Haven't I already said all this?

This all sounds very familiar!



In the words of Ludwig von Mises, "a government can spend or invest only what it takes away from its citizens... Its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity."

Are our leaders misrepresenting Keynes?

Central Banks appear to be citing Keynesian monetary policy as a reason for pushing down interest rates to dangerously low levels.

Yet it is far from clear that the dead economist would himself have approved of low or no interest rates.

According to his General Theory of Employment, Interest and Money, when the "rate of interest has fallen to a certain level… almost everyone prefers holding cash to holding debt which yields so low a rate of interest," as a result of which central banks can "lose effective control over the interest rate" (p. 207).

The problem, as I have noted repeatedly, is that if interest rates are low, there is no incentive to lend money, thus furthering the very “liquidity trap” that the Central Banks believe they have to resolve. As Keynes understood, people have no incentive to hold bonds (or deposits) rather than cash. In fact, the rational investor would shift their money abroad.

Rather than resolving the problem, today’s low interest rate policy is sowing the seeds of the next economic crisis by encouraging further credit expansion which, in turn, will lead to further misallocations of resources and requiring future punitive interest rate rises.

Three-out-of-three is bad

Before Christmas I reported that the Labour Government has managed to increase both taxes and unemployment. In my enthusiasm for the festive fun, I overlooked a third painful statistic: inflation, too is rising.

That taxes and unemployment were rising simultaneously should come as no surprise, as high income and corporate taxes squeeze entrepreneurs and businesses, while high employment taxes (National Insurance to my British audience) raise the price of labour and make expansion unprofitable or shift the balance in favour of capital (i.e. it is cheaper to mechanise than to employ).

In the dark and dismal past, however, it was generally held that unemployment and inflation were opposing sides of a great balance. Between the 1940s and 1970s economists – inspired by J M Keynes – convinced governments that unemployment could be countered by inflationary policies (which surreptitiously reduce real earnings and so free up capital to employ extra workers). This was a flawed thesis, as demonstrated by Nobel economics laureates such as Milton Friedman and F. A. Hayek, who persuasively argued that policies aimed at full employment were both misguided and counter-productive.

Even more flawed, perhaps, was the resulting myth that inflation and unemployment were a trade-off. In theory, unemployment could be reduced only by inflationary policies, while the eventual need to rein in inflation would cause unemployment. It did not, however, follow that the two were in balance. In fact it is possible to have both rising unemployment and rising inflation. Our current Labour government is in the process of proving it.

Britain’s consumer-price inflation rate in November was 2.7 per cent, the highest rate since records began and also the highest rate since Labour took office. Combined with the rise in unemployment to 5.6 per cent from 4.7 per cent a year ago, a budget deficit of 3 per cent, further expected tax rises and GDP that is predicted to fall in 2007 and this is a pretty miserable picture of Labour economic failure.