Cable, Keynes and Deficit Reduction
I admire Vince Cable’s audacity, arguing, as he has in his New Statesman essay, that John Maynard Keynes would have supported the Coalition Government’s deficit reduction package. Sadly, my admiration stops there.
Cable is quite correct to point out that Keynes was a liberal, not a socialist. Keynes was not a man of the left, in the political times in which he lived; the fact that he is associated with the left today is a sign of how the political centre of gravity has moved rightwards. A more interesting question is whether Vince Cable is a Liberal (as opposed to a liberal). Coming a day after Nick Clegg called for political differences within the Coalition to be aired publicly, so the voters can spot the Liberal arguments, Vince Cable chooses some strange bedfellows. Quotes from his essay, including “another point made by both me and George Osborne in 2009” and “In modern times, the best analysis has come from Friedrich Hayek” do not exactly put clear yellow water between Vince and the right.
Vince Cable is correct to argue that the most controversial part of the debate relates to the speed at which the fiscal deficit should be corrected. He is, therefore, wrong to characterise those who do not support a policy of eliminating the deficit over the lifetime of a Parliament – a policy that looks set to have have horrifying social consequences – as deniers of the need for fiscal discipline. Trade unions don’t deny the deficit. But we don’t see evidence that the deficit is being reduced fairly (witness, for example, the rise in VAT to 20 per cent, the one tax guaranteed to hit pensioners and the very low paid, as well as Middle Britain and millionaires). We don’t see the taking forward of ideas such as a Robin Hood Tax, or real pressure on bankers bonuses, that would allow all of us to believe that those who caused the crisis are playing at least a part in clearing up the mess. And we don’t believe that deficit cutting at this pace is necessary; indeed, we believe it could lead to sluggish growth or even a double-dip recession. Plenty of respected economists, such as Nobel Laureate Joseph Stiglitz, share our view.
This brings us to the question: What would Keynes have done? The economic concept most associated with Keynes is that of counter-cyclical demand management. Put simply, this means that in troubled economic times, when private sector companies or individuals are not (or cannot) spend, the public sector, i.e. the government, should fill the gap. This will involve running a deficit, which is then reduced when the economy returns to health and the private sector pick up the baton. What the Coalition Government is doing – and what I think Keynes would oppose – is the removal of the public sector spending before the private sector has started to act, on the expectation that the private sector will start to act. What is more, the public sector element should be reduced gradually, not as if it has just fallen off a cliff.
In his essay, I find Cable’s language complacent in places. He says the UK had the economic equivalent of a heart attack two years ago, but the “intensive care phase has passed”. He doesn’t accept the need for a plan B, if rapid cuts depress economic activity, because “there is a credible plan A and every sign that it is working”. He is right to point out that the UK is not immune to the kind of financial firestorm that occured in the eurozone in April and May, but offers no convincing evidence that such a firestorm was ever likely in the UK either. He also has the cheek to describe the National Union of Students as being part of the “promised land of big spenders”, when all the NUS did was ask a major political party to stick to a promise it made, very publicly, before the election. Surely not such an outrageous demand in a democracy.
Cable is right to say: “We still need to address the question of how to generate investment and sustainable growth. It will not happen automatically.” In which case, why was the Growth White Paper downgraded and the Manufacturing Framework never published? As Secretary of State for Business, Cable was in prime position to take those initiatives forward. It isn’t too late. We have a Growth Review with a very short timescale, designed to deliver in time for March’s Budget. The TUC is working with that Growth Review, but we are realistic about what can be done in two months. So after the Budget, throughout Spring and Summer, let’s have a real effort to deliver a growth agenda for the UK. The economic fortunes of millions of us depend on it.