Watching Paul Krugman speak at the LSE this week, I was amazed at how simple and direct his message was. In essence, the argument is that we know from Keynes how to get out of recession; what the UK economy needs is a stimulus of the order of £250-400bn (ie, 2-3% of GDP).
The costs of failing to provide such a stimulus are growing by the day. In simple monetary terms, the minimal cost of not acting is the 4% of GDP we have not recovered since the economy peaked in 2008. More realistically, they are currently 12% annually of GDP in the value of output forgone had we continued to grow at our post-war trend rate. Either way, the cost of the stimulus is far less than the output we are losing. And of course, there are further ‘external costs’ in terms of the human damage created by unemployment, job insecurity and reduced social benefits, particularly for the young.
The real clincher is this: the stimulus will pay for itself! The ‘Treasury view’— that there is a fixed pot of savings to be divided between the public and private sectors—is nonsense. State-led investment would cause national income to grow, and so too would savings, both private and public. Simply put, the Treasury’s ‘prior savings’ notion is wrong: new investment creates its own higher savings.
How do we finance the initial impulse of investment to get self-sustaining growth? We can either borrow, mainly from our own public at very low interest rates, or we can tax the super-rich and introduce a Tobin Tax as François Hollande is doing in France. For that matter, we can use more of the QE with which Mervyn King has so generously boosted the balance sheets of the banking system. The problem with QE so far is that little money has found its way into job creation, but this could easily be remedied by creating and funding a British Investment Bank. In reality, we can do all three.
The main impediment is that the current Tory-dominated government is unlikely to change course drastically—which it would need to do if Britain is ever to return to its long-term trend growth rate. As Krugman himself notes in his ‘Leprechaun factor’ piece on this website:
.. by the time it became clear that there was in fact no pot of gold at the end of the austerity rainbow, the coalition was so deeply committed to the austerity delusion that it couldn’t and can’t back down.
The second problem is that Labour seems incapable of breaking with the tired mantra of ‘cutting more slowly’. What Ed Balls and Ed Miliband are offering is peanuts: a temporary VAT cut here, perhaps some form of mansion tax there and (perhaps even) a return to the 50% top rate of personal tax. This doesn’t begin to add up to a real stimulus. The reason they are so frightened is mainly that the Daily Mail and other media will trot out the old ‘tax and spend’ accusation.
What Ed needs to say is what Paul Krugman said the other night: this self-induced depression is costing Britain billions. The solution is not rocket science and needs not only to be put in terms people can understand … and repeated over and over. Britain is NOT broke. Austerity is NOT the answer—reflation, growth and jobs are what we need.