Tony Curzon Price (London, openDemocracy): George Osborne gave the Today program an opportunity to demonstrate the great emptiness of the media-political conversation this morning.
Paraphrasing, here was the interview:
SM (interviewer): "What is wrong with Darling's plan?"
GO: "You can't spend your way out of a recession with a Keynesian splurge on big projects"
SM: "What would you do differently?"
GO: "Freeze council tax, give small businesses help and let the bank of England cut interest rates, putting money in people's pockets."
SM did not then ask why this wasn't itself Keynesian splurging. There are three points here:
1. what should be the level of fiscal largesse?
2. is it better to spend this mainly on public investment or to delegate that spending to households and small businesses?
3. who eventually pays for fiscal largesse?
GO pretended to answer "1" by answering "2", and Today let him get away with it. "3" is a very interesting question which GO proposed one answer to that was never challenged by SM. The point about "who pays?" is closely linked to Ricardo's equivalence, the argument that claims that there is no difference between financing government spending through borrowing or through the raising of taxes. Public borrowing has to be paid back, eventually through higher taxes. Taxpayers, if they understand this, will know their lifetime consumption possibility has fallen by exactly the amount of the public spending, so who cares if it is financed through taxes now or higher taxes later (higher in order to cover interest payments)?
The argument is fine in a classical regime - as long as we do not currently face the risk of a Keynesian recession. The point of a Keynesian recession is that capital markets do not work; hence the equivalence argument based on households comparing present and future consumption is simply not applicable. The only question that Today's interview should have drilled towards was this: does GO think there is no risk here (there is certainly a case to be made -- Tim Congdon has made it recently -- but is GO really taking the political risk of supporting this view)? Or does he deny Keynesian efficacy in such an eventuality?
One day, Today will ask the hard questions.
Comments
Yes - another way of putting it is this. the claim that "Public borrowing has to be paid back, eventually through higher taxes" is false if that borrowing creates economic activity which a) saves on welfare and other tax costs and b) generates tax revenues that otherwise would not exist. However, the government can over-borrow, lend in the wrong way etc.
I agree Anthony.
It is the Keynesian counterpart of the Laffer Curve (remember - cut taxes to raise tax revenue...) -- both are entirely possible (flat taxes can work in weak states where evasion is high, for example). What we need to hear from our politicans now is what their assessment is of where the economy is and what it is based on.
Tony
Public borrowing is exactly that: BORROWING. It has to be paid back at some point. George Osborne is actually quite right, and we have the experience of Japan to prove the point. The Japanese Government went on a spending spree which has given the country lots of white elephants and a huge debt burden. That burden is on the back of the productive side of the economy which has to service it through its tax bill. Because 'Gordon the Moron' has spent like a mad man we have a huge debt burden already and now he and his lackey are proposing yet more of same. He would do far better to cut back public spending, reduce the size of the unproductive side of the economy and help the real economy. He could do this by reducing National Insurance contributions (certainly by employers which is a 'Jobs Tax') and also by raising tax allowances. When the states finances are in a better more stable condition a new administration should look at reforming the public services and a radical reform both of the tax and benefit systems. These are so complex no one understands them.
I fear that some owls go to sleep as the dusk enfolds the definitive evidence of the day. Borrowing is not "exactly that" if it creates new economic activity which would not otherwise exist.
owly - note that GO is also proposing to increase fiscal largesse. This was my initial annoyance with 'Today'. You can't claim that too much borrowing is proposed _now_ and in the same breath explain all the borrowing you would also do --- in GO"s case by reducing the tax take.
You are proposing a fiscal tightening - cutting government expenditure - at just a time when the government is about the only institution that can borrow.
whatever the argument in the longer term about the amount of spending that ought to be collective and the amount that ought to be personal --- and there is a good argument to be had here --- the immediate concerns are entirely different. I think that to resposnibly take the position you're taking, you need also to argue that we're not currently risking a Keynesian recession. This is Tim Congdon's argument --- is it yours?
Tony
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