failed economic policies continue to fail it becomes clear that those
pushing and implementing such policies have no interest in learning why they
are failing. But the rest of us do know, and writing in the Financial Times British Economist Robert Skidelsky
is eloquent in his simplicity, and about as effective a communicator as one
can be. Britain
Here for example is how he explains the failure of monetary policy, without having to revert to all that technical stuff about a liquidity trap and IS-LM curves.
The BoE’s mistake has been to believe it is the supply of money that is critical for economic recovery; Keynes said it was the demand for money. In 1936 he wrote: “If, however, we are tempted to assert that money is the drink which stimulates the system to activity, we must remind ourselves that there may be several slips between the cup and the lip.” These slips have been much in evidence. By printing money, the BoE aimed to increase spending through various channels: portfolio rebalancing, increased bank lending and, more vaguely, “confidence” that the BoE would not let the money supply collapse. But the money supply did collapse; some of the money has been invested in speculative assets; most of it remains stuck in banks and companies.
And here in three paragraphs is the essence of Keynsian economics, that aggregate demand stimulated by government spending is the key to recovery.
The Osborne recipe for recovery was based on the Treasury View, which Keynes confronted when arguing for public works during the Great Depression. The Treasury then argued that extra government spending would take away resources from the private sector; and even if there were spare resources, the loss of confidence and associated rise in long-term interest rates would far outweigh any stimulative effect of the extra spending.
Continuing the same line of thought, Mr Osborne’s Treasury has argued that reduction in the deficit would “crowd in” the private sector by freeing up the capital and labour appropriated by the public sector and by “restoring confidence”, so reducing long-term interest rates.
Keynes would have claimed otherwise: that cuts would reduce the level of total spending in the economy and thus perpetuate the slump. This has happened: the economy has been flat for two years and large parts of it outside
and the southeast
are sinking. London
And Keynesians like Mr. Skidelsky, Paul Krugman and even The Dismal Political Economist are entitled to take quick victory lap. The failure of monetary policy is no shock.
This does not come as a surprise to Keynesians. We have argued that banks create deposits in response to the demand for loans. The demand for loans depends on market expectations. If businesses see no market for their products, they will not borrow whatever the interest rate and the BoE cannot force them.
And the solution is not a surprise either.
What is to be done? If I were chancellor of the exchequer, I would immediately restore the programmes of capital investment cancelled by Mr Osborne and his predecessor Alistair Darling, accelerate infrastructure projects now in the pipeline and expand the programme of the Green Investment Bank. This would add about £100bn to aggregate demand, galvanising industrial supply chains.
The programme could be financed in various ways. I would borrow directly from the BoE for the government’s own capital programmes. To allow for their monetary financing I would give the bank a new nominal income target of (say) 5 per cent to replace the existing target of 2 per cent inflation.
I would also set up a National Investment Bank, whose mandate would be to borrow from the pension and insurance funds for revenue-generating infrastructure projects, and which could offer a higher rate of return than obtainable from gilts.
All of this is directly the opposite of what Conservatives believe. But when those beliefs are put into practice, as they have been in Europe and as Conservatives have to lesser extent in the
S. the beliefs fail the test of producing
the desired or expected results. But don’t
expect things to change, one thing Conservatives have in excess is an inability