Another unpublished letter to the Guardian. I sincerely hope that both Phil's conclusions turn out to be wrong, but he poses two very real dangers.
19 September 2010
As a long standing member of the Lib Dems, a lot fell into place when I read the feature about Danny Alexander, Chief Secretary to the Treasury, in the Guardian (Friday 17 September). On moving into his office, we were told, he took down the portrait of John Maynard Keynes and replaced it with one of Gladstone. Gladstone was a great Liberal prime minister, but his slogan of ‘peace, retrenchment and reform’ included retrenchment which meant cuts. The Victorian era was marked by recurrent slumps leading to a bigger one in the 1920s and a still bigger one in the 1930s. It took the genius of the great Liberal economist, Keynes, to grasp the counter-intuitive truth that you don’t cut your way out of a recession, you spend your way out. In a slump you’re not poor because you lack productive resources, but because you’re not deploying them.
A recession will inevitably worsen government finances, because more unemployed people means more dole paid out and less tax pulled in. If the government misguidedly responds as if it were an individual, by economising, it may balance the books in the short term. But the extra unemployment this causes will widen the deficit again, by increasing dole claimants and shrinking the tax take. So in Keynesian terms there will be a new equilibrium, but at a lower level of output and income. The economic illiteracy of rejecting Keynes’s analysis looks set, I regret, to smash the Liberal Democrats and put the country through the needless agony of the 1930s all over again.