Good for the Irish!

The Irish, just about the only country with a more threatening economic situation than our own, are preparing savage cuts in order to produce a prospect of balance. They have little choice, because they have signed away any latitude by fixing their exchange rate as a Euro currency member.

At the same time G.Brown is proposing to spend even more, in some wild dash for growth or electoral salvation. He is invoking the name of Keynes, as are many others, who in the face of a credit-caused recession are recommending still more credit creation.

There is no time to explain the Theory evolved by Keynes, but merely its main thrust. When there is unemployment, he suggests, and therefore inadequate total spending, the government should spend to make up some or all of the shortfall. Few, I think, would doubt this in the case of a full-blown depression such as in the 1930s. (It should be remembered, however, that despite massive public works programmes and social benefits, in 1931 unemployment stood at 17.4% and the Dow Jones Index at 140 and by 1938 unemployment was still at 17.4% and the Dow had dropped to 121. If the Keynesian remedy was working, it was working rather slowly!

There is an alternative view - that unemployment is not merely from a lack of total demand, but also from a serious imbalance in the economy which requires serious correction. Keynes's prescription does not deal with this.

In the early 1980s 285 ( or however many) economists (Keynesian devotees) wrote their famous letter, protesting at what the Thatcher government was doing. It was a hard time for many, but the Thatcher remedy worked, and for a few years we had one of the strongest growing economies in the world.

That might not be the best example, but there is also the Swedish example in the early 1990s, where cuts solved their problems very quickly, a process which Cameron and Osborne are known to have thought about.

Everyone quotes, as I have, the 1930s experience of the USA, but fail to mention the earlier depression of 1920. President Harding was pilloried for having a policy of cuts and balance, but Keynes had not yet written and the opposition had no theoretical underpinning. Harding cut taxes and cut expenditure. He paid off a third of the government debt. More importantly, by the late summer of 1921 the economy was visibly recovering.

The Keynesian "solution" is intuitively attractive, but it ignores the complexity of the economy, with its sundry imbalances and unpredictable expectations, reactions and outcomes. In 70 plus years the possibility of a depression may have been unrealised by the confidence it bred. Once we are in a recession, and Keynes policy was a failure in the 1930s, there is more rationality in allowing the complexity of the system to sort itself out, with government support of victims, rather than perpetuating imbalances and maladjustments and dragging out the process.

In our present situation, out-of-control government spending has deepened and prolonged our recession, and there seems little recommendation to continue it, except ideological and electoral considerations.Further government credit expansion could cause problems in financing and interest rates, and the famous "second dip".