Alan Johnson\’s new economic policy

In a departure from Labour\’s policy at the general election, Johnson will call for a big increase in capital spending on road building and construction – probably funded by a far higher levy on banks and action against bankers\’ bonuses – to boost economic activity and create jobs.

Well, aye.

But let\’s stick with strictly Keynesian thinking here shall we?

OK, so we have unused resources, getting the economy back to full tilt requires cooking up schemes to get those unused resources used. Great, and infrastructure seems like a good way to do this, roads, railways, power plants, whatever, let\’s rebuild the infrastructure of the economy.

Ah, but, now hang on. We would like to get these resources back to work right now: how long does it take to get one of these infrastructure projects up and running?

For Keynesian thinking does not mean that throwing money at such projects is good: it means only that doing so when there are unused resources is good. What we don\’t want to be doing is throwing rersources at them when the economy has already managed to stagger to its feet unaided (and yes, just about everyone thinks that it will, eventually, the argument is over how long is \”eventually\”) and thus be pumping fiscal stimulus into the economy when it\’s already growing at or above trend and thus doesn\’t need or want such stimulus. Indeed,  at this point, according to that very Keynesian thought process, we should be withdrawing such stimulus, actually having fiscal contraction in order to lessen the boom and the inevitable associated bubbles.

In the US economic debate over the past few years this whole conundrum has been boiled down to \”shovel ready projects\”. What infrastructure projects do we have lying around which can actually be brought into action quickly enough that we get that stimulus when we want it, now, instead of in the future when we don\’t?

As President Obama has just admitted:

He realized too late that “there’s no such thing as shovel-ready projects” when it comes to public works.

There are two reasons for this: one is simply the complexity of modern projects and the modern economy. You simply cannot decide on Monday to build a new railway and have people digging by Friday. You\’d be damn lucky to have people breaking ground withing a presidential term actually.

The second is more amusing: parts of this delay are from exactly all the stuff that good little left liberals (ie, those who tend to be Keynesians) have insisted should be in place. We\’ve got to study the environmental impact, have public hearings on planning permission, ponder the gender impacts, make sure that only union labour gets hired….the restrictions differ from country to country but the general outcome is the same. Those accretions of the modern state mean that the modern state simply isn\’t nimble enough to do the intervening in the economy some would like.

Well, OK, so it\’s not nimble enough to do it by infrastructure spending at least.

However, something which the State does have control over, something which can be implemented very quickly indeed, is a tax cut on the costs of employing labour (and to a large extent these taxes are actually bourne by labour itself). As, in fact, was first mooted:

National insurance contributions were to be cut during downturns and deferred income tax credits paid during depressions.

Quite: you want fiscal stimulus? Cut employers\’ national insurance contributions. You really can decide that on Monday and see the money flowing by the time the next paycheques get written.

The effect to hte employer is that hiring labour has just got cheaper. The effect to the employee is that his nominal wages stay the same. We\’ve done precisely what we want to do: cut the real costs of wages without having to have that awful fight over cutting nominal wages. The budget deficit balloons, we have fiscal stimulus. And above all, we can do this fast.

The reason we don\’t do this is simple of course: politics. It\’s not just that anyone with sufficient ego to get elected has sufficient ego to insist that they know where the trains and bridges should be. It\’s that they\’ve, by definition, got too much ego to be able to understand that the solution doesn\’t require them to do something, it requires them to stop doing something.

What? You mean, in a crisis, less politicians?

Yes, actually, that is the solution.

4 thoughts on “Alan Johnson\’s new economic policy”

  1. I think lefties like huge infrastructure projects because they think you will get the scenes depicted in Soviet realism art.

    Tim adds: There’sw amusement in hte fact that if what you did need to build a railway was hundreds of thousands of men with shovels, then they’d be right, infrastructure building would work. But we don’t anymore, which is why they won’t.

  2. Big projects do not just mean big egos, they require the politicians as arbiters, or, more rightly, sphincters.

    Spending other peoples’ money. Whereas cutting taxes funded in the same way enables people to keep more of their own money and as such, IMHO, make better decisions.

  3. Just a thought- in the twenties and thirties, when the idea of government spending to stimulate the economy arose, infrastructure projects did, as Tim commented, employ a lot of people whereas now they don’t.
    Also in the twenties and thirties very few paid income tax, no-one paid national insurance, and there was no corporation tax. Therefor the scope for stimulus via tax cuts was limited.
    I wonder if the left’s adherence to the idea of government spending as the best way of stimulating an economy is not evidence that they are stuck in the past, and need to learn what has changed these last 90 years.

Leave a Reply

Your email address will not be published. Required fields are marked *