There has been a succession of moderately good news for the UK economy. Many analysts and business leaders think that a modest recovery is under way. Indeed, some think the recovery is actually larger than that shown on the official figures. Others warn that it is fragile, easily overturned by the next eurozone crisis. Jeremy Warner asks if the policy of austerity, cutting back debt and spending, has worked, and discredited those who argued that only stimulus, pumping new demand into the economy, could succeed.
People point out that the austerity always promised more than it performed, and that the rhetoric was never matched by the measures. Its defenders reply that it is partly about expectations, in persuading people that the party is over and that more sensible policies will be pursued in future. There were public sector cuts, and cuts to planned increases. The UK did not raise borrowing and spending for pump-priming a-la-Keynes. At the heart of the dispute is the Austrian view that crises follow when credit and money are made too loose for political purposes, causing over-enthusiastic and inappropriate investment. Recovery comes after that bad investment has failed and capital has been redirected to other areas. Recovery comes from private investment creating new growth and jobs, once they have the confidence. The neo-Keynesians think that recovery comes from boosting demand, and that government should put money into the economy to achieve that. Once people are spending, they say, the economy will expand in consequence. Warner is not wholly convinced by either side.
“Hayek and other members of the Austrian school are useful in understanding how distortions to the free market bring crises about, but they are of little help once you’re in one. By the same token, Keynes offers no convincing counter to the way his remedies tend to embed much higher and ultimately unsustainable levels of state spending in the system.”
I disagree, but mildly. Austrian economics can tell you what to do in a crisis, but they cannot say what politicians want to hear. Politicians want to be seen to take active measures to stop businesses going to the wall and jobs being lost, but most failing businesses should be allowed to go under in order that space and resources are available for new ones. I do agree with Warner when he points out that ideology needs to be tempered by experience. You have to be prepared to tweak your approach depending on what happens in practice, rather than sticking resolutely to an ideology regardless of the outcomes it produces. He suggests that Milton Friedman’s approach has shown its effectiveness in combining support for low taxes and a small state with monetary intervention to prevent and address crises. It involves tempering economic theory with a dose of pragmatism.
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