I was thinking about this when skimming through the Times’ endorsement for Cameron.  Its basic premise is similar to that of the Economist (see last post): reform of an overmighty and just-too-large State is the essential challenge of the era, and the Conservatives are best for this:

Amid the sound and fury, a fundamental philosophical difference has emerged: the Conservatives want to reduce excessive public expenditure, the Labour Party wants to keep on ratcheting up benefits, tax credits and other forms of state spending. One party recognises the benefits of individual independence. The other keeps fostering a state of benefit dependency.

The Times praises Labour at times – for the urban renewal palpable in some cities, for an increased presence on the world stage – and some of its praise for Cameron quite justified, although the modernisation project still has ‘jury out’ all over it. There is also much that is contradictory; not many of us can believe quite so wholeheartedly in the ‘optimism’ at the heart of a Conservativism still addicted to miserabilism, and wonder why so much is wasted on inheritors and the wealthy married.  Above all, this sentence is strangely unjustified:

The economy is broken and so is politics. It is time for a change

when the Times say almost nothing about the politics, and are implicitly cheering on the election of a couple of hundred unsackable MPs on a disproportionate basis.

Some of the attacks on the Liberal Democrats are wounding – anti business populism, perhaps, and an uncertain strategy on the Euro.

But in this post I want to focus on an attack on the Tories that just cannot work forever. I read on this blog and elsewhere comments along the lines of ‘how can anyone support the Tories when they are all for cutting like mad?’ I hear the same said about Vince Cable – not to be trusted, because he wants to cut.

Here is my view.

The financial crisis and deflationary slump led to an extraordinary ‘Keynesian moment’; a period of 2-4 years during which a shattered financial system and zero base rates meant that the government’s balance sheet became critical for keeping demand high.  We may still be in that moment. Conservative misunderstanding or poor judgement about the need for support was an egregious error, indeed.

But it did NOT usher in a permanent new Keynesian reality, one in which monetary policy became permanently subordinate to fiscal policy.   If it had, then leftish claims that the Tories just don’t get it would have real merit.

If we grow reasonably over the next few years, we will be left much closer to our economic capacity, and should quite rightly worry about our productivity, and the place an overweening government plays.  Sure, in some regards that government can help in useful reforms – of finance above all.   But stopping the debt becoming unsustainable without rising inflation will be a major part of the challenge. We will need to make spending/revenues more like 1.02, not 1.25, at some point, or there will be huge consequences.

The 1976 crisis tells me that the worst moments for government solvency often come years after the worst of the recession.  That is when you can judge what they would choose to do.  Paying down debt is about taking tough choices in the good times.  I share the profound scepticism of many others that if we had a year or two of good growth, the Labour party would be unwilling to upset its public sector friends and supporters, and would – not in 2010-11, but perhaps 2013-15 – undermine confidence in this country. Particularly if Ed Balls has influence.

I support all sorts of radical policies when this economy is far beneath its potential.  Keynes was so right – in 1933-9.  But naive extraopolation of that thinking for 1968-79 was greviously ill-judged.  Given their genetically-bred need to see government as the answer to everything, I see this as an error that Labour could easily repeat, if given the chance, and the Conservatives much more likely avoid – if they could only be trusted to do the right things for just a couple of years.

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14 thoughts on “The Keynesian moment cannot last forever

  1. I’m afraid I can’t take The Times’ editorial seriously as it brings up the gold sale as a reason to vote against Labour, which is a sure sign of economic and financial illiteracy.

    I await with interest the Times’ running commentary on the performance of the Conservative government’s reserve management strategy.

  2. Reading the Times’ leader I think I can see some thoughts out of James Murdoch’s head: such as accusing the Lib Dems of being “soft-headed” (if Nick Clegg has to apologise for calling Cameron’s nastier European allies “nutters” then shouldn’t the Times apologise too?).

    Moreover, far from ducking the deficit the Lib Dems are the party that has set out more cuts and tax rises than either the Conservatives or Labour according to the IFS (admittedly only 25% of the total required, but that’s better than either of our competitors!). So the Time’s opinion that “the Conservative Party has shown the most consistent willingness to deal with the atrocious State of the public finances that this Government will bequeath” is factually inaccurate.

    Also, how on Earth can they think that an annual cap on extra-European economic immigration is “measured and intelligent”? If it’s anything like the H2B visa system in the USA the cap will be hit about halfway through each year and businesses will suffer the consequences.

    The Times may have given a vote of confidence to the Tories, but it’s lost my confidence with such stupid arguments.

    1. I think rhetorically the Conservatives have been the most fiscally hawkish – but in a way that is often blind to the circumstances. Could not agree more about the Cap idea – total headline grabbing policy mad rubbish

  3. I had (well, started really) a whole load of arguments about IHT yesterday with an assortment of Tories and Tories-who-thought-they-were-libertarians. Once I’d got them to stop raving about Communism and knocked down all the usual popular arguments for raising the threshold, we were left on the harsh economic bedrock: in a country with a large deficit, a generally overspending government and an unbalanced tax and benefit system that incentivises all the wrong things, what tax cuts do you offer first?

