The Keynesian experiment has worked
Capitalists might not like to hear this. But it looks like the biggest ever experiment in Keynesian economics might just have worked.
In the half century since the great economist died, no UK government has ever intervened on the scale of the current administration to revive an economy.
On the monetary side we have slashed interest rates to negligible levels when normally rates rise in recession.
And on the fiscal side, the chancellor has abolished stamp duty on most home purchases, subsidised new car purchases under the scrappage scheme and reduced Vat across the board for more than a year.
The boost to car sales has been immediate. It may be harder to find a direct link between duty and property purchases but the price slump has halted and sales volumes are increasing. Retail sales, meanwhile, remain buoyant with stores groups now pleading for the Vat cut to continue.
The jury is still out on the other monetarist measure, quantitative easing. The Bank of England has made £125bn available but it is not obvious it has eased credit markets. However, the special liquidity scheme has given banks cash to lend and injecting government equity into HBoS, Lloyds, Royal Bank of Scotland and Northern Rock has given them the capital to keep lending. The asset protection scheme will take the worst bad debts off the banks’ balance sheets.
After nationalising the banks, taking control of the East Coast rail line may seem nothing, but the scale of state intervention in the private economy in the past year is breathtaking.
And perhaps the greatest surprise is that is has worked so speedily. The UK has gone quickly into a sharp recession but emerged equally quickly. The temptation will thus be to adopt similar measures every time the economy looks like dipping.
But before employing this armoury of weapons again we need to pay for using them the first time. The special liquidity lending should be repaid in full but the Bank could take a hit in reselling the bonds bought under the quantitative easing scheme. And the government will be stuck with the banks’ bad debts and faces a loss selling the taxpayers’ shares in the banks even if it waits years.
By comparison, the £13bn cost of the Vat cut, housing exemption and car subsidies are peanuts, but still require taxes to rise in future.
It has been an interesting experiment but it does not end when the recession ends. It continues until all the losses are repaid. And until then, government’s must avoid the temptation to do it again.
