replying with no discussion, just bitter remarks for the most part. To me it is just what you expect from Labour and its supporters. But well done in your missionary work trying to bring civilisation to the savages.
October 21, 2008
I despair whenever people look to economists to solve political problems. The economist, is, in reality a mathematician, very useful in many ways but far too regimented, too lost in abstraction to be able to look at real-life problems and offer real-life solutions. The only way to respond to economic problems is to respond pragmatically to the situation at hand, without recourse to the ideologies of Keynes, Marx, Ricardo, Friedman etc.
When the economy takes a downturn it is because liquidity is restricted, either consciously as quick-fix to quell inflation, or by circumstance as with the credit crunch. So in the latter instance the priority has to be a temporary issue of credit by the state. The state should create short-term issues of money and loan the issue out to solvent business with a view to recalling and destroying the issue at a set time. Such an issue of money would be enough to provide liquidity but would not stay in the system long enough to create inflation. Government does not need to go borrowing close on 100 Billion, it can create an issue of money itself to refloat the market, so long as the loans are short-term and managed properly, the system would work.
Looking back to economic theories of old, be they left or right, leads us into making the same mistakes, we stop thinking and subscribe to the orthodoxy. Its time to bury the likes of Keynes, Marx and Ricardo, time to think on our feet and take practical solutions to economic problems. There is great danger in abstraction, it leads to the perception that economic forces exist, that there are categorical imperative in economics, that problems can be cured by faith in theory. We shouldn't dig up Keynes, but must look to solve the problems we face pragmatically, and by ourselves.
October 22, 2008
Reading about the global financial system, and people's reactions to it given the current economic and politcal climate, on the internet it strikes me that there is a large and rapidly growing body of people out there that are highly uncomfortable with the current status quo.
There seems to be a movement of people out there that are questioning the entire fundamental framework of the financial system. These people range from fans of global conspiracy/new world order websites to people like Tony above, who's comments I have always read and respected over the last year or so.
This time last year I had Tony down as a typical run of the mill British conservative voter who is fairly smart and likes commenting on blogs. In my mind I never lumped him with the people I read on youtube, advocating a return to the gold standard or abolishing fraction reserve lending and the current system of central banking.
Over the last few weeks I've noticed that Tony is seriously questioning the fundamental framework of the financial system, and I must confess I have been for quite some time too.
I like to think I do my best to keep up to date with the 'credit crunch' but don't have an economic background or any kind of financial expertise. So I guess what I am saying is I find it all pretty confusing.
On one hand I can see the political danger in governments being allowed to have complete unfettered control over the issue of money in what is supposed to be a democracy. I can see the fundamental arguments in terms of the loss of freedom of the individual to dictate the demand for money in what is supposed to be a 'free market'.
On the other hand, the arguments that the opponents of the current system make with regards to it's sustainability being dependent on constant inflation debt creation do make sense.
So when, like this week, we are treated to a drama involving Mr Mandleson, Mr Obsorne, a Russian plutocrat who's name I can't remember, and Mr Rothschild (who the conspiracy theoriests claim is one of the people really running the show) it just makes me lose even more faith in the system.
Which is a shame really, because by and large the system seems to work.
One thing I can't help but wonder however, is that if the UK government did do what Tony suggests and simply print a few billion quid bypassing the bankers, how would the bankers take to this?
October 21, 2008
There is a case for the government spending their way out of this but it would have to be by spending on something which is genuinely the best investment the country can do. Schools, hospitals & housing are not it. If they were to spend it instead on building nuclear power stations, improved road & modernised railways & the genuine infrastructure John has written of before that might well work. Altetrnately the same spur to growth could be achieved without cost by cutting the regulations which are preventing nuclear build for 5 years, the restrictions on housing which artificially inflate house cost 4 fold & the regulatory structure that makes major projects about 13 times more than they should be (Richard Rogers has said that of the £670 base cost of the Dome only £46M was spent on actual building, the same applies to the new Forth Bridge & I have no doubt to Crossrail).
