“Please clarify this for me – wouldn't £150bn of cuts be a terribly bad thing for the economy at this point in the recovery?"
No, it wouldn't be a bad thing for the economy, at this point or any other. All the advocates of government fiscal stimulus conveniently ignore one thing: that the government can't spend a single penny without first taking it out of the private sector economy. It actually doesn't make any difference whether they do it by taxes or borrowing – they are taking capital which would otherwise have been used by individuals and businesses. Once you accept this, it all comes down to the argument that government will put that money to better use than the private sector during a recession – a point of view that strikes me as being on very shaky ground.
I guess the Keynesians would say that if you leave money in the private sector during a recession, people will just cut back on consumption and use the proceeds to pay off debts and build up savings, and that this will lead to a deflationary spiral. But in reality this kind of behaviour is precisely what the British economy needs. At its root, this was a crisis founded on too much borrowing and spending, and not nearly enough saving (these things were to a great extent the result of overly loose monetary policy, which pushed interest rates below their 'natural' level).
Ultimately, this is the whole point of recessions – while unpleasant, they are actually a necessary, remedial phase of the economic cycle, where bad investments are liquidated, debts are paid off, relative prices adjust, savings ratios recover and the economy, which was distorted by the boom, rebalances. All that deficit financed 'stimulus' achieves is to prevent these things from happening, entrenching economic distortions, creating new ones, and storing up more trouble for further down the line.
This article on the Mises Institute website tells an interesting story. When faced with a depression in 1920, President Harding did precisely what Keynesians say would lead to disaster: he cut spending almost in half, cuts taxes, and paid off a third of government debt. Meanwhile, the Federal Reserve took a hands-off approach. By August 1921, the economy was recovering.
Compare that with the Great Depression of the 1930s, when Presidents Hoover and Roosevelt intervened left, right and centre, with wage and price controls and gigantic public works programmes. In September 1931 unemployment rate was 17.4 per cent and the Dow Jones industrial Average was 140. By January 1938, unemployment was still at 17.4 per cent, and the Dow had dropped to 121.
It really makes you wonder why laissez-faire ended up with a bad reputation, while Keynesianism became the new orthodoxy, doesn’t it?
