Cowen and Lenihan need to start spending to get us out of this mess. Any more cuts and our economy is doomed
George orwell, that great scourge of totalitarianism and capitalist exploitation, once wrote that “to see what is in front of one’s nose needs a constant struggle.” The origins of the current crisis suggest that, for many years, we have, on the contrary, being staring resolutely at our own nostrils. How could we ever have thought that selling houses to each other at ever-inflating prices would provide a sustainable route to prosperity? Or that banks could function along the lines of James and the Giant Peach, borrowing money from each other in order to lend it on to consumers at a higher interest rate? Or that the people engaged in these activities could be trusted to regulate themselves when the obligation to seek higher profits actually dictated that they should take ever more reckless risks?
The answer is what Friedrich Engels called ‘false consciousness.’ To justify this manic game of economic Pass the Parcel, some intellectual jiggery-pokery was required to allow us to think away the blindingly obvious. Thence a panoply of bogus concepts developed – ‘efficient market hypothesis’, ‘shareholder value’, ‘the ownership society’ – which are now being rapidly repudiated by their erstwhile champions, notably Alan ‘Maestro’ Greenspan and Jack Welch. This sort of guff was often collectively grouped under the dictionary-shredding barbarism ‘blue sky thinking’. I wouldn’t normally go so far as to say these people should be swinging from lampposts, but I am still inclined to agree with Henry Higgins that “by rights they should be taken out and hung for the cold blooded murder of the English tongue.” So thank heavens the most successful branding exercise in history now seems set to go the way of New Coke.
Or does it? At least in this country, recent commentary suggests that the hegemonic delusion of the ‘free market’ remains dominant. (Of course, there’s nothing particularly ‘free’ about it. Who decides how much money you earn? You? Your employer? Your customers? The fact is, all of you are hostage to forces entirely beyond your individual control.)
For linked to the discredited idea that markets are self-correcting is the perverse notion that the government’s job in the face of a shrinking economy is...to shrink the economy even further. That, I’m afraid, is what happens when you cut spending and raise taxes during a slump. John Maynard Keynes called it ‘the paradox of thrift’: it makes sense for individuals to cut back in hard times, but if they all in fact do so then everybody will end up worse off.
Do our politicians and pundits grasp this admirably simple truth? To paraphrase that humbled brown envelope merchant, Mick Bailey: “Do they fuck!”
Even stranger is the way that severe cutbacks are presented as being as inevitable as teenagers having their stomachs pumped on St Patrick’s Day. As the Irish Times’ Stephen Collins put it in one of his most heroic displays of groupthink yet, “The only way that the state’s solvency and its ability to function can be guaranteed is if the April 7th budget cuts deep into the level of public spending and raises significantly more tax to plug the yawning gap between income and expenditure.”
Hot on his heels was the Sunday Independent’s Alan Ruddock who proclaimed that the government “must prepare the economy for recovery and restore some credibility to the public finances by cutting its spending.” In fact, these assertions are self-contradictory. Here, we must defer to someone who knows what he’s talking about, Martin Wolf, chief economics commentator of the Financial Times, who says that the recession will be “deep and prolonged” unless governments start spending a lot more money soon. Most relevant to our own situation is this insight: “Attempts to curb fiscal deficits when the private sector is cutting back sharply are likely to fail even in their own terms.”
This is why Ruddock and Collins’ talk of “painful yet necessary measures” is so deluded. By inflicting that sort of pain on the patient right now, we are likely to kill him. When the government contributes to the slump by cutting back its own spending, that reduces the size of its tax base, forcing them to cut back again and so on ad infinitum until we wind up in a similar economic position to that of Weimar Germany circa 1933. In the 1980s, this strategy just about worked because the rest of the world was booming and could buy our exports but amid the worst slump since the Second World War, it is a recipe for catastrophe.
Nevertheless, all indications are that this is what Cowen and Lenihan will do this month, when they try ‘to claw back’ more revenue. The truth is they are grasping at air and their outdated ideas will spell doom for this country. Contrary to the ‘There Is No Alternative’ (TINA) brigade, the government can borrow as much as it wants as long as it is prepared to pay the interest.
There is in fact nothing inherently unaffordable about the national debt soaring to well over 100 per cent of GNP in the short term – according to Wolf, it would cost about 1 per cent of GNP per year once growth returns. The time will come to pay the bill but trying to limit its size today will perversely just make it even bigger.
Max,
This is unrelated to your post but relevant in its greater context...
The most intriguing fact I learnt in the past month is that the U.S. Federal Reserve is not a Central Bank. It is a private bank.
I recently received a link to the curious documentary from the 1970s: 'The Money Masters', from a gentle poet who seemed to have experienced an epiphany in terms of how he now viewed the world. With an arched eyebrow and some curiosity about what it was that had led this gentle poet to declare with all the zeal of a religious maniac, that 'finally it all makes sense!'...I looked it up.
Produced in the 1970s, it involves economists of some repute. Five years ago it would have seemed conspiratorial. Today many of the acolyte websites dedicated to getting its message out there, smack of the loudspeaker shrillness and zealotry of the Socialist Workers' Party. That might have put me off as should its excessive length. Nevertheless I saw it through. I will admit the sceptic in me was somewhat quietened by the sober facts presented. The U.S. Federal Reserve story being amongst them...
I would be interested to hear your thoughts on the U.S. Federal Reserve, on the nature and level of power such a private bank wields and on the U.S. government's unwillingness or incapacity to take it on, as part of its supposed root and branch reform of the banking system.
The divine status afforded to this private institution intrigues me, as does the apparent cult of infallibility which surrounds it, which precludes it from all review or reform. A keystone in the foundation of the U.S. banking system, surely it too requires serious scrutiny? To question it however, will involve a re-think on the whole economic order and by extension how society is held together and structured. That requires not merely the cosmetic surgery we are presently witnessing, but vision and courage, of a nature, even Mr. Obama, for all his attributes, would not dare to lead on. That, would require, true blue sky thinking.
Posted by: Erato | April 10, 2009 at 14:09