It is not necessary to spend this money to get the economy going & Labour are spending it on things which will not achieve the aim anyway.
October 21, 2008
If it is addressed elsewhere I apologise, but it has struck me that the horse's mouth was perhaps the best place to get the answer to a question I have posed here:
http://www.bbc.co.uk/blogs/newsnight/fromthewebte…
As a consequence of posts following last night's Newsnight…
'Might one enquire if the person to whom the comment was directed was indeed lying? And did the moderator assist the viewer to a conclusion?
If Mr. Robinson was not economical with the truth then Mr. Redwood's response would indeed reflect poorly upon him.
However, if the show is merely to allow voice to any old Pol's Porkies without being held to account, then I'd say it is both Mr. Robinson AND the host who need a bit of… um… help.
Frankly I am wondering what value most on-air interviews have these days when rampant untruths and/or errors of omission and/or selective claims are allowed to be made that demand immediate and total refutation by those who are paid, and should know enough of the actual facts, to put such things squarely in their places.
And if not at the time for whatever reason, then if demanded there should be follow up. Which is why I like the Ch4 Fact Checker, though 6 and 3/4 folk probably see it vs. the millions who get served a whopper and swallow it thanks to the 'integrity' of the medium it emanates from.
When it comes to holding those in power to account, I could therefore live with fewer displays of 'charm' if being sold a pup is the alternative consequence.'
I doubt I will get much from Mr. Robinson or his supporters, nor indeed the BBC (if they are different), but tangibles here would be appreciated.
October 21, 2008
Keynes is basically
1. More taxes
2. More government spending
3. More borrowing
All to avoid a recession.
Since that's what the government has been doing for the last 10 years, there is a major flaw.
We're in a recession, in spite of doing the Keynsian thing to avoid it.
You have to explain why
Nick
October 21, 2008
From the comments above, it appears that a lot of people have misunderstood what John meant by Keynesian economics.
Especially,
@Nick – 1.12pm:
"Since that’s what the government has been doing for the last 10 years, there is a major flaw."
You spend in a recession and save in a boom, thus smoothing out the natural cycle. The Labour government were only good Keynesians from 1997-2003 when they paid off the debt. From 2003 onwards we were in boom and they were still spending. All the money has been spent during the boom and none is left for the recession that we are now entering. They have not stuck to basic economics and that is one of the reasons we are in so much trouble.
@ Tony Makara,
I believe John was trying to explain that Monetarism built upon existing Keynesian theory, then strengthened and improved it. It did not discard basic theory such as the cyclical softening by public borrowing/saving. It was the Naive Keynesians who gave Keynes a bad name by misleading us about his teachings. Keynes himself was fully aware of how important inflation and monetary policy is.
Spending in a recession is a good thing, but it only works when you have been saving in a boom!
@ John:
Congratulations on a highly successful Newsnight interview last night. You did well to put an end to the fallacious attacks on your mortgage regulation statements. Chris Huhne in particular has been using the lie to attack the Conservatives for a number of weeks and it was important to stop it.
I also worry about the left wing attempting to champion Keynesian policy against us, but it is their complete lack of understanding of Keynes which will be their downfall.
Regards,
Andrew
October 21, 2008
The fact that we haven't been saving is irrelevant to the point (but not to the reality).
I'll reiterate. We have had Kenysian policy implemented by Brown since 2003, and we have still had a recession. Proof that Keynsian policy does not stop recessions, but in this case has caused one.
Nick
October 21, 2008
The fact we have not been saving is completely relevant to the point. If you don't save in boom time you are not exercising Keynesian policy. Gordon Brown may have said that he has exercised Keynesian policy, but he hasn't.
I'm still not sure you understand. It is only Keynesian policy if you spend in recessions and save in booms. He spent in booms (when he should have saved for a rainy day) and is now having to borrow to spend in a recession. He has NOT exercised Keynesian policy – This is our problem.
