The age of austerity and the rediscovery of Keynes

Another great event here last night. It was the first in our series about a new age of austerity and last night a distinguished panel, including Lords Skidelski and Desai and Martin Wolf, were exploring the rediscovery of Keynes.

The one non-economist was John Naish, author of ‘Enough: Breaking free from the world of more’. John’s focus was on a Keynes essay entitled ‘economic possibilities for our grandchildren’. In this essay Keynes predicted that the progress of technology should mean that by about now we could stop worrying about economic growth and instead concentrate on cultivating the good life. For Naish the economic crisis, combined with the even more profound challenge of climate change, is the opportunity for us to reconsider the whole growth strategy of consumer capitalism.

I have some sympathy with this view. As I have said in recent blogs we are still waiting for our political leaders to be upfront with us about the sheer scale of the problems we face and the kind of adjustments individuals and society will need to make, not just to get through this crisis, but to reduce the risks of it happening again.

But the focus now is on what to do to stop a recession becoming a deflationary depression. Our experts last night tended to agree that increasing borrowing (primarily to allow tax cuts with the aim of increasing consumption) was a necessary evil. In today’s Guardian, Gavyn Davies (a friend and advisor to Gordon Brown) is even more radical, stating that the Government faces no alternative but to simply keep printing money until the danger of deflation recedes.

One problem here is that the message from Government and most economists to consumers, businesses and banks is to do precisely what caused the crisis in the first place: spend, borrow and lend like there’s no tomorrow. This is what happens when you move from a bubble in which people can raise money for anything, however crazy, to a bust in which no one will lend or borrow for anything, however sensible. But not only is it difficult to persuade people to resume the behaviour which got them into the pickle they are now in, there will also be a tomorrow in which the money now being thrown at banks, public services, and soon taxpayers, will have to be reclaimed.

Because people had their fingers burnt and because they are fearful for the future. Government has to go to great lengths to persuade them to spend. This in turn creates the danger that the medicine causes reactions as bad as the illness, for example, the depreciation of the pound and the risk of national insolvency. My own prescription, for what it is worth, is that whilst borrowing will inevitably increase, we should also re-profile existing spending. In particular, I would enact a time limited tax increase for higher rate tax payers (including me), passing the revenue over to increase unemployment benefit, which I am told is one of the best ways of ensuring that additional public spending translates directly into consumer spending.

I am not a good enough economist to know whether there is a genuine choice between radical short term actions aimed at making the recession ‘v’ shaped and a more profound policy approach which accepts the inevitability of a long term period of economic stagnation while seeking to manage its social impacts. The case for the latter approach is based not just on concerns about the knock on effects of the emergency measures now being discussed, but also the persistence of the underlying economic challenges which have been obscured by the crisis. As I said, climate change continues to be the greatest threat facing the world. Add to that a report yesterday from the International Energy Agency saying both that oil would run out without a massive increase in investment in research and infrastructure and that there is still a deeply inadequate global response to the need to generate more energy from non fossil sources. Then add other underlying resource issues such as food shortages plus the impact of demography. As David Brindle pointed out yesterday, rising life expectancies are increasing UK pension liabilities (not to mention future health and social care costs) by between £8 and £9 billion a year. John Naish and other environmentalists might argue the case for a zero growth economy. The problem is that no growth would actually mean either sharply deteriorating public services or sharply falling living standards.

Economists are busily tearing up almost everything they have written for the last thirty years. But this mustn’t just be in order to justify emergency measures today. We also need a much more profound debate about how our national and global economy can be restructured to meet the demands of the 21^st century.