Historical economics

 Once in a while I read a column and really, really wish I had written it. For weeks I have been looking for the historical analogy with which to illustrate the argument that removing debt from the economy is not the same as taking money out of circulation. Dominic Lawson in today's Independent has found exactly the right example: Frederic Bastiat's advice to the French National Assembly in the aftermath of the Napoleonic wars. In doing so Mr Lawson also offers a compelling antidote to the argument that reduced state spending is inimical to growth. He also offers a powerful incentive to read and reread the history of the French revolution. It inspired Karl Marx too, of course (the revolution that is, not Dominic Lawson's column).  

Comments

A good example indeed to illustrate the point, but I think he goes too far in subsequently accepting the scale of cuts without question.

No-one is suggesting (as far as I can tell) that we need to keep public servants employed because they're incapable of getting jobs in the private sector - the fear is that the private sector isn't able to provide enough employment at the moment.

If more people simply end up on the dole, then they'll be adding to the debt in the same way those who became unemployed in the recession have. Falling tax receipts and increased jobless payments (and not bank-bailouts) are a direct cause of the debt (leaving aside the colossal structural deficit for now). So, in my mind, the issue isn't as cut and dry as Lawson makes out. Nevertheless, an interesting piece.

By johnsaunders

I suspect Mr Lawson would argue that, on average,  unemployment costs less per capita than state employment and that a rise in unemployment is not therefore incompatible with reducing gross indebtedness. That was certainly the Thatcherite argument, most explicitly stated in the description of rising unemployment as "a price worth paying." I think the human price of unemployment renders that view too callous, but I do not believe every job is worth saving. Oh dear, I'm being pragmatic again.     

By TimLuckhurst

...is also decreased activity in the private sector, though, so it's not just the difference between their benefits and wages. Your logic makes sense, though.

What annoys me is the idea (implicit in much coverage) that a simplistic exchange takes place between public and private sector employment - less of one (public) automatically means more of the other (private). What about the knock-on effect for companies dependent on government contracts (in IT, for example) of massive cuts in public spending? Is public spending 'crowding-out' their activity? It's an unecessary and distorting simplification.

By johnsaunders

...In no particular order...Your points are well made, but I think you should consider the context. These cuts are designed to reduce British public spending to a figure close to its post 1945 average. So, perhaps the right question to ask is whether the economy performed better or less well before the massive expansion in debt brought about by Mr Brown's combination of i) lavish expansion of spending on state services and state employment and ii) his truly enormous stimulus package. Also,  consider the possibility that reduced state expenditure on jobs and services may allow the state to direct more of the taxpayer's limited resources to purchasing expertise from the private sector. I am very glad that there is Liberal influence in this government. I think it shows clearly. Conservatives are often cautious and corporatist in their economic outlook. Liberals are better equipped to balance the benefits of private enterprise with clear concern for the vulnerable and the excluded. So far, I'm quite impressed by Messrs Clegg, Cable and Alexander. And face it, after the Greek fiasco, Labour would have had to cut savagely too. It is easy to underestimate how much market sentiment has changed since Greece, Ireland and Spain began to look fragile. The strategy on which A. Darling and G.Brown fought the election is no longer credible.           

By TimLuckhurst

Because that doesn't form part of the debt that needs to be paid down. Brown's lavish spending, though, does, and of course you're right that money could be freed up to be spent on private sector contracts by cutting the public payroll. I wasn't trying to argue against cutting, more the way the issue is framed by much of the coverage.

It could go either way, I think. Economics is such an inexact science (if indeed it is a science), that any prediction is foolish. Having said that, though, I think it's a pretty safe bet that growth isn't going to return to any more than 3% by 2011 (as was originally forecast), in which case paying down the debt is going to be even more of an uphill struggle (bit of a mixed metaphor, but you get my point). In which case, maybe cuts are even more necessary. Who knows?

By johnsaunders

Has the stimulus actually stimulated anything? Brown's claims that things would have been worse if he had not printed money (sorry, quantitatively eased the money supply) are pure assertion. We do not know what would have happened if he had refused to apply a limited  grasp of Keynesianism to a circumstance J.M. Keynes did not contemplate.  Beyond that, economics is no science but my guess is that letting Northern Rock fail would have been cathartic.  RBS  and Lloyds/HBOS are harder, but splitting the speculative and traditional parts of the banks should have been a prerequisite for public support. Anyway, it is probably a good thing that I'm not Chancellor of the Exchequer.  

 

By TimLuckhurst

Who'd want to be? You can't really take credit for anything, especially if you hope to avoid blame in the bad times.

By johnsaunders