Republicans in the United States and many Conservatives in the U.K. have for years clung to an idea, which surfaced during the Reagan era, that tax cuts can pay for themselves. This is rooted in the thoroughly debunked and discredited idea of the Laffer Curve, which you can read more about here.
Now we have Martin Wolf in the FT with a truly savage attack on the UK government’s austerity programme, in which he cites a paper by the economists Brad DeLong and Larry Summers, summarised wonkishly here, and concludes that
“extra spending can pay for itself.”
That is only true in certain circumstances, they note, but those circumstances are . . . . now. And just as the ‘tax cuts pay for themselves’ became a slogan, so I don’t see why the ‘extra spending can pay for itself’ soundbite couldn’t become similarly used.
The Wolf article is a demolition job on the UK government’s austerity policies, and is complemented by Philip Stephens in the same edition of the FT saying things like this:
Spending cuts and tax increases have not brought the expected falls in deficits. As a result, the markets have been having second thoughts about what constitutes a credible strategy. So, too, incidentally have the experts at the IMF and OECD. Even in Berlin there has been a subtle change of tone. Inexplicably, Mr Cameron alone seems determined to nail himself to the cross of austerity-come-what-may.
I don’t normally weigh in on the austerity versus pump-priming debate, and although I do think the austerians while conceding that they display a good grasp of Martian economics, have a rather shaky grip on more terrestrial matters. But I also do have one unusual reservation about the Keynesian pump-priming approach. And it’s a biggy.
The Great Depression of the 1930s, the result of appalling policy-making and financial deregulation, was so severe that it produced a wholesale political realignment, particularly in the United States, which in turn ushered in half a century (interrupted by the Second World War, admittedly) of remarkable and broad-based growth, around the world.
The sea-change political realignment has not happened this time around . . . yet. But it seems that austerity is wreaking such havoc on the world now that it is not unreasonable now to expect, or at least hope, that we could get there.
There may be a rather large, if yet hard to discern, silver lining in all the dark clouds that are gathering.
That is my hope, at any rate. For now, I can’t see much except dark clouds.