Is Keynes Dead?

Literally, yes. But the ideas that Keynes produced, Keynesianism and derivatives of, are still alive albeit under-utilised.

The 2008 recession ushered in a new opportunity for Keynesianism, but the artificial demand was created in the sectors less deserving of the capital injection – namely the financial sector. This is not to suggest that the bank bail out was unnecessary, it was crucial in order to stop the systemic collapse of our economy and Quantitative Easing was a welcome opportunity for banks to begin recapitalisation.

The scrappage scheme was a cheap and effective way of boosting demand and output in a small section of manufacturing. This is a positive example of Keynesian theory in action.

However, with lots of problems in the society and economy, more could have been done to solve them. The first is housing, or severe lack of. The second is an ageing infrastructure. The third is an undiversified economy.

The theory behind Keynesianism is that the aggregate demand is artificially boosted by state spending, either from reserves or borrowing on the domestic and international markets. This is to supplement the fall in private investment due to the unpredictability of the economy caused by a recession or similar.

The first problem encountered in the economy is a lack of housing. This blog has posted a fair amount on housing with individual posts or short references to. There is a lack of housing in this country – affordable, for rent etc – and, arguably, the financial crisis which preceded the recession was born out of the bubble created by unsustainable housing prices. The first industry is suffer from the recession was construction. Billions should have been poured into the industry for the purpose of building houses en masse- alleviating the pressure on housing lists and the burden placed on the state in the form of housing benefit. It would have stabilised the housing market and produced jobs for the unemployed, increased aggregate demand and, as an added bonus, increased tax receipts! I call that a win/win situation.

The second problem is an ageing infrastructure. It is evident to everyone in this country that our infrastructure is not fit for purpose. A railway system that has not been largely updated since it was constructed in the nineteenth century. Airports that close at the lightest of snowfalls. A road system that has become congested. Telephone lines that are not fit for the digital age. Thankfully, steps were made to address some of these, however partial they were. The high-speed rail, initiated by Labour, has been taken on by the Coalition Government. The result of improving the infrastructure is increased aggregate demand, reduced unemployment and increased tax receipts with the option of leasing these infrastructure developments back to the private sector, thus creating another revenue stream. Win/win? It sure is!

The third problem of a lack of diversity in the economy can be simply solved by following the lessons of the scrappage scheme. State involvement can be minimal but the effects will be profound. The state provides the necessary capital investment and lets the private sector do its thing. This can be done in the new growth areas, such as renewable energy (also reduces overall long-term energy costs and secures our energy provision), knowledge economy (which includes Higher Education), etc. Needless to say it produces a win/win situation and creates a more stable, more diverse economy.

While these problems were not addressed properly by the previous Labour Government, and nor was Keynes invoked properly, there could very well be a situation where Keynesianism is needed and soon. It is fair to say that consumer demand has almost disappeared as consumer confidence has dropped rapidly. Before waiting for a double-dip recession or crisis on a similar scale it would be wise of the Coalition to start practising Keynesianism…

Cameron’s Privatisation: Good, Bad or Misguided

On Monday the Prime Minister, David Cameron, announced in the Daily Telegraph an outline to effectively privatise swathes of the public sector. A white paper will be released in the next two weeks allowing private companies the automatic right to bid for the provision of public services. This is not to say that the public sector will not be able to bid for these services as well. All public services, such as education, health, sanitation etc, will be open to the private sector for their provision.

This is not new. A lot of services provided for by local authorities, such as bin collection, are already outsourced to the private sector and because there is an asymmetrical flow of information, the provision for these services are a) expensive b) inefficient and c) unaccountable.

Education, through the Academy programme and now through the Free School  programme, has let the private sector in to educate our children. One could say “this is a terrible thing!” However, it is too early to decide either way, with regards to the Free Schools. The Academies have turned failing schools around they are now competing for the top spots in the league tables. Is competition such a bad thing? No, but not everyone thrives on competition. In fact, some people shy away from competition, so education needs to accommodate those of a non-competitive disposition and, especially, those outside the mainstream ie learning difficulties.

With the topic of the NHS, we are all in agreement that a health service, free at the point of use, serves to benefit us all. However, we do not spend enough, on a per capita basis, on healthcare. The Primary Care Trusts and Foundation Hospitals were the first step to introducing a market into the NHS. However this blog has already voiced concerns about the government’s proposals to hand 80% of the Healthcare Budget to GPs and they can be read here – NHS Reform: Privatisation?

From what we can gather, from the initial outline, accountability will be the main problem with Cameron’s proposals. This, as mentioned earlier, stems from an asymmetrical flow on information. In other words, unless companies bidding for these services disclose everything, the market is weighted in favour of the private provider rather than it being a neutral transaction. It would be advisable if the white paper included mechanisms to create a symmetrical flow of information. This will, hopefully, drive prices down, standards up and be more accountable than the services, whether publicly or privately provided, currently are.

 

Hyperinflation is the course of action

This is a controversial statement and I speak for myself, not this blog.

Many people have a fear of inflation, which means that hyperinflation is beyond their comprehension. Under normal circumstances, I too would be fearing inflation. However, these are not ordinary circumstances.

We have just come out of a recession, and we might be going back into one too, debt levels are at a record high! The recovery is weak, in fact it’s almost non-existent.

Inflation is currently 4% – relatively high compared to what has been experienced in the recent past. The Bank of England base rate is 0.5%, the lowest it will ever be and the longest it has ever been held so low. The average credit card interest rate is 18.9%, the average mortgage interest rate is 3% and the average loan is 9.2%.

Household debt levels are at a record high, having breached the £1 trillion mark around the beginning of the year. Corporate debt levels are not that far behind.

Inflation, theoretically, eats into the debt. So to adjust for inflation, credit card interest rates are 14.9%, mortgages are -1% and loans 5.2%. So the people that benefit from the current inflation rate are homeowners.

Because of the high levels of debt and the high interest charged on the debt, I advocate hyperinflation of 100% or more. This means that debt will effectively be wiped out within a year and we can rebalance and restructure the economy. Suffer a temporary hardship now in order to enjoy lasting prosperity and stability at a future date.