The bubble of pop Keynesians like Cable needs bursting

Cable's simplistic rhetoric, calling for the government to 'do things' is the type of pop Keynesian thinking Allister Heath addresses in today's column:

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.

(Full article)

When politicians say that government must 'do something' they are often being disingenuous. Their choice of language implies that it is only government that can do something to address a problem, when it is quite possible that government has already done too much. It isn't the case that without political action that things don't change. The role of entrepreneurs is very important and often under-appreciated by those in Westminster.

The financial crash followed a boom, when some sectors of the economy were overvalued. Following the crisis, the economy needs to readjust to reflect that false valuation. This is a painful process, and can be slow. What can make this more painful is when politicians do 'try to do things' such as loosen monetary policy. These efforts prevent reallocation of capital as the old distributions are entrenched by cheap money. Firms that aren't productive limp on, an undead army of zombie firms.

If Osborne is to do something to help the UK's economy next Wednesday, it should be to take steps to have politicians make less decisions about the economy and have entrepreneurs take more. The process of creative destruction that sees old firms give way to make room for new ones isn't an easy one, but that pain is far easier than the prolonged period of economic stagnation and depressed living standards that is the alternative.