This article in the Financial Times by Ian Mulheirn of the Social Market Foundation is nothing more than a collection of popular economic myths.
In his first four paragraphs Mulheim makes it clear that he thinks stimulus is not possible without raising the debt. He needs to study economics: as I’ve pointed out a hundred times on this blog, both Keynes and Milton Friedman pointed out that a deficit can be funded from borrowed or printed money. I.e. if you want stimulus, but don’t want more debt, then print. (Cue chants of “Mugabwe” and “Weimar” from economic illiterates.)
For a more detailed explanation of the latter “print” point, see here.
In his second paragraph Mulheirn says “Weak growth is putting pressure on plans to cut the deficit.” Hang on – what’s the point of trying to “cut the deficit”? Absolutely none!!
That is, the deficit needs to continue for as long as it is needed for stimulus purposes. And if that is ten years, so be it. In contrast if there is a big rise in consumer confidence next year, the deficit might need to be abandoned, and possibly even turned into a surplus. Or as Keynes put it, “look after unemployment, and the budget will look after itself”.
Of course there are numerous economic illiterates is high places who don’t understand the latter point, but it would be nice if authors of articles in the FT had got it.
In Mulheim’s third paragraph comes the old cliché about creditors losing confidence in government debt if the debt is not reduced. Well if they do lose confidence - who cares? Just stop borrowing and go for the above mentioned form of stimulus that both Keynes and Milton Friedman advocated.
Bang per buck.
In the second half of the article Mulheirn sets out a number of alleged cures for our economic problems which are all based on the “bang per buck” myth. I’ll explain.
Mulheim advocates scrapping a number of government programmes which involve a relatively large amount of government spending per job created, like Winter fuel payments for wealthy pensioners. He then wants to divert the money saved to areas where more jobs are created per pound of government spending.
Well the reality is that there no merit whatever in trying to maximise the number of jobs created per additional pound of government spending. I explained the reasons here under the heading “Bang per Buck” here.
But briefly, the flaw in the Bang per Buck idea is that inflation (which is THE CONSTRAINT on job creation) is determined by the number of jobs created, not by the amount of money spent. Thus the inflationary effect of creating a thousand jobs is the same regardless of the amount of money that has to be spent to create those jobs.