When Lord Myners proclaimed this month
that ''there is nothing progressive about a government that consistently spends more than it can raise in taxation”
he gave support and comfort to one side of an argument that is at the heart of the new government’s
agenda – what to do about the government deficit.
Lord Myners’ intervention was all the more significant because it came from someone who, just
a few weeks ago, was a minister in the Labour government. He weighed in on the side of those who seem to
assert that the first priority of the new government must be to get the deficit down; but he may have also given us a clue
as to why Labour’s position on this issue during the election campaign was so confused.
Most commentators agree that the global financial crisis has
prompted an overdue resurrection of the reputation of last century’s greatest economist. But, for
Lords Myners it seems, Lord Keynes may never have existed. He continues to exhibit an unreformed attachment
to one of the most common fallacies in economic thinking over the past thirty years.
It is a common assumption in right-wing thinking that the government should
be regarded as merely an individual person or corporation writ large, and that it should therefore always act as a prudent
individual would do. Although most individuals would plead guilty to the charge of borrowing in order to
build or acquire an asset (like a house), the government – according to this view – must never spend beyond its
means. In a recession, when individuals stop spending and investing, and the government’s tax revenues
therefore decline, the government must also slam on the brakes.
This view is especially ironic when a large element in the government’s indebtedness is the
money provided to bail out failed institutions, and especially banks, in the private sector. But, more
importantly, it completely overlooks the responsibility of governments during a recession to lean against the logic of the
As Keynes saw, a government
that behaves in a recession as everyone else behaves will simply make the recession worse. It is the special
role of government in that situation not to retrench but to use its huge resources, its ability to create new money through
“quantitative easing”, and its responsibility to take the longer view and to act in the common interest, in order
to stimulate the level of economic activity so as to shorten the recession and thereby restore its own financial position
as soon as possible.
that ignores that responsibility and focuses narrowly on its own short-term financial position is likely to see the recession
last longer with inevitable longer-term consequences for its own tax revenues and finances. A braver government
that lives with a deficit as its contribution to a counter-recessionary strategy will see its tax revenues recover faster
and – paradoxically, it may seem – bring the deficit under control sooner than it would otherwise have done.
None of this means that government spending should
be let rip. If the deficit is to be effective in bringing the recession to an end, the spending must be
economically worthwhile. The new government is quite right to scan the whole of its expenditure so as to
eliminate wasteful, unnecessary or ineffective spending. The spending that is undertaken must not be focused
on consumption but on encouraging investment, employment and improved productivity. The goal must be investment
in an improved economic performance for the future so that a double bonus is obtained – an immediate counter-recessionary
boost to the level of demand in the economy that takes the form of a counter-cyclical stimulus to longer-term productive capacity.
To follow this course requires political courage
and political leadership. The Lord Myners of this world are always quick to condemn a departure from what
passes as orthodoxy. It is not something that should be sub-contracted to officials. The new government
has received plaudits for setting up the Office for Budget Responsibility and George Osborne has now announced greater regulatory
responsibilities for the Bank of England. But these agencies cannot be expected to take the tough decisions
about the overall course of the economy that are now necessary. That is what we elect governments to do.
The new government must step up to the mark.
16 June 2010.
This article was published in the online Guardian
on 14 June.