Chris Dillow takes to bits the various aspects of Conservative economic philosophy evinced by John Redwood, which is all aimed at the same point: the idea that you can’t make the economy stronger by borrowing to spend. Ever. Because you either just defer pain, or drive up rates, or prevent the good ol’ private sector from spending, or something.
This, I suppose, is the Blue Toryism that Paul refers to, and which must be gaining ascendancy over the (minority interest) of Green Toryism, and (not really thought out yet) Red Toryism.
At a recent evening event hosted by a fine new economics outfit, I heard one right wing speaker dismiss government spending as “just taking a bucket of water out of one side of the pool and pouring it into the other side”. The image of finite resources being artificially diverted (into presumeably corrupt and inefficient channels) is what all these right wing theses aim at.
This all reminds me of the massive fuss raised by Eugene Fama about a year ago, when criticising the very idea of stimulus working, with this home spun logic:
The problem is simple: bailouts and stimulus plans are funded by issuing more government debt…. The added debt absorbs savings that would otherwise go to private investment…. [G]overnment infrastructure investments must be financed — more government debt. The new government debt absorbs private and corporate savings, which means private investment goes down by the same amount.
This is so seductive, and so ‘micro’economically sound, that its failure to be TRUE is often beside the point: by then, the polemic is written, and the voter persuaded. Brad DeLong is so infuriated by Fama’s Fallacy that he has tried to find it anywhere else, and failed. Even in supposedly primitive economic history, they understood that a depressed economy can see its speed increased by government investment. Here is Brad. It seems that even the famously Treasury View Hawtrey got it:
There is, however, one possibility which would in certain conditions make the Government operations the means of a real increase in rapidity of circulation. In a period of depression the rapidity of circulation is low, because people cannot find profitable outlets for their surplus funds and they accumulate idle balances. If the Government comes forward with an attractive gilt-edged loan, it may raise money, not merely by taking the place of other possible capital issues, but by securing money that would otherwise have remained idle in balances.
So perhaps it is just Eugene Fama. And John Redwood MP.
I am not denying that there are certain, indeed many circumstances in which government spending depresses demand. See last Thursday’s post. But that is very different from saying that by sheer force of logic it is inevitable, because ‘the money must come from somewhere’. Money has velocity. It doesn’t GO anywhere – it circulates.
(this makes me all the more surprising the Dr Butler thinks deflation may happen)