What would Keynes say now?

LONDON‭ ‬–‭ ‬The United Kingdom’s new Chancellor of the Exchequer‭, ‬Rishi Sunak‭, ‬has done what Prime Minister Boris Johnson wanted him to do following the forced‭ ‬resignation of Sunak’s predecessor‭, ‬Sajid Javid‭, ‬in February‭. ‬In his March 11‭ ‬budget‭, ‬Sunak turned on the spending taps by unveiling a stimulus package worth‭ ‬£200‭ ‬billion over five years‭.‬

“It was a budget of which‭ [‬‮…‬‭] ‬J.M‭. ‬Keynes could have approved‭,‬”‭ ‬wrote political commentator Matthew Parris in The Times‭. ‬And there was even more praise for Sunak’s March 17‭ ‬announcement of an extra‭ ‬£350‭ ‬billion to support UK businesses through the coronavirus pandemic‭. ‬UK fiscal policy‭, ‬it seems‭, ‬has at last been restored to‭ ‬its proper place after years of austerity‭.‬

But I am skeptical about these latest‭ ‬“return of Keynes”‭ ‬stories‭. ‬This is partly because there has been no principled repudiation of austerity‭, ‬and partly because most of the new converts simply equate Keynes with budget deficits‭. ‬In fact‭, ‬Keynesian arithmetic can also point to surpluses‭.‬

For starters‭, ‬there is nothing Keynesian about Sunak’s‭ ‬£350‭ ‬billion package to protect the economy against COVID-19‭: ‬Any government will spend freely to protect its people against such‭ ‬disasters‭. ‬Even the austere former Conservative Chancellor George Osborne would have recognised that these are not normal times‭. ‬But Keynes would have asked something that no one so far has‭, ‬namely‭, ‬“How do we pay for it‭?‬”‭ ‬–‭ ‬a matter to which I shall return shortly‭.‬

Before I do‭, ‬consider Sunak’s budget-day announcement of an extra‭ ‬£175‭ ‬billion in public investment over five years‭. ‬“Investment in roads‭, ‬rail‭, ‬housing‭, ‬broadband and capital projects as a proportion of the economy will rise to levels not seen since the 1970s‭,‬”‭ ‬enthused the Financial Times‭, ‬which had been a staunch champion of the last ten years of spending cuts‭. ‬Certainly‭, ‬this seems to mark a return to the fiscalism of the Keynesian era‭, ‬and Sunak hinted as much‭: ‬fiscal policy‭, ‬he said‭, ‬should play a‭ ‬“more active role”‭ ‬in stabilizing the economy‭. ‬But what neither the chancellor nor the FT explained is why this fiscal Exocet missile is being fired only now‭.‬

For example‭, ‬Sunak announced a‭ ‬£2.5-billion fund to fill 50‭ ‬million potholes on UK roads over the next five years‭. ‬But why could this program not have been started in 2010‭, ‬when there would have been fewer potholes and many more people available to fill them‭ (‬because UK unemployment then‭ ‬stood at 8‭ ‬per cent‭, ‬as opposed to just under 4‭ ‬per cent today‭)? ‬The orthodox answer is that the government‭ ‬“couldn’t afford it”‭ ‬in 2010‭, ‬but that its prudent deficit-reduction policy since then has now given it the‭ ‬“fiscal space”‭ ‬to launch the initiative‭. ‬This is nonsense‭. ‬What a government can afford is limited only by the amount of real resources it can‭ ‬command‭, ‬and not by self-imposed financial constraints‭.‬

The pothole story has an important moral‭, ‬though‭. ‬Not only should the fiscal stimulus have come a lot earlier‭; ‬it now risks coming at the wrong point in the economic cycle‭. ‬Keynes wrote that‭, ‬“the boom‭, ‬not the slump‭, ‬is the right time for austerity at the Treasury‭.‬”‭ ‬True‭, ‬it does not feel much like boom-time right now‭; ‬forecasters were pointing to a possible UK recession even without the coronavirus‭. ‬But the UK and other Western economies undoubtedly have less fiscal capacity today than they did ten years ago‭.‬

Third‭, ‬having spent the last 40‭ ‬years‭ ‬“fighting inflation‭,‬”‭ ‬and continually warning of its re-emergence if fiscal policy was unchained‭, ‬governments are now turning a blind eye to this risk‭. ‬But although‭ ‬“cost-push”‭ ‬inflation is indeed unlikely to be a problem in an era of decentralised labour markets‭, ‬expanding demand at full employment will still result in faster price growth‭. ‬So‭, ‬at some point‭, ‬governments will have to raise taxes if inflation is to be avoided‭. ‬By‭ ‬loosening and tightening fiscal policy at the wrong times‭, ‬they would repeat the‭ ‬“go-stop”‭ ‬approach that discredited Keynesian demand management in the 1970s‭.‬

That brings me back to the virus‭. ‬Johnson has said that the UK needs to go onto a war footing‭, ‬and other leaders such as French‭ ‬President Emmanuel Macron have said the same about their countries‭. ‬But a war economy is a shortage economy in which you cannot‭ ‬have both guns and butter‭. ‬Butter has to be rationed to produce more guns‭. ‬The problem then becomes one of excessdemand‭, ‬not deficient demand‭.‬

Keynes recognised this in his 1940‭ ‬pamphlet How to Pay for the War‭. ‬UK civilian consumption needed to be cut‭, ‬either by higher prices or higher taxes‭. ‬Keynes advocated a steeply progressive income tax‭, ‬with a top marginal rate of 97.5‭ ‬per cent‭, ‬on the grounds that it was‭ ‬“fairer”‭ ‬than inflation‭. ‬And‭, ‬in an imaginative twist‭, ‬he proposed that the taxes collected automatically from the poorest workers would‭ ‬be repaid by the government after the war‭.‬

It is to be hoped that the COVID-19‭ ‬pandemic will not force today’s governments to make such a choice‭. ‬But it is not too early for policymakers to start thinking about how to pay for this particular war‭; ‬and it is good to be reminded of tough Keynesian arithmetic‭.‬

Robert Skidelsky‭, ‬a member of the British House of Lords‭, ‬is Professor Emeritus of Political Economy at Warwick University‭. ‬The‭ ‬author of a three-volume biography of John Maynard Keynes‭, ‬he began his political career in the Labour party‭, ‬became the Conservative Party’s spokesman for Treasury affairs in the House of Lords‭, ‬and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999‭. ‬©Project Syndicate‭, ‬2020‭. ‬www.project-syndicate.org