From the TUC

Yes We Can-ism and the recession

04 Jan 2009, by in Economics

There should be another section on this blog to balance the “They Just Don’t Get It” thread. And it should be called “Yes We Can” – slogan of both Barack Obama and, of course, Bob the Builder. Because what Obama reminded us about throughout last year was that things can be changed (note the grammar – not things can change, but things can be changed, by us – collectively – doing things). There has been a lot of fatalism about both the course of the economic recession we face and the predominantly Keynesian responses, but neither was inevitable*. This weekend, the Financial Times argued strongly that we can affect both the length and depth of the recession and reminded me that we could do something tragically misguided.

Samuel Brittan, on Thursday, argued that there are lots of things the Government could do to reduce the length and lower the depth of the recession by boosting demand and meeting some fairly obvious needs. The FT’s editorial on Saturday argued that there were worse things than counter-cyclical fiscal activity.

Brittan argued that:

“A slump is a tragedy for those who lose their jobs and also for those who fear to lose them. But it is also a logical absurdity that there should exist unsatisfied wants side by side with idle workers willing to supply them.”

But it’s not so much the practical measures Governments could take that have struck me so far this year. It’s the bullish optimism, somewhat out of fashion for a generation, that we – and in particular governments – can do something about the recession. And this is an important part of the political shift now taking place which we need to emphasise. As Brittan put it:

“The slump is being discussed as if it were a natural catastrophe like the arrival of the comet that destroyed the dinosaurs. All the popular talk is of retrenchment, cutting down and spartan savings of all kinds. It should not take a genius to appreciate that such activities can only make the situation worse and aggravate a downward vicious spiral.”

There are other voices arguing alternative approaches. Many in the Conservative Party have come close to arguing that we should let the recession run its course, and that interfering would make matters worse. That was, after all, what the previous Conservative Government did in the early 1980s, allowing – encouraging, even – failing companies to go to the wall and expecting that resurgent entrepreneurs would create new jobs as the economy returned to growth. The invisible hand of the market would provide. Similar arguments were advanced by the Austrian school in the 1930s.

When I was learning economics in the late 1970s, the Austrian school, by then known as monetarists, were in the ascendancy for the first time since the 1930s. State intervention would squeeze out entrepreneurial activity, mostly by reducing the cash available for it (strangely there is a well-known lump of labour fallacy, but not a lump of money fallacy). The result was that the recession of the 1980s left Britain with a permanent army of unemployed which Labour has managed to reduce but not eradicate (partly because so many were converted into invalids – and are now very difficult to reintegrate into the labour market), and a legacy of social ills which were far more persistent than ‘negative growth’.

I accept that there is a way of arguing that Keynesians were right in the 1930s and monetarists right in the 1980s (when inflation and recession combined) – which also suggests that Keynesianism is right now, when inflation has all but vanished (except for railway ticket prices). But as there are still people arguing that nothing can or indeed should be done about hundreds of thousands of job losses, it’s still important to argue that such people are wrong.

And it’s a welcome return to fashion (sorry, common sense) for Keynesianism.

* Pedantic footnote: I’m not arguing that recessions themselves are always avoidable – I suspect boom and bust is pretty inherent in most forms of capitalism – but that we can affect the length and depth of them, and we could, if we so chose, make them worse by repeating the monetarist mistake instead of opting for Keynesianism.