Sunday 26 April 2015

No surprise Keynes is back in fashion

It is hardly surprising that, in the thick of the greatest financial crisis since 1929 and all that followed, the ideas of John Maynard Keynes have come back into fashion.

Keynes's theories about how an economy should be run were inspired in that period by the scale of economic devastation caused by the Great Depression. Most renowned of all is his dictum that in times of recession a government should spend more in order to prevent the downturn from worsening.

So painful and long-lasting are the side-effects of recession - high unemployment, shattered consumer confidence, tumbling house and other asset prices - that an economy can be left disfigured and disabled and unable to recover for many years. Unless a government accepts this as inevitable, it should "prime the pump", creating state jobs by investing in the economy itself, he said. Although this means borrowing more, and potentially causing some inflation, so be it, goes the Keynesian mantra. From the 1930s until the 1970s it seems Keynes's theory had been proven right. What helped rescue the US from the Great Depression was the massive amount spent by the state first on Franklin Roosevelt's New Deal and second and more importantly on World War Two.

Although Keynesian ideas fell out of favour in the 1970s, when they were perceived as bearing responsibility for stagflation - high inflation tied to low economic growth rates - they still play an important but silent part in the way modern economies are run. During a recession, governments earn less tax revenue from companies and individuals and have to spend more on support for the unemployed, so whether or not they like it they will have to borrow more to support the economy. So when Alistair Darling maintains that he will spend to support the economy, he is only explaining what the in-built "automatic stabilisers" in modern economies do anyway.

However, Keynesian purists maintain that governments should do more, and borrow and spend more freely to inject a little more adrenaline into the economy. While this might, in theory, help prevent the recession being as deep as many expect, Mr Darling faces some obstacles. First and most importantly his predecessor borrowed so much in recent years that he is starting from a point of serious fiscal weakness. Britain had the worst structural budget deficit in the western world even before this slowdown. Unless the Chancellor intends to weaken the pound even further and drive up inflation he cannot borrow much more.

Second, one of the problems with using public money to support the economy is that the cash takes a long time to feed into the system. It is not merely that we will have to wait until next month for the Pre-Budget Report, but that it takes months after that before the money is properly apportioned, goes through Parliament and finds itself being used on public works and invesment. The alternative is to cut taxes - something which could be done far more quickly. However, a quick look across the Atlantic reveals that George W Bush's tax cuts have merely deferred rather than prevented the American recession.

However, the most important concern is that borrowing of this sort will need to be repaid later. At some point in the future, taxpayers will have to bear the burden of higher government spending, either through lower spending in the future or tax rises. And, most likely, markets will punish the UK and its currency severely unless such tax rises are forthcoming soon after the economy recovers. Is this really the manifesto Gordon Brown wants to adopt ahead of the next general election?

How we moderate
blog comments powered by Disqus



More from the web


More from the web


Back to top

© Copyright of Telegraph Media Group Limited 2015

Terms and Conditions

Today's News


Style Book

Weather Forecast