15 MAY 2004, Page 18

Bring back Keynes

Thatcherite Conservatives attack Gordon Brown's public spending plans. They are wrong, says Janet Bush Ttying to make mincemeat of Gordon Brown's economic policies has been pretty thankless for Michael Howard and Oliver Letwin, but their strategy for the next election is clear. They will dismiss Mr Brown as a 'credit card' chancellor, a throwback to old Labour tax and spend, a meddler not a moderniser. They must grind out advantage where they can. They will press home their charge of profligacy with the nation's finances; they will make much of the ideological chasm between their liberal views on choice and those of a man who, in his heart of hearts, didn't much like foundation hospitals, a pale imitation of what the Conservatives would like as the norm in the NHS.

But this is a phoney war. Fiscal policy will be a key battleground of the election, but the real divide is not between the different sizes of desired deficit and degrees of choice now on offer from government and opposition, not between Karl Marx and Adam Smith, but between, as Princeton's Paul Krugman has put it, 'Immanuel Kant's categorical imperative and William James's pragmatism'.

Gordon Brown's splurge of investment in public services has been derided by his Conservative critics; yet it was precisely the shot in the arm to demand that was needed to keep Britain growing through what had looked like a rather serious synchronised world slowdown. Would a Conservative chancellor have done any differently? Would, indeed, a European approach to budgetary policy have been more alluring? The Eurozone's growth and stability pact is a thing of beauty if one wants to elevate the goal of balanced budgets to an ideological obsession; it is a disfigurement if one believes that managing an economy means promoting growth, jobs and prosperity. It is only by virtue of the fact that France and Germany could not, economically or politically, abide by the insane rigidity of the GSP that the Eurozone has got any growth this year at all; as it is, the Eurozone's projected growth of about 1 per cent is paltry compared with Britain's 3 per cent.

Compounding the Eurozone's economic underperformance is the European Central Bank, which thus far has refused to cut interest rates to arrest the euro's appreciation against a plunging dollar. The man

agers of the euro delude themselves that the rising euro is a virility symbol and stick doggedly to their ideological guns, wreaking havoc on jobs and growth in the process. In the meantime, others pursue economic self-preservation, not self-immolation, in the face of the dollar's decline. China, for example, pegs its currency to the dollar; thus as the US currency declines, so too does China's, and that keeps Chinese exports pumping. China has come under astonishing political pressure from the US to abandon the peg (because America wants to cut its trade deficit) but has so far refused. Japan has spent many billions intervening in the foreign exchange markets to hold the yen down against the dollar to give at least temporary respite to its fragile economic growth. And so the poor old Eurozone, principles proudly intact, takes the full brunt of the dollar's decline.

The king of economic pragmatism, of course, is the US. While the Bush administration preaches non-intervention in Adam Smith's world of perfectly functioning markets, it is engaged in the largest exercise in Keynesian demand management imaginable: benign, if not gleeful, neglect of a devaluing dollar, very low interest rates, higher spending (albeit largely military) and a massive dose of deficit financing. Two years ago, the Bush administration (whose chief economic adviser Gregory Mankiw has a dog called Keynes) predicted a cumulative budget surplus of $5.6 trillion by 2011. Now the Congressional Budget Office is looking for a deficit of $2.3 trillion; others think it will be more like $4.4 trillion.

Keynes, remarkably, is still a dirty word on the Right; his assertion that capitalism needed a modicum of government interven tion to keep the show on the road does not suit free-market fundamentalists. Yet here we are today, watching a firmly right-wing Republican administration and a mildly leftof-centre British chancellor demonstrating that Keynes's prescriptions for combating recession were, and remain, on the nose. It is not rocket science — if an economy is in danger of dropping into recession, cut interest rates, allow your currency to devalue and temporarily boost demand by increasing public spending or cutting taxes.

So simple is it that one might wonder why everybody else isn't at it. The answer (except in the eye of the managers of the Eurozone, who seem simply to be into masochism), largely, is that while America is content to use Keynesian demand management to the max for its own benefit, it continues to preach orthodox monetarism to those less powerful than itself, largely through the good offices of its buddies at the International Monetary Fund.

Take Argentina, now in default on its debts. Like Britain when it joined the Exchange Rate Mechanism in the early 1990s, Argentina thought that it was hopeless at managing its own affairs and would therefore hitch a ride on the monetary credibility of others. So Argentina pegged its peso to the dollar, just as Britain pegged the pound to European currencies. Unfortunately, the US went into a dotcomrelated boom, the dollar soared and Argentina's economy was decimated. Rather than admit the policy wasn't working and counsel a Keynesian reflation, the IMF simply preached austerity and more austerity. All too predictably, the result was the end of the peg, social and economic mayhem and default, and now the same coarchitects of Argentina's collapse tell her to pay back her debts, whatever the cost to her people. The same self-flagellation has been preached in recent years, with similarly disastrous results, to Mexico, Japan, Brazil, Thailand, South Korea . . the list goes on. And meanwhile, faced with recession, what did the US Federal Reserve do in 1975, 1982, 1991 and 2003? Cut interest rates and revive its economy. Keynes will be turning in his grave to think that his prescriptions are, indeed, alive and well in the 21st century — but only for the powerful.

None of this is to say that deficit spending is the Holy Grail, full stop. Of course it matters that the debts racked up in bad times are paid back in good times; naturally, it is a matter of concern if Gordon Brown's spending spree on public services produces no real improvements in service and borrowing is paid back by hobbling business; yes, we should question whether George Bush's tax cuts for the very rich are, firstly, equitable, and secondly, produce the required growth to pay off America's debts. The nuance is important but it is nuance. The point is that spending your way out of trouble is eminently sensible. Tax may be anathema to Letwin's law; spending, when the economy needs it, isn't.