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.