Ignore the markets – or how to really defeat the economic crisis

By Jonathan Power

What have these eleven countries in common – Finland, Norway, Canada, Japan, Poland, Turkey, Australia and, to a lesser extent, the US, Russia, Sweden and Denmark? They have not put themselves through the economic purge and their economies are growing at a reasonable rate. Not for them savage cuts in social services and public investment combined with lower wages. They have kept their economies purring. They are pro-Keynesian – a policy attributed to John Maynard Keynes, the most brilliant economist of the last century, in an age when there were many brilliant economists, both of the left, the middle and the right.

They have not given extra favours to the well-to-do at the expense of the lower middle class and the working class. The US and Russia excepted, they have a good distribution of income compared with other countries and they have kept it that way. Their leaders have not panicked at the economic and financial crisis. They have kept cool heads and are now reaping the benefit.

Most of Europe has voluntarily partaken of the hemlock of deflation – cuts followed by more cuts. In the US, at the federal level, President Barack Obama has managed to fend off an almighty onslaught by the Republican opposition and kept his government spending, albeit at a lower level than is truly necessary. However, the states have been mandated by Congress to cut their budgets and this has had a big effect on lowering the country’s potential growth rate as unemployment stays high, they sack teachers and ignore much needed infrastructural development. Audi have a new advertisement for selling their cars in the US that says in effect: “Buy our car and you will be protected from the badly surfaced roads”! In comparative world tables, conducted by the Organisation for Economic Cooperation and Development (OECD), the educational levels of American youth continue their fall.

Yet the cutters are not moving towards their target – ending the purge and resuming economic growth. Spain has now moved into the severe crisis camp with rising bond prices and 50% unemployment among its youth- despite being one of the few countries with a small foreign debt. Britain has just announced that its unemployment rate is going to continue to grow and has had to admit that its earlier hopes about renewed growth later this year have been shelved. According to the Nobel Prize winning economist, Paul Krugman, writing in the New York Times and the International Herald Tribune, “Britain’s slump has now gone on for longer than its slump in the 1930s”.

As for Greece the savage cuts to pensions, unemployment pay and the like have reduced incomes of the poorer sectors of society by up to 20%. In significant numbers families can no longer get by.

Of course, Greece’s social programmes were over-bloated by anyone’s standard. Greeks avoided income tax, retired in their late fifties or early sixties and milked the system. They do have to put their house in order.

But this is to miss the point. Greece is a special case. It lied its way into the Eurozone.

For the rest, as Keynes argued again and again, cuts that are indiscriminate mean that one is digging the hole even deeper. Cuts mean lower tax revenues, less trade and industrialists as well as foreign investors having less confidence and incentive to invest. Where does that lead? Keynes argued that it merely deepens a recession.

The alternative of paying men to dig holes in the road, he said, and then filling them in again was a better policy than this. What deflating economies need is more demand, more employment, more expenditure, thus generating more tax revenues that can be spent on new roads and railways, bridges and health services and which while aiding people boost the spending power in the economy and raise incomes.

Roosevelt is heralded as the president who pulled America out of the Great Recession. That is partly true. But economists almost to a man argue that it was wartime spending that saved the US and European economies. Hitler with his massive autobahn building program and re-armament saved the German economy and got himself elected to power. Do we need another war to save us?

Western leaders, with the exceptions I mentioned in the opening line, have got their knickers in a twist. They have allowed the markets to lead them, not vice versa as they should. This is supposed to restore confidence. But the markets are operated in the main by relatively green 20 and 30 year olds who have not studied Keynes, the 1930s, nor the rise of Hitler.

The truth is government leaders must now ignore the markets and take whatever hits they are given on the chin. They have to prime their economies, re-start growth and grow their way out of their debts. As growth gathers speed the present debts would become ever less a percentage of the whole. A little inflation would be useful too; it would pay down some of the debt.

Keynes would roll over in his grave if he could see what was going on now.

© Jonathan Power 2012

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