Monday, April 27, 2009

The paradoxical culture of thrift

(title inspired by Bob Hancke)

David Cameron made a big speech yesterday:

He is offering us a 'culture of thrift', to replace Labour's 'spendaholic' government. Where do I start?

First, as I've pointed out in a previous post, the last thing we need at the moment, with debt deflation lurking around the corner, is thrift. What we in fact need is profligacy, both private and public, to avoid more jobs being destroyed and companies bankrupted. Designing a political campaign around the notion of 'thrift' may be a smart move politically, but if it has any effect at all on the economy it will be to make the recession worse (because of the effect of the 'paradox of thrift' identified by Keynes - individually we may have an interest in cutting our spending to rebalance our household finances, but as a society we should do the opposite).

Second, it doesn't even make that much sense in the long run. The projections on government borrowing suggest our national debt will hit around 80% of GDP at its peak. That would be good enough to get us into the Eurozone, since Italy, Belgium, and Greece all have much worse levels, and France and Germany are barely any better. So why do we have to strain every sinew to get debt back down to 40% of GDP? 40% is a purely arbitrary figure. It's better to have less debt than more, all else equal, but Japan has a ratio of 180% and still manages to sell treasury bonds and pay for bullet trains without too much trouble.

The only sense in which the 'thrift' idea works is the one which Cameron doesn't talk about - restricting the activities of the financial sector to avoid another meltdown, and reducing the spendaholic ways of the managerial class that has almost sunk our economy. No mention of that. Encouraging more saving, and in particular cutting spending on new cars and cheap flights, would be a fine idea. But any sign of slapping punitive taxes on petrol, SUVs and air travel? Nope.

I don't expect politicians' slogans to be consistent with the most basic concepts of post-Hoover economics all of the time, but it would be nice to hear some serious suggestions on how to rebalance our economy, increase productive forms of investment, and give people the skills they need to earn a living and make us all better off in the process.