Boris’s stimulus stunt

As far as I can tell, the first person to write about reactionary Keynesianism was the American Socialist Michael Harrington. In a 1966 Encounter article (and also in a 1972 piece for the New York Times) he credits the concept to JK Galbraith. Basically it means a government giveaway that fails to achieve progressive purposes.

Examples might include blowing a surplus on tax cuts for the rich or a war in the Middle East. Then again, the Left would probably deem any expenditure signed off by Johnson and Javid to be either inadequate or misdirected, so they might as well blow the lot on a 500 ft statue of Margaret Thatcher.

There’s another pre-emptive strike on Conservative economic policy from Larry Elliot in The Guardian. But more than a mere critique of what the Conservatives might be about to do, it’s a devastating analysis of both Conservative and Labour economic policy since the 1990s:

“For decades Britain has consumed more than it has produced, with the result that the UK has the biggest deficit on its current account of any member of the G7…

“The economy was kept going through the boom years of the 1990s and 2000s because cheap imports meant inflationary pressure was weak and interest rates could be kept low, allowing consumers to load up on debt to buy ever more expensive real estate. Rising property prices made people feel richer than they actually were. They borrowed to trade up to bigger homes and they borrowed to fit them out. Personal indebtedness soared.”

This economic model has biased opportunity to the South (especially London) and to the asset rich baby-boom generation – who have run up debts while making precious little provision for their impending old age. Younger generations, already struggling with the rent and mortgage payments, are poorly placed to shoulder the burden.

As Elliot puts it, “Britain has a trade deficit problem, a London versus-the-rest problem, a debt problem, a housing problem and a care problem.”

He’s absolutely right to take the long view. The new economic policies unveiled at each Budget or even at the start of a new government are less important than what doesn’t change, i.e. the prevailing economic orthodoxy. If that is fundamentally flawed, and the government does nothing about it, then everything else is just sticking plaster.

I do differ from Elliot in his analysis of what happened in the crucial decade of the 1990s, though. His chain of cause and effect (cheap imports → weak inflation → low interest rates → borrowing boom → runaway house prices) doesn’t tell the whole story.

Another way of looking at it is this: to pay for the persistent trade imbalance, there had to be a compensating inflow of foreign investment – the current account deficit can only be as big as the capital account surplus. Successive governments encouraged the inflow by promoting the UK as a place to buy up assets, e.g. British property and British companies. This increased demand for sterling, pushing up its value on the currency markets. This in turn meant lower interest rates, cheaper imports and less uncompetitive exports – thus further exacerbating the trade gap. For a while, the vicious circle can be sustained because loose monetary policy allows more borrowing and thus rising asset prices, which attract further foreign capital.

Though it has precedents in the Thatcher era, this is essentially a New Labour economic strategy – exactly what one would expect from a government committed to a major expansion of the welfare state, but without the growth rates or tax rates necessary to pay for it. That left public sector borrowing as the only way to raise the money directly – plus the indirect boost provided by private sector borrowing.

Of course, to keep the money flowing in it has been necessary to turn the British economy and property market into a convenient piggy bank for the world’s loose change – with all the damaging consequences described above.

The austerity (plus quantitative easing) of the Cameron and Osborne years may have seemed like a change of direction, but in fact it was just a reaction to the financial crash they inherited from Gordon Brown (borrowing booms tending to end badly). They left the underlying economic model largely untouched – which is why they moved so quickly to get house prices inflating again.

Osbornomics was followed by Theresa May’s “economy that works for everyone”, but was nothing much of anything really. Now we’ll have to see whether the “end of austerity” under Boris Johnson amounts to anything more.

If all it provides is a Brexit-ready stimulus without underlying structural change then the charge of reactionary Keynesianism will be well deserved – though equally applicable to previous governments.

Larry Elliot sets out a test of the current government’s willingness to tackle the country’s deepest economic problems:

“Being tough on the causes of Brexit means changing the culture of business so that it boosts investment. It means rethinking the role of the state so that Britain leads rather than follows in the fourth industrial revolution. It means spending more on infrastructure, especially in the north. It means a mass housebuilding programme. Put simply, it means doing stuff not normally associated with politicians who think the free market is always right.”

I agree with almost all of that – except that one’s attitude to the free market isn’t the real issue. Whether right or wrong, the market works within the framework of public policy and what it incentivises. So what counts is whether government seeks to support a genuinely enterprising, inventive UK economy or prefers to keep the plates spinning on what amounts to a country-sized Ponzi scheme.

Innovation or speculation? The choice is ours.

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Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.

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