<<<	articles
The big myth of taxpayer cost Samuel Brittan Financial Times 24/10/08 One of the most irritating aspects of the current debate on the credit crunch is the headline estimates of "taxpayer cost" of official rescue operations so avidly taken up by opposition parties, populist media and financial market pessimists. According to Dresdner Kleinwort "state intervention in the developed economies is rapidly approaching €3,000bn", so far mostly due to guarantees for new lending between banks. The cost of the UK package was originally put at £400bn, although this will depend on take-up and may already have grown. The UK's National Institute of Economic and Social Research has projected government borrowing peaking at over 6 per cent of gross domestic product in 2010-11 and public sector net debt then rising above 60 per cent even without counting all the banking liabilities acquired by the state. But as far as the citizen is concerned the "cost" is what he or she might have to suffer in terms of future increases in the tax burden or lower public expenditure on tangibles such as schools and hospitals, to pay for rescue measures. The answer is; very little if anything over the next couple of years and perhaps not very much looking even further ahead. The limit to any stimulus is given not by accountancy, but the point at which rising inflation is again a danger. Conventional thinking assumes that there is a fixed pot of money and what is used to take over a bank, let alone finance a road programme or a cut in consumer taxes, is not available for other purposes. This was not even true under the gold standard and is absolute nonsense with paper currencies, where the amount of money - or "liquidity" if you must - is a joint outcome of official policy and private agents' behaviour. The obvious temptation is to allow too much money to be created and to end up with rapid inflation and no lasting gain to output or jobs. But faced with the risk of a severe slump, when men and women who could be working satisfying human needs are left needlessly idle, conventional wisdom needs to be stood on its head as the danger is of too little spending. Some readers have been puzzled by my drawing on both Keynes and Milton Friedman, who are popularly regarded as polar opposites. In fact, they have a remarkable amount in common. Both believed that there had to be official policies to remedy any deep-seated demand deficiency; and neither lost any sleep over government borrowing. Friedman believed that sufficiently vigorous action to prevent a 30 per cent drop in the US money supply in the early 1930s could have prevented the Great Depression. At least one of his disciples, a certain Ben Bernanke, considered that monetary policy might have to be supported by fiscal expansion, as he has reminded us. As for Keynesianism, it is a pity that the media regard it as a leftwing argument for public works. As a matter of historical fact, Keynes - unlike his more logically consistent follower, James Meade - hesitated to advocate a deficit to finance current spending and put his hopes on devices similar to the present British public-private partnerships in which the red ink did not show. But there is nothing in the logic of his arguments to make one prefer extra public spending to tax cuts. Public works take a long time to be fully effective and are difficult to reverse. The conventional argument against tax cuts is that in an uncertain atmosphere they might be saved rather than spent. Nobody has rebutted my suggestion of temporary cuts in sales taxes such as VAT. It is of course true that fiscal stimulation will be more effective if undertaken by the main world economies together. But there is no need to wait for formal co-ordination, let alone "another Bretton Woods". Common understandings between national actors, as has occurred on the banking front, may suffice. And a floating exchange rate gives some limited room to go out on a limb. A more interesting question is: what will be the taxpayer legacy in the longer run when one hopes that growth resumes. There are several scenarios. One is the familiar picture of a straight line growth trend with a wavy line snaking on either side representing recessions and booms. This is the model lying behind the eurozone's growth and stability pact, the UK fiscal guidelines and other central projections. It also lies behind the insistence of Alistair Darling, the UK chancellor of the exchequer, that public spending will eventually be reined back to the original guidelines. Keynes, writing in the 1930s, had a very different picture. It was of an economy where there was a permanent surplus of potential saving over profitable investment opportunities and which could only be saved from an "underemployment equilibrium" by continuing stimuli. There are many other possibilities. A plausible one suggested by Christopher Dow in Major Recessions is that there is no permanent demand deficiency, but no return to the old trend line either, as the output lost in a big downturn is lost forever. It will take some time to assess where we are among these and many other possibilities - for instance, the trend might bend - and it would be best to postpone any rewriting of fiscal guidelines nationally or internationally.
<<<	articles
Published on www.samuelbrittan.co.uk Contact - samuel dot brittan at ft dot com