Keynesian over-spending won't rescue the economy

Letter by IEA economists in the Sunday Telegraph

The following letter, by sixteen economists, thirteen of whom are associated with the IEA, has received considerable news coverage since its publication:

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.

See also:
Living with Leviathan: Public Spending, Taxes and Economic Performance by David B. Smith.

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