October 21, 2008
Andrew, my point is that govt does not need to strangle the taxpayer with astronomical debt through borrowing when the state can create a new issue of money, use that as short-term credit for business to provide transient liquidity to get us out of recession. The govt route of borrowing to spend is too expensive and will be too slow to achieve an upturn in the economy. Short-term loans to business through the creation of new money, which can be recalled and destroyed at a later date, is the way to fight recessions, which are caused by a shortage of liquidity.
October 21, 2008
I'm not necessarily disagreeing with your idea, I am just trying to point out that the economic theory is still relevant. Recessions are not only caused by a lack of liquidity, they are caused by a lack of demand and worse still a lack of confidence. It looks like you are focusing more on healing the liquidity problem, rather than the falling demand problem. If we don't throw money at the economy, we will not be able to stop demand and consumption from falling to dangerous levels.
My earlier point was that a lack of saving during the boom times (thanks to Gordon) has resulted in us having to 'strangle' the tax payers, but we have no choice. If the economy had been run correctly we would have been running a government surplus from 03-07 and would then happily spend the money in the bank to boost demand until ~2010 avoiding mass recession.
October 21, 2008
Mr Redwood has answered Mr Robinson's allegation, that he is against all banking regulations, before by pointing out that it is bad regulation alone he is against. It may have been undiplomatic to say "stop lying" but Robinson did not come back on it & I think it does no harm to show a politician refusing to woffle.
I was quite surprised that Paxman asked real questions rather than the sort of "have you stopped beating your wife" ones he usually does. I think it worked but then I'm an argumentative fellow.
October 21, 2008
A government that had racked up a huge current account surplus* might have a limited case for some spending on overtly public goods such as the road network (though there is no reason for the state to own roads so I somewhat contradict myself) or the armed forces who are poorly equipped. Outside of that, taxation holidays for companies and individuals would be the best way to 'pump-prime' the economy, as well as being the morally correct thing.
Mr Brown will not countenance this, instead drawing yet more power to himself, increasing taxes and making favoured groups the beneficiaries of his largesse ~ this is socialist keynesianism and they all do it from the Chancellor to Zanu-PF
(* Clearly not this one in such debt)
October 21, 2008
Increased government spending during a recession is not, of itself, a cure but it can soften the blow. Essentially sound businesses can be kept afloat by what could be described as artificial demand, in other words demand which has been created for the specific purpose of filling the void left by a reduction in private sector demand.
There is no contradiction between excessive government borrowing and spending helping create a recession and government spending of borrowed money then helping ease the effects of recession. Excessive borrowing and spending can help fuel a credit bubble, the deflation of which is recession, but then government spending can slow the rate of deflation of the bubble.
Having said that, government borrowing during recession can also slow growth after recession because the loans have to be repaid, thereby taking "spending" money out of the economy.
At least, that's how I understand it.
February 16, 2009
I'm just an oldish guy who has worked most of his life, married with grown up sons. We worked, we saved, and we spent moderately. Our savings are now worth diddly because bankers lent money not out of wisdom, but greed. I'm 'old' and 'past it, ' or actually probably not, because, I'm not in debt, and still work, giving I believe, a good service to my customers, because my philosophy is improvement and growth, rather than profit and spend.
The world is based upon those that create wealth..and you need to know what that is. It is NOT bankers, Politicians, or other redundant pen-pushing idiots. It is people who move about materials close to the earth's surface, those who sweat, think, care for their fellow humans, and actually DO something useful. ie. It's not rocket science. (not much use) It's Bridge building, (in every sense.) So, workers of the world, unite. challenge those who claim superiority and be proud of what YOU do!. The rising market is in the east, The 'new victorians!'…
And what's wrong with 'old fashioned values?' I'd welcome your comments..
October 6, 2009
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