Wrong then, wrong now

Today’s letters by 60 economists to the Financial Times in support of the government’s policy of delaying cuts in public spending echo the arguments used by mainstream economists during the deep recession of the early 1980s.

In March 1981, 364 economists wrote to The Times arguing strongly against the then government’s monetary and fiscal policy. However, the Thatcher government decided to ignore these voices and continue the pursuit of policies to restore fiscal responsibility. It worked, and the economy recovered strongly. The Keynesian “court intellectuals” were wrong then and they are wrong now.

It is often said that conditions are different today because the over-riding concern at that time was inflation. That would be to entirely miss the point of the 364 economists’ debate. There are two main points. Widening the fiscal deficit does not increase so-called “aggregate demand” – it simply transfers demand and economic resources from where they are valued to where they are less valued. Secondly, the problem of funding the deficit does matter. If credibility is lost, there is a long-term cost in terms of the rate of interest on government borrowing.

The first point is well illustrated, of course, by the performance of Japan as its economy has become more and more distorted by “expansionary” government borrowing. And the misunderstanding of the point is brilliantly illustrated by Joe Biden in this video:

 

 

As Guido Fawkes points out it is worth watching for the comical discussion of the mark on Biden’s head alone. However, Biden then demonstrates the importance of huge government borrowing in promoting growth by an anecdote about somebody whose job has been saved by the “cash for clunkers” scheme. As Bastiat would say, this is the “seen” and the obvious. The unseen are the thousands who have lost their jobs because people are buying cars they don’t really want and putting aside purchases of items they do want to buy.

“Widening the fiscal deficit does not increase so-called “aggregate demand” – it simply transfers demand and economic resources from where they are valued to where they are less valued.”I don’t think there is much more to it than that, well said.

The States have a simple procedure – annual property valuation. Property values have crashed so property tax revenues have crashed leading to cuts in services. UK property valuation is every 5 years, due this year. But the revaluation is based on 3 years ago – at the height of the boom! How stupid can we get? Commercial rent have now dropped such that commercial rates tax is 100% of income! Will 100% tax encourage or deter recovery? Maybe that is one reason why the US recovers faster from recession. Commercial property is cheap now. with lower overheads more people are likely take the risk of expanding or setting up – creating jobs.

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