The 2010 general election was famous for its polarised economic views. Gordon Brown advocated a Keynesian response to the financial crisis, while the Tories were self-flagellating in the need of austerity. We’ve learned much from that Petri dish, and the six years that followed. The IMF has now published the new economic consensus, under the headline Neoliberalism: Oversold?
In 2010, Osborne argued that the markets would turn on sterling if the debt was not addressed urgently. Brown argued that the debt would naturally reduce with growth, but immediate cuts would damage growth. The IMF has called Brown the winner:
“Faced with a choice between living with the higher debt or deliberately running budgetary surpluses to reduce the debt, governments with ample fiscal space will do better by living with the debt.”
The IMF used to be such zealots of neoliberalism that they and once forced Jamaica to slaughter their entire dairy industry because market forces made imported powdered milk cheaper. Today they worry about inequality.
“There is now strong evidence that inequality can significantly lower both the level and the durability of growth.”
They even advocate higher taxes, and dismiss the argument that taxes hurt growth.
“…by using taxes and government spending to redistribute income. Fortunately, the fear that such policies will hurt growth is unfounded.”
The big difference between 2010 and the modern day is that we have come to realise that low growth is permanent, a phenomena known as “secular stagnation”. Our jobs are done more cheaply overseas, or by the internet, our ageing society means fewer of us earning and, as the IMF say, inequality is also a drag.
The combination of these factors makes an economy with little momentum. This can be seen in the lack of inflation. No inflation means that no one is demanding a wage rise. The shopkeepers are not putting up their prices. Those restaurants are choosing to stay competitive. Everyone is clinging onto what they’ve got, instead of joyfully racing ahead. The animal spirits are subdued.
Think of the people who will vote to leave the EU because someone must be to blame for the disappointments in their life. If a politician were able to fix secular stagnation, then she would have done a great service to the people.
The only reason quantitative easing (QE) ended is because they ran out of Government bonds to buy, not because there was no capacity to continue creating new money. As long as inflation is so low, the economy is crying out for new money to be created, but it has to be spent in the real economy, not in the bond market. Infrastructure and training are essential right now.
Rather than money, let’s imagine the water on the Earth’s surface. If the aquifers sucked all the water underground, then the sea level would fall, rain and clouds would dwindle and the planet would overheat. To fix this, man would drill holes into the aquifer, to cause the water to surface and the rivers to flow. However, man would not be inventing rain or rivers, but only allowing the water to flow.
QE is exactly the same. The economy needs money to be created to pay for infrastructure to be built, and people to be employed, in order to fill a vacuum created by secular stagnation. It doesn’t create the need for that bridge to be built. Nor does it create the workers who will build the bridge. It just connects the two; the workers and the project. Failing to make this connection is failing both the projects and the workers. All the politician has to do is choose to act.
If a person was dying of a fever, and you have antibiotics, would you be killing that person by not giving him the medicine? For politicians to stand by and refuse to create QE for the real economy, they would be acting in an equivalent manner. The law would not find you guilty of murder, but morality would do so.
The age of neoliberalism is not completely over, but the zealotry certainly is. The new age of intervention requires Government to increase the amount of money, not in the financial markets but in the real economy. That is the future intervention. The politicians just need to arrive there.
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