Perhaps we should be increasing the deficit—not cutting it
Surprise surprise, the British economy continues to languish. George Osborne hoped that demonstrating the seriousness of the government’s commitment to fiscal probity would unleash the animal spirits of the business community, and the ensuing upsurge of investment and exports would bring us to a new age of prosperity. It hasn’t worked out that way.
We continue to suffer from a lack of demand. Households are paying off their debts, not incurring new ones; firms are sitting on piles of cash, not investing, not hiring. The traditional prescription for this sort of output gap—between potential supply and aggregate demand—is increased government spending. Instead the coalition decided to cut.
Our rulers have forgotten something every economist, every policymaker used to know. Back during the great depression, Keynes realised that a downturn could be self-perpetuating: if consumers aren’t buying, then firms won’t hire or invest and so consumers, fearing for their jobs, will continue to keep their wallets shut. Keynes saw that a recession does not contain the seeds of its own demise. Equilibrium need not be at full employment. And doing nothing allows the economy to further spiral southwards.
His cure, taught for generations of introductory economics classes: government deficit spending. Hire men to dig ditches, others to fill them, they will spend their salaries. Seeing customers in their stores, watching their inventory decrease, firms will have reason to hire and invest and, hey presto, the downward spiral can reverse. The New Deal did not end the depression (Roosevelt’s deficit spending and hiring programmes were too timid) but the second world war certainly did. It was that massive government spending funded by borrowing that finally brought the world out of the slump.
I am not advocating war, but considering the spectacularly low borrowing costs right now, would this not be a sensible time for the government to invest in Britain’s future? One suggestion: education. I live in a pleasant bourgeois neighbourhood in London served by half a dozen state schools, and yet every middle class parent who can afford it is educating his or her children privately. This is a disgrace. Britain needs good state schools. Considering that human capital is Britain’s primary advantage in the global economy, wouldn’t building more schools, hiring more teachers and reducing class sizes be a sensible way of trying to ensure Britain’s future prosperity?
Since Reagan and Thatcher it has become a shibboleth on the right that government is always the problem, never the solution. It is that desire for an ever-smaller government that excites deficit hawks on both sides of the pond. But considering how desperately we need increased demand, and how low current borrowing costs are, this is the moment for the government to stop bleeding Britain and instead invest in our future. Improved infrastructure and human capital will pay dividends both today and 20 years from now, when our children are entering the job market.
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