Cut or Spend? Fad or Strategy?

Before the British coalition government’s proposed cuts were announced they were greeted by 39 top business people writing to the Daily Telegraph confirming that they would create the necessary jobs so as to make the public sector cuts work. That way tax rises might be avoided and long-term cuts in public sector activity achieved. For them, any reduction in tax and spend would be a Good Thing. Well, business people would say that, wouldn’t they! But were they expressing a seriously thought through strategy, or merely expressing the currently dominant free market fad?

Those alternatives have been argued before. After the great crash of 1929, US President Hoover was focused on limiting the budget deficit, determined against large-scale government action to counter the developing depression. But he was wrong – it didn’t work. It fell to Roosevelt to introduce the New Deal to create jobs and stimulate the economy.

Economics Nobel laureate Paul Krugman condemns the coalition’s cuts, saying the plan “boldly goes in exactly the wrong direction.”. Not only that, but Peter Lawrence, professor of development economics at Keele University and occasional correspondent to this site, agrees with him. As does a massive army of concerned ordinary people. The same dilemma is being faced across the globe, notably in the United States.

If only economics, with its sophisticated mathematical models, could provide the answer. As a posting on this site (‘Dogma has had its Day, 6/9/10) pointed out, “governments are …flying by the seat of their pants in deciding between tackling unemployment and belt tightening.”

We are bombarded with conflicting certainties from all sides. Moreover many of these arguments are promoted, at huge expense, by organisations with deeply vested interests in the outcomes they promote. What to believe? At least Krugman and Lawrence can be relied on to say what they believe, not what someone is paying them to say.

The idea that we might learn from past experience seems persuasive. On that basis, Hoover’s strategy of cuts could never be preferred to Roosevelt’s job creation. Leaving economic stimulation to the mercy of Sir Philip Green and his co-correspondents of tax avoiders and asset strippers, would certainly be high risk.

The one thing that can be said with some certainty is that the public sector has over the past 20 years or so created a massive new bureaucracy to oversee and administer centralised control via the target culture, the creation of pseudo markets, and offering of worthless choice. That bureaucracy, created by dogma, should surely be dismantled. But it has to be done carefully and sensitively, aware of the possibilities of prolonged recession.

At the end of the day, the question really is about the nature of the coalition government. Is it the right wing ideologue of its Thatcherite past, and, in particular, is George Osborne a secret Tea Partygoer? Or does it reject fad and dogma, and reserve the intention to act pragmatically? If the cuts produce recession, will they trim their sails accordingly?

If only economic models worked!

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