Tuesday, 6 August 2013
Cable to Cole
To read John Cole's original letter to Vince Cable please click here.
Here is Dr Cable's reply:
House of Commons,
London, SW1A OAA
26th July, 2013.
Dear Mr Cole ,
Thank you for your thoughtful letter.
I must have explained myself badly. My thoughts on Keynes et al were more coherently and carefully set out in my New Salesman article of March 6th 2013. Of course there is a role for government in stimulating economic activity as Keynes would have argued (borrowing for public investment). But the fundamental difference from the Keynesian framework is that we have a barter (sic)* banking system. The, mostly, US writers you cite are not commenting on the UK but globally where a Keynesian framework does make more sense. That is also my my criticism of Labour: their (part) responsibility for the banking crisis.
I have never understood the generalised complaint about 'austerity' as opposed to criticism of specific fiscal positions in particular countries. The world is not in slump. The world economy and trade have been borrowing (sic), out side the EU. This boom may or may not be sustainable (e.g. in China) but 'austerity' it isn't! The southern European austerity has to do with the management of a freed (sic)** exchange rate regime on top of a fragile banking system. The German reluctance to help the rest of the Euro zone to 'rebalance' is a key here. The UK has a unique combination of ailments - a very large fiscal deficit; a badly damaged banking system; a massively dysfunctional housing market - which helps explain why real recovery is so elusive.
The Rt Hon Dr Vincent Cable MP
* possibly "battered" was intended.
** presumably "fixed" was intended.
I'll post John's detailed response later in the week, but take issue now with Dr Cable on two points.
First it is rather disingenuous to dismiss the academic support John cites as "largely US." Of the sources John quotes Simon Wren-Lewis is a professor at Oxford and Martin Wolf a contributor to the Financial Times, so both have firm British credentials. True Paul Krugman and Joseph Stiglitz are based in the US, but both have taken a forensic interest in the performance of the British economy and written specifically and frequently about it. Only Richard Koo, a Taiwanese-American now based in Japan, could be regarded as "outside the box," though, in my view, no less relevant for that.
Secondly, I challenge the idea that Britain's "set of ailments" is unique. At the time of the financial crash several countries, including the US, Germany and France had debt/GDP ratios of the same order as the UK*; the banking system of the US is just as "battered" as that of the UK, and a French bank was one of the first to collapse; and, of course, it was the dysfunctional "sub-prime" loans in the US housing market which triggered the present crisis.
Nevertheless, in this letter and in his New Statesman article it is good to see our Liberal Democrat economic champion at last nailing his colours to our traditional mast and recognising the need for "a role for the government in stimulating economic activity as Keynes would have argued (borrowing for public investment.)"
* In an article, (23rd February 2013) Wren-Lewis writes: "As Paul Krugman has pointed out many times (Britain's) "debt problem" is seen my many on the right as a useful cover to reduce the size of the state." I tend to agree and am saddened that so many leading Liberal Democrats have allowed themselves to be taken in. From the agenda for our autumn conference in Edinburgh, published today, it seems that the leadership is intent on bullying the rest of the party into agreeing with them in their delusion.