Nationally and internationally, economic growth – such as there was – is faltering. China’s slowdown has prompted falls on the Asian and global stock markets. The US Fed’s signal that interest rates may soon rise – and QE wind down – multiplies the gloom. Europe creaks, as new crises – refugees and fears of Brexit – reinforce the sense of a whole continent desperately seeking a way out. After seven lean years, there seems to be little prospect of seven years of plenty anytime soon.
The debate over policy responses remains locked between government debt reduction and renewed action by central banks, in some new version of QE. On March 10th, the European Central Bank surprised financial markets by cutting interest rates and expanding its QE programme to €80bn a month (up from €60bn). It also launched a new scheme to encourage the commercial banks to lend to businesses: all in an effort to revive economic growth and avoid deflation. The markets however seem to be taking all this as a sign that if this does not work, the ECB has no more to offer. This may therefore just reinforce business and consumer expectations of continuing stagnation, compounding the gloom.
It is not therefore surprising that the Bank of International Settlements has warned of a ‘gathering storm’, with governments and central banks ‘running out of options’. Moreover, with reforms of the banking system, following the 2008 crash, having been much less than many deemed necessary, any significant weakening of the global macro-economy could well provoke a new banking crisis.
Faced with the evident limitations to what monetary policy can achieve, the OECD has been arguing for a stronger fiscal policy by governments. The new leadership of the Labour Party, with Stiglitz, Piketty and Mazzucato among its advisers, is trying to develop just such a strategy (albeit couched initially in the language of QE, re-worked to fund anti-austerity measures). Nevertheless, UK government policy remains focussed on debt reduction and shrinkage of the public sector. Budgetary discipline likewise provides the guiding rule for governments in the Eurozone, subject more and more to Germany’s economic hegemony.
It is in this context that the Chancellor George Osbourne makes his 2016 budget statement. Additional cuts in public spending will be needed, with disability benefits carrying much of the burden. These cuts are needed because, he claims, the world is in a difficult and dangerous place, with more uncertainty than at any time since the global economic crisis of 2008-09. “We have got to live within our means to stay secure, and that’s the way we make Britain fit for the future,” he told the Andrew Marr Show.
The IPR Report Alternatives to Austerity, published in July 2015, set out an alternative approach to the continuing recession. This was inspired in considerable measure by Keynes, whose General Theory was published eighty years ago last month. What then is the situation that we face: and what is now to be done?
Keynes was centrally interested in the role of money in a modern capitalist economy. This did not however mean that he looked to monetary policy to steer such an economy, least of all to kick-start growth during a period of recession. In a recession business confidence would be lacking - and however low interest rates were pushed, entrepreneurs would sit on their hands (and their cash) and wait till times got better. Keynes would not therefore have been surprised at the very modest response of the economy to the QE stimulus provided by central banks over recent years.
Why then have governments continued to look to the central banks to shoulder the main burden of getting the economy out of recession? The reason surely is not any positive belief in the efficacy of monetary stimulus: more the belief that there is no alternative, no other hope on the horizon, especially now that China’s growth has faltered. Why no alternative? Because the high levels of government debt that resulted from their bail-out of the banks – coupled with the shrinking tax receipts of an economy in stagnation – have been the prime target of government concern. Debt reduction trumps economic growth as the prime objective of government policy, in the UK and the Eurozone in particular. This is in part in the belief that reducing public expenditure will allow the private sector to expand; and in part out of fear of the international money markets. The problem is, that without a return to economic growth, and to more buoyant tax receipts, debt reduction is unlikely to be feasible.
Is there some other alternative? Here we must notice the varieties of interpretation that have been placed on Keynes’ own work – in part because he himself addressed the problems of both short and long-term adjustment, and the problems of recession but also (especially during WW2) those of an economy operating close to full capacity. Nevertheless, in these different situations, his recurring theme was that government can and should act to ensure that national resources are fully used and effectively deployed: steering and complementing the functioning of markets, but also reducing the uncertainty about the future which otherwise disables and dispirits entrepreneurs and investors.
Although Keynes did allow some role for monetary policy, his basic message was that interest rates should be kept stable and low. The heavy work and the fine-tuning would be done by fiscal measures. The latter can however take many forms. The first priority – much emphasised in the General Theory – was to secure a level of effective demand that would produce full employment and high levels of utilisation of capital equipment. In a recession, when private spending on consumption and investment were low, the immediate priority was therefore to increase public spending, almost regardless of what form this took. Spending that created jobs for the unemployed was given pride of place, in part to address a social evil, and in part because the workers thus employed were likely to spend and thus to have multiplier effects across the larger economy.
This left Keynes being viewed by many as concerned solely with demand management and with public spending geared to soaking up unemployment. It also left many of his interpreters (what Joan Robinson referred to as the ‘bastard Keynesians’) to argue that once Keynesian expenditure had secured full employment, the market mechanism could be left to do its work, with Keynes having little or nothing else to offer.
Keynes was not however concerned only with ensuring sufficient effective demand in a recession. More fundamental was his concern over low levels of business confidence and their ‘liquidity preference’ – sitting on their hands rather than investing in skills and factories. Only government could provide the stability within which capitalist entrepreneurs and their ‘animal spirits’ would flourish. The returns that entrepreneurs could expect on their investments and on the inventions they brought to market depended on the general level of activity in the economy and this was itself dependent on public policies. Government policy shaped the environment within which businesses made their long-term investment decisions. It was those long-term decisions – by government and by business – that then determined the long-term growth potential of the economy, the tax revenues that could be expected and the long-term health of the public finances.
More generally, Keynes and his successors emphasised the role of public investment in building the long-term capacity of the economy. This might be through investment in infrastructure or human capital or the science base. It would involve long-term projects which were of a scale or duration which no private investor could contemplate. It might involve projects whose benefits were collectively enjoyed but which did not offer realistic returns to any individual private investor. What all these public investments recognised was that capitalist economies develop by expanding and transforming their human and technological capacities; but that this is unlikely to take place at the optimal rate, if investment is left to the private sector. Capitalist economies need to be steered and coordinated. From this point of view, austerity as a way of addressing our economic woes is fundamentally misplaced.
The world, says the Chancellor, is an uncertain and dangerous place. We must, it seems, hunker down, be thrifty and hope for better times to come. Keynes disagreed. Precisely because of that uncertainty, governments – individually and in concert – must be proactive in managing the global economy and the global markets before whose anxieties and dictates they too readily tremble. There was a moment following the 2008 crisis when the G20 seemed ready to act together and decisively but it soon faded. Unless the brave but limited efforts of the central banks are now succeeded by vigorous and concerted government action, geared not least to the green technologies we so desperately need, continuing stagnation seems unavoidable. And that in turn may mean growing political discontent and disaffection, social conflict and division. The increasingly dangerous world the Chancellor says he wants to fend off may in that case only be hastened.