Après nous le déluge
7 April 2009
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Anatole Kaletsky [The Times, April 6] says the G20 countries are right to borrow and spend even more than they have done already. But he seems to be living in a dream world.
First he says this recession is actually quite a modest challenge compared with the recessions of the 1970s and 1980s. He says even the most dogmatic theoretical proponents of Austrian economics, once they are put in the practical position of managing public finances, realise that cutting public spending or raising taxes during a recession will dig the public finances into an even deeper hole. But this was not the UK experience of the 1981 budget, against which 364 economists famously protested.
Then he says that government borrowing to minimise the economic damage done by private debt reductions is the most important economic insight since Ricardo’s argument for free trade and against “protection”. But as Lawson pointed out in his memoirs, behind this assertion lies the implicit assumption “that no economic recovery is ever possible other than by a conscious act of demand management by an expansionist government”.
Kaletsky claims that Keynes refuted the economic logic of the Austrian school’s “market solution” in his General Theory in 1936; though I don’t know where in that book he thinks Keynes did this. I prefer Hayek’s comment that Keynesian economics was the theory of “full unemployment”, which made the price mechanism redundant.
He then says the only way to reduce public sector deficits is to restore economic growth; though surely reducing the burden of tax and over-regulation might help in that respect. Another way to reduce the burden of debt is to debase the currency, a topic on which modern governments require no advice.
The thrust of what Kaletsky argues is that politicians have no alternative. How convenient, with an election coming up in little more than twelve months at most, to be able to “spend, spend, spend” before the election; and let someone else worry about having to cut back public overspending and increase taxes afterwards. In our lifetimes we have probably never seen a better example of “après nous le déluge”.
Professor D. R. Myddelton is Chairman of the Institute of Economic Affairs.
First he says this recession is actually quite a modest challenge compared with the recessions of the 1970s and 1980s. He says even the most dogmatic theoretical proponents of Austrian economics, once they are put in the practical position of managing public finances, realise that cutting public spending or raising taxes during a recession will dig the public finances into an even deeper hole. But this was not the UK experience of the 1981 budget, against which 364 economists famously protested.
Then he says that government borrowing to minimise the economic damage done by private debt reductions is the most important economic insight since Ricardo’s argument for free trade and against “protection”. But as Lawson pointed out in his memoirs, behind this assertion lies the implicit assumption “that no economic recovery is ever possible other than by a conscious act of demand management by an expansionist government”.
Kaletsky claims that Keynes refuted the economic logic of the Austrian school’s “market solution” in his General Theory in 1936; though I don’t know where in that book he thinks Keynes did this. I prefer Hayek’s comment that Keynesian economics was the theory of “full unemployment”, which made the price mechanism redundant.
He then says the only way to reduce public sector deficits is to restore economic growth; though surely reducing the burden of tax and over-regulation might help in that respect. Another way to reduce the burden of debt is to debase the currency, a topic on which modern governments require no advice.
The thrust of what Kaletsky argues is that politicians have no alternative. How convenient, with an election coming up in little more than twelve months at most, to be able to “spend, spend, spend” before the election; and let someone else worry about having to cut back public overspending and increase taxes afterwards. In our lifetimes we have probably never seen a better example of “après nous le déluge”.
Professor D. R. Myddelton is Chairman of the Institute of Economic Affairs.
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Completely agreed (of course). Another myth that needs to be debunked is the idea that governments can borrow more cheaply than the private sector. If you just look at the average rate that governments pay, this is probably true, but it is more important to look at the marginal interest cost of additional borrowing, which is probably higher than that paid by the private sector (click my name for worked example, comparing Germany and Italy).
Completely agreed (of course). Another myth that needs to be debunked is the idea that governments can borrow more cheaply than the private sector. If you just look at the average rate that governments pay, this is probably true, but it is more important to look at the marginal interest cost of additional borrowing, which is probably higher than that paid by the private sector (click my name for worked example, comparing Germany and Italy).
I think Anatole Kaletsky is having some sort of crisis-of-confidence.
Eighteen months ago Kaletsky was generally a free market enthusiast, though simultaneously an apologist for New Labour. Then he spent 2008 denying that the recession was coming, and then admitting that it was coming but that it would be minor, and then admitting that it was major but that we could get out of it by adopting all the policies that we had rejected back in the days that he claims were the glory times of the late 90s and early C21st.
Like too many weak free marketeers, he has panicked the moment that the anti-capitalists refound their voices. That makes it all the more important for the rest to stand firm.
I think Anatole Kaletsky is having some sort of crisis-of-confidence.
Eighteen months ago Kaletsky was generally a free market enthusiast, though simultaneously an apologist for New Labour. Then he spent 2008 denying that the recession was coming, and then admitting that it was coming but that it would be minor, and then admitting that it was major but that we could get out of it by adopting all the policies that we had rejected back in the days that he claims were the glory times of the late 90s and early C21st.
Like too many weak free marketeers, he has panicked the moment that the anti-capitalists refound their voices. That makes it all the more important for the rest to stand firm.
This part in Kaletsky’s text is revealing:
“preserving living standards and jobs, protecting savings and keeping people in their houses, take a much higher priority than abstract Austrian arguments against preserving the Austrians’ “unsound production structures”.”
Sounds like “This weird Austrian stuff is too complicated anyway, so I rather do some nice-sounding little-man-in-the-street rhetorics”.
He is implying that there was an easy, painless way out of a recession, but the heartless Austrians don’t want to take it just because some textbook tells them otherwise. He is not addressing the actual Austrian point: the current structure of production cannot be sustained.
This part in Kaletsky’s text is revealing:
“preserving living standards and jobs, protecting savings and keeping people in their houses, take a much higher priority than abstract Austrian arguments against preserving the Austrians’ “unsound production structures”.”
Sounds like “This weird Austrian stuff is too complicated anyway, so I rather do some nice-sounding little-man-in-the-street rhetorics”.
He is implying that there was an easy, painless way out of a recession, but the heartless Austrians don’t want to take it just because some textbook tells them otherwise. He is not addressing the actual Austrian point: the current structure of production cannot be sustained.
Kaletsky’s columns have become something of a standing joke in the last year or so and the one you so rightly criticise was probably the worse so far. It would be good to see Jamie Whyte bring some much needed challenging insight back to the comment pages of The Times.
Kaletsky’s columns have become something of a standing joke in the last year or so and the one you so rightly criticise was probably the worse so far. It would be good to see Jamie Whyte bring some much needed challenging insight back to the comment pages of The Times.
I have been on holiday and have not read the article in full. But, the phrase the most obviously reveals his lack of understanding is “abstract Austrian arguments”. The Austrian arguments are not in any sense abstract. They deal precisely with the practicalities of the problems that arise in recessions.
I have been on holiday and have not read the article in full. But, the phrase the most obviously reveals his lack of understanding is “abstract Austrian arguments”. The Austrian arguments are not in any sense abstract. They deal precisely with the practicalities of the problems that arise in recessions.