We should stop teaching economics in universities and instead teach only political economy. Because every economic policy – every economic law, regulation and rule – has a political origin and a political consequence. (And not always anintended consequence.)
Take, for example, the UK Chancellor George Osborne's proposal for a UK balanced budget law, under which Chancellors would have to seek the permission of Parliament to run a deficit. Pure economists have of course dismissed this as economic illiteracy. When times are bad, they say, government has to spend more, and run deficit budgets, in order to sustain welfare payments and pump-prime the economy.
I'm not even sure this is good economics, since most people can probably spend their own money far more productively than the government can, so leaving people to make their own investments is probably better than having the state invest it for them. And debt is not free – you have to pay interest on it, and that then curbs your freedom of action and makes you poorer.
What I am sure of is that deficit budgets are lousy politics. No, not in the sense that they don't win votes – often, they do – but in the sense that they corrupt and damage the political system. If there is no restraint on how much governments can borrow, then their every incentive is to borrow more and more. Then they can spend more and more (and buy more and more votes) without having to raise taxes. They simply pass the bill on to the next generation.
This is a one-way choice that no human being should be asked to make. The high-spending, high-borrowing route is just too beguiling. You would need to be an angel to resist it, and our politicians are not angels.
This is of the main reasons why political economists from Adam Smith onwards have been worried about the very existence of a national debt. Once you admit the principle, there will be no stopping things. Forget the idea of asking Parliament – yes, it might embarrass them, but they will always support the majority party's spending. Far better to have an inflexible rule that all budgets must balance ... or if you want flexibility, that all budgets must balance over the five-year term of a government. And if not, there are consequences.
Terrible economics, some might complain. But very sound political economy.