Running out of money? Spend more!

So says the New Economic Foundation:

We are approaching a fundamental choice: do we continue trying to appease the markets by clinging to a set of self-imposed constraints that block the kind of spending needed to improve living standards and revive growth? Or do we remove those constraints and make the decisions necessary to fix our economy? I know which I’d prefer, not least because public investment can boost growth, raise tax revenues and ease pressure on the national debt over time. The alternative of more austerity risks doing the opposite: choking off growth, weakening the economy and actually making our debt burden harder to manage as a result.

The fear is that markets will punish us for daring to spend. But that fear has become self-defeating. In reality, the financial returns from well-targeted public spending – on infrastructure, childcare, health, skills – are often far higher than our anaemic assumptions allow. The economic returns are bigger, the benefits broader and the risks lower than we have conditioned ourselves to believe. A politics that always talks down the impact of spending ends up justifying stagnation.

If this were true - if - then having run budget deficits for most of the past century we’d not have a national debt at 100% of the annual output of everything, 100% of all incomes for all. That is, we face the debt constraint precisely because that public spending doesn’t boost the economy as much as some say.

Which leads into the second round of our problem. Which is that all that past spending assumed that it did. Therefore this causes the current fiscal straightjacket. For to make the sums add up for what we’ve already done, what we’ve already promised ourselves, we must have the higher growth that was assumed. Without that growth that, mysteriously, hasn’t turned up we must either increases taxes or cut those promises to ourselves.

Note the final outcome here. We can’t have anything new and nice because we can’t even afford what we’ve already assumed we’re going get. In a nutshell they’ve already run out of other peoples’ money.

Max Mosley is a senior economist at the New Economics Foundation

We’ve run out of money so we must spend more. Nice to know that Giles Wilkes’ crack about them being the Not Economics Frankly groupuscule still works.

Of course, there is an actual solution available. Kill those parts of government that prevent economic growth and the economic growth we desire will happen. It’s called “supply side reform” and yes, it works. One joy of it being that it doesn’t rely upon the other peoples’ money that we’ve not got any of.

Tim Worstall

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