Tag Archives: keynes

Alternatives to the Cuts: Keynesian stimulus

This post forms part of the alternatives to cuts series, an exploration into why cuts won’t work, and what we could be doing instead.

As I wrote in the Will Austerity Solve the Deficit Problem? post, there is a clear relationship between the size of the deficit, and periods of growth/recession.  During periods of growth the deficit shrinks, and if the problem you are seeking to solve is the size of the deficit, then one thing you want to do is ensure that there is growth in the economy.  In that post I showed that austerity is not producing growth now, rather the economy has flatlined., and that this will fundamentally undermine the spending cuts in their effect on the deficit.

In this post I am not going to explore deeply the theory behind why governments borrowing and spending money produces growth, if people want it, I will try to write a post on that.

The basic idea is that recessions happen because of a lack of demand.  People stop spending money, and so the level of production/trade in the country decreases to match this new level of spending.  Unfortunately, there is a vicious circle effect, because as people lose their jobs, their spending (demand) decreases, causing further reduction in the level of aggregate demand, which in turn causes reduction in the level of production/trade and so on.

Governments have the ability to step in and produce demand during these periods, and to turn the vicious circle into a virtuous circle of rising demand and employment.  There are a number of ways they can do this, and Quantitative Easing was one of them.  But this produced jobless growth, as it reduced the level of debt (or at least the level of risk associated with the debt) of the private sector, allowing some growth in value of the economy, without a commensurate increase in employment.

Now is the time where a government should be spending money to invest in the economy, in order to stimulate demand and in turn stimulate the private sector back into growth.  There are many proposals as to how this money should be spent, and I will outline some of them here.

The best way to spend money for a Keynesian stimulus is by investing in infrastructure, or in areas which are either too risky, or have a rate of return that is too long for private companies to invest in.  If these investments can also help to forward other policy aims, then so much the better.

Please note that the inclusion of a possible policy here does not constitute a statement of support for that policy by Birmingham Against the Cuts.  There are other discussions to be had about the merits of each of them, which I am not going to enter here.

■Investment in Green Manufacturing / Green New Deal / Green Jobs for Growth

Variously called by different titles, this set of investment would see government funds invested in the manufacturing sector surrounding “green” industries.  The most likely place for much of this money to go would be into the design and manufacture of wind turbines – particularly offshore wind turbines- tidal and wave generators.  The UK has some of the best resources for renewable energy in each of these areas, and could be world leaders in these technologies.  Investing in these could replace some of the industries that have been largely lost, such as shipbuilding or steel production.

Additionally, it would make sense that the UK would start as the major customer of the industry in this country, and doing so would help us to reduce our reliance on fossil fuels and combat climate change.  Along with this, we need to reduce our dependency on oil and gas, and become (more) self-sustained in terms of energy usage.

I will do a lengthier post on this at some point.

■HS2 railway

This is particularly controversial at the moment, and I must emphasise that its inclusion here does not imply support or dislike for the project.  I am including it here because it is a good example of an investment whose returns will take too long for a private company to invest.  There is never likely to be the profit in a short enough space of time for a company to invest in such a project, which will take many years to construct, and many more before a return on investment is possible (if ever, given the amount of subsidies that are paid to railways already).

■Social Housing

The great council house sell-off, and the ban on councils investing in new housing is part of the reason why house prices are so high today (there are other factors, but the lack of a widescale, reasonably priced, rental market has allowed rent and house prices to rise).  We hear often of issues with affordable housing, particularly in London, or with a lack of housing.  These houses could be built to the highest environmental standards, and would be very cheap to heat during the winter.  With ever rising gas prices, this could be especially helpful for elderly people.

Additionally, the construction industry is always hit hard by a recession, and this would help that sector in particular.

■Buildings projects

Schools, Hospitals and many other public buildings could use renovating or replacing.  Such projects should not be done using PFI, which has been shown to be expensive, but would improve public services, through a one-off payment.

There are many other ways to produce a Keynesian stimulus.  The key is that increased government spending produces demand, and that it is easy for that spending to be removed once the need for the stimulus is over.  The unemployment benefit system is an example of an existing keynesian stimulus, which works almost naturally – as we enter recession, more people become unemployed, and government spending on unemployment benefits increases.  As the private sector moves back to growth, people get jobs and spending on unemployment benefits decreases.  But this is not enough – it is already existing in the system, it limits the depth of a recession but will not take us out of one.

Join us in calling for an alternative to austerity, on Sunday 18th September, outside the Liberal Democrat Conference in Birmingham.
For more information about alternatives, you can also see False Economy



Filed under Alternatives to Cuts