Keynesian Spending

These laddies do have a point.

Further to your interview with Alistair Darling, we would like to dissent from the attempt to use a public works programme to spend the country\’s way out of recession.

It is misguided for the Government to believe that it knows how much specific sectors of the economy need to shrink and which will shrink "too rapidly" in a recession.

Thus the Government cannot know how to use an expansion in expenditure that would not risk seriously misallocating resources.

Furthermore, public expenditure has already risen very rapidly in recent years, and a further large rise would take the role of the state in many parts of the economy to such a dominant position that it would stunt the private sector\’s recovery once recession is past.

Occasional slowdowns are natural and necessary features of a market economy.

Insofar as they are to be managed at all, the best tools are monetary and not fiscal ones. It is inevitable that government expenditure and debt naturally rise in a recession but planned rises in government spending are misguided and discredited as a tool of economic management.

If this recession has features that demand more active fiscal policy, which is highly disputable, taxes should be cut. This would allow the market to determine which parts of the economy shrink and which flourish to replace them.

Dr Andrew Lilico, Europe Economics; John Greenwood, Chief Economist, Invesco; Richard Jeffrey, Cazenove Capital Management; Dr Ruth Lea, Economic Adviser, Arbuthnot Banking Group; Trevor Williams, Chief Economist, Lloyds TSB Corporate Markets; Dr Nigel Allington, University of Cambridge; Prof Philip Booth, Institute of Economic Affairs; Prof Tim Congdon, Author, Keynes, the Keynesians and Monetarism; Prof Laurence Copeland, Cardiff Business School; Prof Kevin Dowd, University of Nottingham; Prof Kent Matthews, Cardiff Business School; Prof Alan Morrison, Said Business School; Prof Sir Alan Peacock, Former Chief Economic Adviser, Dept of Trade and Industry; Dr Mark Pennington, Queen Mary College, London; Prof David B. Smith, University of Derby; Prof Peter Spencer, University of York.

We\’ve already got in place what are called the "automatic stabilisers" which will ensure that government borrowing will rise. For taxes will fall off, as of course they always do in a recession, while payments on such things as unemployment pay etc will rise. So we\’ll already be pumping up aggregate demand, as Keynes would have said we should.

But deliberately going out and spending more on, say, the railways? Two problems. The first is timing. Getting a show like Crossrail on the road (sorry) takes years. It\’s a decade or more already, isn\’t it? This recession is likely to be over two years from now….and it\’s extremely unlikely that any significant sum of money would or even could be spent upon an infrastructure project in the next 24 months.

So the stimulus, even if it were in fact correct that we want to make such a stimulus, just isn\’t going to arrive in the timescale that would be necessary.

The second of course is that we\’ve seen an economy try to do exactly this recently. Japan. And that worked so well, didn\’t it?

So the biggest argument against such schemes, massive public sector infrastructure spending, is that they won\’t actually work, won\’t solve the problem we aim to solve with them.

In which case, why would we do them?



10 thoughts on “Keynesian Spending”

  1. “So the biggest argument against such schemes, massive public sector infrastructure spending, is that they won’t actually work, won’t solve the problem we aim to solve with them. In which case, why would we do them?”

    Because the initial spending will all be on the planners, quangocrats, and other useless Labour hangers-on, thus it will keep the tribes happy.

    Alan Douglas

  2. “In which case, why would we do them?”

    Would it be too cynical to suggest that the additional social housing, shiny new hospitals & schools will be built in seats that Labour is nervous about losing at the next election? No, probably not.

  3. I have another problem with this idea of bringing spending forward.

    Does anyone seriously think that if we bring forward capital spending from, say 2010 to this year we will see correspondng reduction in education spending in that year? No, I didn’t think so.

  4. A qualified disagreement- extra investment will boost the economy- if and only if the investment does in fact produce a return, and when and only when that return has paid off the original investment (including interest)
    So a new road, dam, power station, whatever would boost the economy some time after its completion (assuming it too be of the right type and in the right place) and would be a cost until then. Sound like a plan, with a bit of luck thing will be starting to turn up just after the electorate has got fed up with ten years of tory austerity.

  5. So the biggest argument against such schemes, massive public sector infrastructure spending, is that they won’t actually work, won’t solve the problem we aim to solve with them.

    In which case, why would we do them?

    Political expediency.

  6. Can I propose that the use of the word ‘investment’ rather than ‘spending’ be banned henceforth?

  7. Right. Well first arguing from authority: the signatories to that letter are not terribly impressive. There are an awful lot of economists who’d argue for a big increase in G right now, and not because it’s politically expedient. And not just DeLong and Krugman, but Bernanke, Summers, Brittan and so forth.

    We are (probably) about to enter a recession that will do a great deal of damage to a great many people, not as a healthy corrective, but the collateral damage from pointless cock-up in the financial markets. Expectations etc. play a big role in determining the depth and duration of recessions. It’s just not true that there is nothing governments can do to create some jobs at a time like this (even if some big infrastructure projects come with a lag) nor is it true that the experience of Japan tells us such stimulus does not help – there are more available explanations for what happened in Japan than that.

    you should read this (again?)

  8. maybe I misunderstand your point Luis but doesn’t Brittain actually say that he would like a tax reduction and don’t these economists whom you despise on the basis presumably that they are more famous than you say exactly the same?

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