Robert Skidelsky on the Pointless Pain Caucus

Robert Skidelsky:

Britain’s austerity apostles duck the debate: What macroeconomic theory do the budget hawks have to subscribe to, to believe that taking £100bn out of the economy in the next four years will produce recovery? And what do the budget doves need to believe to claim the cutters are wrong?

David Cameron, Mr Osborne, and Nick Clegg appear to believe in something called “crowding out”... for every extra pound the government spends, the private sector spends one pound less. Jobs created by stimulus spending are jobs lost by the decline of private spending. Any stimulus to revive the economy is doubly damned: not only does it fail to stimulate, but, because government spending is less efficient than private, it reduces the economy’s longer term recovery potential.... A refinement of this argument is “psychological crowding out”. In this version it is not a shortage of saving, but a shortage of confidence in the government’s creditworthiness – due to a fear of default – which causes interest rates to rise. Either way the deficit “crowds out” private investment. Net stimulus: zero. The supposed implication of this type of argument is that in the short-run the deficit can do no good; and that in the slightly longer term it harms the potential for recovery....

Keynesians say is that when resources are unemployed, government borrowing is not deferred taxation: it brings resources into use that would otherwise be idle.... When the government borrows money for which there is no current business use, this increases people’s incomes and therefore the saving needed to finance the borrowing without interest rates having to rise... the “crowding out” argument is false.... The deficit is the stimulant the economy needs to start growing again: its withdrawal guarantees stagnation or worse.

Why aren’t we having this argument? The reason is that, against its instincts, the last Labour government accepted the pre-Keynesian economics of the cutters.... To promise to cut a little less, and a little slower, than the coalition is an improvement, but not an alternative economic strategy. Only Ed Balls has the economic confidence and pugnacity to argue the Keynesian case. For political reasons he has been denied the shadow chancellor’s job....

[W]hen [an economy] has large unemployed resources, the Keynesian theory is best, and the government should not be ashamed of running a deficit. A properly Keynesian opposition would say that the budget balance should be dictated by economic circumstances, not by some arbitrary timetable.... But I doubt if this opposition will have the courage to do so.