If Osborne does not spend, he does not borrow, so the money stays in the private sector
In his piece on the economy, Robert Skidelsky makes two arguments (The economy is stagnating before the cuts even bite. We need a plan C now, 22 June). First, that "Britain is very much in the slow lane of global recovery, and this is all before the cuts have started to bite". His other argument contrasts "the [George] Osborne theory" ? that the cuts of �83bn are "equivalent to transferring money to the private sector" ? and the Keynesian argument that "cuts in public spending will not be matched by an equivalent increase in private spending". I accept the first proposition and wish Skidelsky had written more on this aspect. This is because it has implications for his second argument, which I contest.
Britain's slow recovery is because of the nature of the crisis we are in. Unlike previous recessions, which were caused by lack of effective demand ? the standard Keynesian case ? it was due to overspending on the part of households and governments. There is also a longer-term reason. Since the early 1980s, western countries have ceded manufacturing activity to emerging economies and replaced it with private or often public services which generate jobs but not as much wealth. Our wealth-creation capacity has thus fallen and we have deluded ourselves that we are rich by borrowing.
Skidelsky contrasts former chancellor Alistair Darling's budget, which would have "taken out" �73bn from the economy, as against Osborne's budget whichwould take out �83bn over five years. But these numbers are hypothetical. Each represents a difference between what the pre-recession projection of the economy showed for 2010-15, and what in light of the recession and the debt situation each chancellor thought should be the revised path. No money has been taken out or will be from the economy.
Osborne has frozen public spending, as planned by Darling for 2010-11, in real terms for five years. So public spending is not "cut": it has been prevented from rising, as normally happens in a growing economy. Where would the �83bn that Osborne has decided not to spend have come from if he did wish to spend it? Since households are in debt, as is the government, the money would be lent by the business sector. If Osborne does not spend, he does not borrow. So the money stays back in the business sector's balance. There is no question of 'transferring money to the private sector'. It is of not removing it in the first place.
Skidelsky's argument has to be that Osborne should have borrowed because his spending would have a bigger multiplier effect than the private sector would achieve. But the slow recovery tells us that multipliers are low anyway. The longer-term need is for investment in productive activities, not ditch-digging public spending. Skidelsky's Plan C is an admission of this. He would prefer the new investment to be channelled through a green bank, but this is merely churning the money around from the private sector to the private sector.
Eventually the answer is private sector investment, which will be in wealth-creating enterprises and not job creation in the public sector. Whether the Treasury is more efficient at this than the private sector is not a question Keynesians or any other economists can answer.
Source: http://www.guardian.co.uk/commentisfree/2011/jun/29/public-spending-stops-rising
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