So what, exactly, do supporters of ever-greater stimulus believe? To them, the fact that the official public sector net debt has increased from 69.9 per cent of GDP in January 2012 to 73.8 per cent in January 2013, with the government spending the borrowed cash, is not enough. Ditto the £375bn of quantitative easing so far pumped into the economy.
It is a fair bet that had both of these “stimuli” (the term describes an intended consequence, and is therefore loaded) been even larger, and the economy remained unresponsive, we would still be hearing the same calls for more spending and more QE.
I am, of course, over-simplifying; I am trying to describe some (not all) of the pop Keynesian arguments we usually hear about. Many supporters of greater demand-based stimulus have a much more sophisticated argument. They believe that monetary stimulus should take a form other than buying gilts. Others are concerned about the relative “multipliers” of different kinds of spending, and point out that focusing the cuts on capex while protecting current expenditure is bound to have hit growth. Others distinguish between spending hikes caused by “automatic stabilisers” and those caused by willful action.
But regardless of whether these views are right or wrong, let me focus here on some of the lower brow arguments. Pop Keynesians believe austerity – a loose term which conflates spending cuts and tax hikes (I agree the latter have been bad) – has been self-defeating, damaging demand, reducing supply and causing the current stagnation. They argue that spending more would be self-financing: by boosting demand, companies would hire more staff, and in turn that would reduce the deficit.
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Unfortunately, that becomes a claim not subject to refutation: the fact that public spending went up, not down, in the UK last year – from 48.6 to 49 per cent of GDP, the OECD says – is explained as the product of growth-destroying austerity, rather than evidence that “stimulus” doesn’t work. It’s a case of tails the pop Keynesian wins and heads you lose.
Many pop Keynesians always want more spending, and are merely rationalising their desire for social democratic policies. Few were calling for massive spending cuts when the economy was booming and yet Gordon Brown was still running a budget deficit. Too many are uninterested in the composition of demand – private or public – assuming it is all the same. It isn’t: private spending is more efficient than public spending, and governments with high levels of state spending as a share of GDP grow less fast, according to many studies.
Many obsess about lower demand caused by spending cuts – but appear uninterested in the demand destroyed by inflation, in the form of falling real wages and savings. Most believe our problems to be largely cyclical: there is lots of idle capacity waiting to be used, they claim. But what if such a concept is redundant and unmeasurable? What if there is not really much spare capacity, merely a structural mismatch, with lots of labour and capital no longer relevant to today’s needs, and a legacy of past malinvestment? What if activist monetary policies are merely delaying the necessary adjustment, while pushing up prices, as shown by the fact that inflation expectations are now at a multi-year high?
Pop Keynesians also don’t pay enough attention to the fact that we are already at a point where increasing the national debt stifles growth. There is lots that is wrong in the UK economy right now, but a big increase in public spending isn’t the solution.
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