And fails, badly.
Here’s what we learned during the Great Depression, when our view of economics was revolutionized by John Maynard Keynes. In a recession, private individuals like you and me, perfectly sensibly, cut back our spending. We go out less, we buy less, we save more. This causes a huge fall in private demand, and with it a huge fall in economic activity. If, at the very same time, the government cuts back, then overall demand collapses, and a recession becomes a depression. That’s why the government has to do something counter-intuitive. It has to borrow and spend more, to apply jump-leads to the economy. This prevents economic collapse. Instead of spending a fortune on dealing with mass unemployment and economic break-down, with all the misery that causes, it spends the money on restoring growth. Keynes called it “the paradox of thrift”: when the people spend less, the government has to spend more.
Wherever it has been tried, it has worked. Look at the last Great Depression. The Great Crash of 1929 was followed by a US President, Herbert Hoover, who did everything Cameron demands. He cut spending and paid off the debt. The recession grew and grew. Then Franklin Roosevelt was elected and listened to Keynes. He ramped up spending – and unemployment fell, and the economy swelled. Then in 1936 he started listening to the Cameron debt-shriekers of his day. The result? The economy collapsed again. It was only the gigantic spending of the Second World War that finally ended it.
No, Herbert Hoover did not cut spending and he most certainly did not pay off the debt. He ran budget deficits as he massively increased federal spending. It\’s true that Roosevelt did more of this than Hoover had done but it just isn\’t true that Hoover balanced the bedget and most certainly isn\’t true that he either reduced spending or paid pof a single penny of the national debt.
However, there is another example from the 30s that could be used. The UK experience. Here there was no large public deficit, in fact, taxation and spending were kept broadly in line with each other. According to the Keynesian prescription, this should have meant that the UK had a deeper recession than the US and a longer one.
The thing is though, it didn\’t. The recession in the UK was shallower than that in the US, was shorter, recovery came sooner and so did economic growth surpassing that of the previous peak.
What the UK did do is come off the gold standard and allow the pound to depreciate. What the UK government is currently doing isn\’t actually all that far from what the UK government of the 30s did. Devalue, (at least try to) keep some close connection between tax and spend, so as not to run huge defiits and thus increase the national debt.
One of the things you need to know about economic history is that there is indede this lovely Keynesian theory. It\’s just that when you look at the economic history of the 1930s, there doesn\’t seem to be any empirical support for it. The US, which followed the prescriptions of the theory, had an entirely shite time of it, the UK which rejected the theory had a dreary but OK time of it.
We were bust when we beat the Nazis. We were bust when we built the NHS.
Quite true. But having gone bust beating the Nazis and while building the NHS, Major Atlee was running budget surpluses. One of the very few times we really have actually been paying off the national debt, as opposed to just not increasing it very fast…..
Young Johann is of course quite free to make his comments…..but facts are sacred you know.