    The answer is so obviously “pretty much anything but IHT and marriage tax breaks” that at least one of the Tories I spoke to fell back on faith at that point. This is a characteristic I’ve noticed before among them, and it’s there in the Times article: that despite 90% of the policies and rhetoric, Dave will somehow come good and approach a restructure in the correct way. Very redolent to me of Polly/Jackie type faith.

    1. They must have been really terrified of their core vote not turning up to put so much money on things that have so little relevance to greater efficiency or fairness. At least the NI reversal has some solid logic to it.

  4. “But it did NOT usher in a permanent new Keynesian reality, one in which monetary policy became permanently subordinate to fiscal policy.”

    I’m not sure I agree with this definition of Keynesian reality/moment. I don’t know many if any Keynesians who believe that “monetary policy [should] became permanently subordinate to fiscal policy”. I would say that this crisis has (or at least should have) ushered in an age where fiscal stimulus is not seen as a joke. Which it was in many circles.

    Hell, even many Keynesians like Krugman believed that fiscal stimulus was pointless – remember his comment in 1997: “Indeed, if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God”.

    A year later he was arguing that Japan was in a liquidity trap.

    And I’m skeptical of too much skepticism in regards to whether Labour would tackle the deficit. Yes, Brown and the rest are constantly going about telling everyone how they’ll protect all their services etc, but this is just public relations – remember this graphic?:

  5. There has been no Keynesian stimulus ( as you have said a few times here.). Tax revenues plunged and Labour maintained Gov Ex. They told HMRC not to pursue late firms behind on their tax payments and so kept some (and by definition the least efficient) going. That is not Keynesian.
    There has been no National Plan for Reconstruction, but perhaps this cannot be born in this early phase of the economic and political process. (We are still 1931 or 32 in the story) Perhaps you have to go through the Geddes Axe period and this appears now to be set up. But that is so deeply destructive of capital and life opportunities that I hoped 80 years of progress might have meant we could avoid this.
    You can have Government stepping in to provide stimulus without creating a Big State by ensuring that Government enables and commissions while delivery is in the hands of the private and voluntary sectors.
    People who work in the public sector generally believe in service and what they are providing but they are not attached to and are deeply critical of public sector management – just ask any one from consultant to cleaner in the NHS. The Third Way is discredited, but was worthy of a better attempt.
    Finally it is possible to be a social liberal and a monetarist. In fact, I realised in the early Eighties that you had to be and this crisis has only confirmed me in this thinking. The Lib equals Keynes, Con equals Freidman is a false and damaging piece of shorthand.
    It is MV that is keeping the world economy down. To set and to attempt to achieve NGDP growing at say 5% requires in this phase of the cycle the creation of money and a transmission mechanism that ensures that it is spent and spent on capacity enhancement. That requires Government and inter-Government action and private and voluntary sector delivery.
    I cannot see a politician anywhere in the world saying this, let alone in this country. So I must be wrong.
    B

    1. “It is MV that is keeping the world economy down. To set and to attempt to achieve NGDP growing at say 5% requires in this phase of the cycle the creation of money and a transmission mechanism that ensures that it is spent and spent on capacity enhancement. That requires Government and inter-Government action and private and voluntary sector delivery.”

      That is very well put.

      And I obviously agree about the K Sim; only relative to what balanced-budget people like Policy Exchange believe should have happened, have we had a Keynesian Stimulus. And to be honest, nobody in their right mind would really recommend having done that in the crisis, which is why the deficit is not the stimulus.

  6. “in a country with a large deficit, a generally overspending government and an unbalanced tax and benefit system that incentivises all the wrong things, what tax cuts do you offer first? ”

    To which the answer is, if you’d like to have a loverly well functioning social democratic system you’d adopt the tax policies of places which have loverly well functioning social democracies. You know, Sweden stylee.

    You would lower corporation tax, lower capital taxation, eliminate inheritance tax in its entirety, stick up income taxes a bit and whack VAT up heavily.

    That is, you’d move taxation from capital to consumption. And you’d have a less progressive tax system than the one we’ve currently got. But that is the only way that you can raise enough to pay for the big loverly social democratic state without entirely killing off future economic growth.

    It’s one of the things that pisses me off right royally about “the left” in the UK. A total failure to understand that you have to actually make a choice. You can either have a big state which everyone pays for OR you can have a small state which only the rich cough up for. You cannot have a large state which only the rich pay for because there aren’t enough of them and they don’t have enough money to pay for a large state.

    1. “You can either have a big state which everyone pays for OR you can have a small state which only the rich cough up for. ”

      Indeed. I’ll have the latter please. The point of my post was that the Tories are perceived – largely for reasons of faith – to be capable of delivering it, but their actual stated priorities appear to point in a totally different direction. And since we can probably assume they’re not nurturing a secret plan to create/maintain a social democratic superstate, we are forced to conclude that they haven’t a bloody clue what they’re doing (or, in Giles’ kinder version, are forced off course to appease their core vote, who really don’t have a bloody clue).

  7. ..and a wealth tax, which they had until 2007 and I see the likely winners of the forthcoming election woud like to reintroduce. I really have no idea why you think inheritance tax kills off future economic growth or a married couples allowance would increase it.

  8. “inheritance tax kills off future economic growth”

    Because you’re converting capital into current consumption by having the government use it to pay benefits.

    Married couples allowance is of course a nonsense. Simply electioneering buggery about.

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