23 September 2009

This is no time for cuts

The story of the moment is that government borrowing is too high and spending will need to be cut. Here is someone who disagrees:

"The big error of the present economic discussion is to treat national budgets as on a par with the budgets of individuals or firms, which need to balance except for narrowly defined investment projects. Even if you also favour a balanced budget at the national level, it is at most a second order rule to give way if it impedes the achievement of broader economic objectives.

"In fact the public sector balance has an entirely different function: that of offsetting gross disequilibria in the national and international economy. If attempted savings exceed investment opportunities, public sector deficits are needed for as long as necessary to fill the gap - a job which will otherwise be done by stagnation and unemployment. When economic recovery has reached a certain stage, the time may come to roll back public sector borrowing. But we have certainly not reached that stage yet and it is far too early to rule out a second or even third leg of the recession."

He points out that the national debt has been far higher in the recent past and it came down without dramatic upheaval. (Well, 1956 when debt was 150% of GDP seems recent to me.) In the aftermath of the Napoleonic wars and WWII debt was approaching 200% of GDP.

"Of one thing I am sure. If we had the misfortune to engage in a major war we would have far higher deficits and debts than anything now in prospect, and few except some pacifists would worry. Why should it be more alarming for governments to get into debt to put people into useful work satisfying human needs, than to borrow for guns and tanks whose only aim is to kill other human beings?"

Who is pushing this good old Keynesian line? Samuel Brittan, not someone I ever expected to agree with.

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