Monday, May 04, 2009

Is Keynesian demand management politically possible?

One of the arts of blogging is not to lose your nerve. If you wait long enough, someone else will write the posting you have been pondering. Then all you need do is link to it.

Such a case is Tim Worstall's recent posting on the blog of the Adam Smith Institute. He says:

Now remember that we have drunk the Keynesian Kool Aid in its entirely. Just as we believe in fiscal stimulus when growth is below trend, we also believe in fiscal contraction when growth is above it. And can anyone see that happening in recent years?

Such a contraction would have meant raising more in taxes than was being spent by government. Instead of public borrowing, we would have had debt repayment. And can anyone really believe that was going to happen? When you've Polly Toynbee screaming that we can and must abolish child poverty for only a few billion more? When every policy panhandler is pronouncing on how this or that evil of the world can be solved for just a little more taxpayers' cash and anyway, isn't this what a Labour government is for?

This is just what I have been wondering for a while now. New Labour's rhetoric has always told us we need an efficient economy so we can afford the massive increases in public spending they want to see. No sign of counter-cyclical spending restraint there.

If you go back to the early days of New Labour, then we Liberal Democrats were chiefly interested in seeing Britain adopt the Euro. But I do recall our criticising Labour for not spending more on education sooner, so we don't sound too keen on spending restraint either.

Still, all this was BV. Before Vince, that is.


Niklas Smith said...

You're right, this is the root of the problem: politicians cannot be trusted to run a budget surplus in good years unless they're scared into it by a dire debt burden (or if they're Swedish!). Remember old "prudent" Gordon Brown, who splurged borrowed money on the NHS and schools for years?

dheigham said...

Maybe it can be done, but Gordon mucked it up royally. His fiscal arithmetic across the business cycle was based on a pretty wild over-assumption of the productive potential of the British economy, and was therefore very misleading for everyone else and for him. The IFS have spotted and charted this at .

Anonymous said...

This is correct. The whole reason why 'superficial Keynesianism' failed is that very point. Borrowing & spending in a recession only makes sense if there is a surplus in more affluent times. But the lame Socialist idea that you spend, spend, spend in boom time because 'there is more money available' and then you spend, spend, spend in a recession because 'a fiscal stimulus is needed to benefit the poor', leads to a financial crisis in which more poverty is generated, and so it goes on. There are better ways to help the poor in the longer run. As Keynes did not say 'In the long run we are still alive but poorer'. The biggest problem however comes out in the wash - the idea seized upon by civil service managers and public-sector-obsessed Labour folk, that spending public money per se is a good thing, thus exaggerating the already-present tendency for civil service managers not to give two hoots for efficiency and value for money, and to focus on processes and useless inwardly-focused management gobbledegook instead.