Abu Dhabi, UAEThursday 17 October 2019

Why it’s time to find a new economic model

Both the left and right are saying it is possible to spend more of the public purse and not ruin the economy

Alexandria Ocasio-Cortez favours government spending on social welfare programmes. AFP
Alexandria Ocasio-Cortez favours government spending on social welfare programmes. AFP

In the court of liberal opinion, few kind words are said about Poland’s ruling Law and Justice party. It is not only viewed as being authoritarian and far right-wing but is also accused of having sought to undermine the independence of the judiciary and thus the separation of powers. It was all the more remarkable, then, to read a report in the UK’s Guardian newspaper that conceded the Polish government remains highly popular because “for four years it has undeniably shown a striking commitment to the less wealthy”.

The government has embarked on a huge programme of wealth distribution, aiming subsidies particularly at low-income families, raising the minimum wage and lowering the age of retirement. These are surprising, not just because we hear little about them but because they are not policies one associates with administrations of the right. But the Law and Justice party is not alone. In Britain, Boris Johnson’s Conservatives have announced plans to spend many billions of pounds on hiring thousands of new police officers and invest in hospitals, transport and digital infrastructure.

Which leads me to ask: if governments on the right are doing this, and the left on both sides of the Atlantic have won new confidence and adherents by arguing unashamedly for expanding the state, have we finally reached a point where the old orthodoxy that favoured smaller government, tax cuts for the wealthy and curbs on public spending is over?

I cannot overstate how much this truly was the orthodoxy for decades in Europe, America and institutions such as the International Monetary Fund. I was taught economics in the 1990s at one of Oxford's most left-wing colleges by a tutor who had been an economics adviser to two Labour prime ministers. You might have thought that my youthful belief in the pro-government interventionist, expansionary ideas of JM Keynes would have been encouraged.

Former US President Barack Obama promised affordable healthcare for all but did not dare offer a free universal health service. Getty Images
Former US President Barack Obama promised affordable healthcare for all but did not dare offer a free universal health service. Getty Images

Instead, I left sadly concluding that Keynesian economics might have had some relevance in the 1930s but in the 1990s, it was delusional. The overwhelming intellectual agreement was that everyone had to come to terms with monetarism, sound finance and the supremacy of the markets. Anyone who had not lost contact with reality – so it was put – had to operate in that framework. This was the era of the so-called “third way”, the market-friendly governments that were nominally on the left but seemed only too comfortable with the terrain of the right – New Labour in Britain, Clintonism in the US, Gerhard Schroeder in Germany.

That the consensus was maintained by subsequent governments of the right was to be expected. But parties on the mainstream left remained committed to it, too, not least out of timidity and fear of being branded irresponsible. As US president, Barack Obama, a Democrat, promised affordable healthcare for all; he did not dare offer a free universal health service. Parties that wanted to break with the orthodoxy, such as Syriza in Greece and Podemos in Spain, were considered radical outliers whose dreams were unworkable.

All this has changed. While the resurgent left in both the US and the UK may be led by “oldies”, Bernie Sanders and Elizabeth Warren in the former, Jeremy Corbyn and John McDonnell in the latter, the energy and sense of renewal is coming from younger activists, such as congresswoman Alexandria Ocasio-Cortez in America, and commentators such as Grace Blakely and Ash Sarkar in Britain.

And what they are saying is that it is possible to spend more money and not ruin the economy. They are not held back by the "realism", reluctant or otherwise, of my generation, and they cannot be dismissed as the “loony left” since they represent, or are aligned with, mass sections of the Democratic and Labour parties respectively.

If governments of the right are blowing up the old rules too, it just goes to show that you can always find the funds if you really want to

They have good arguments that have long been overlooked. If you put more money in the pockets of the less well-off, for instance, they are statistically more likely to spend it – the multiplier effect, which stimulates further growth and job creation. This is just what has happened in Poland, where, the Guardian noted that “the huge level of state spending appears to have boosted rather than damaged Poland’s finances… fuelling a stellar growth rate last year of 5.1 per cent, which far outstrips the eurozone”.

If governments of the right are blowing up the old rules too, it just goes to show that you can always find the funds if you really want to. Or, as the late British politician Tony Benn put it: “If we can find the money to kill people, we can find the money to help people.”

This is not to say that it is always right to borrow and spend. Profligate governments that allocate funds inefficiently or corruptly have wrought ruin in many countries, such as Zimbabwe and Venezuela. Neither should the state be so active that it crowds out the private sector.

But while out-of-control borrowing is not to be encouraged, it seems that the idea that public debt is intrinsically bad is being rejected as the lie it always was on both left and right. It sounded convincing because people compared it to personal debt. But much of the time government debt is not paid back; it is eroded by inflation. As any economist will tell you, the key figure is not the size of the debt – which is bound to sound alarming – but how much you have to pay to service it. If that is statistically small and the gains to the economy outweigh that cost, you can keep on borrowing.

Perhaps this is only the beginning of a change and the Keynesian model will not necessarily be right for every country. But it is a seismic shift and while people on the left might not want to be associated with right-wing governments in Poland and the UK, they should at least celebrate that they too are breaking an old orthodoxy that impoverished so many, and agree that they are all in effect saying – to paraphrase Mr Obama – “Yes, the state can.”

Updated: October 7, 2019 08:04 PM

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