Are you tired of world economy experts popping out of the woodwork all over the place, in particular at Christmas parties? Dying to tell you what caused the crisis and how to solve it?
In fact the remedies for an economic crisis are distinctly old hat. F.A. Hayek and Milton Friedman told us how to tackle it. Their principles are of a baffling simplicity – yet for the last months we have utterly failed to explain them.
Labour still believes that money grows on trees. We know that it comes out of our pockets: a penny spent by the state is a penny we can’t spend. State spending makes the economy grow, but at the same time contracts it as private spending is reduced. As Milton Friedman said: “There ain’t no such thing as a free lunch”. A job created by the state is a job that will not be created in the private sector. Over time Labour’s increased state spending results in a net loss of jobs.
Individuals are said to hide their savings under the mattress whereas we need a boost right now. Tomorrow’s tax rises will pay for today’s state spending. Individuals do not save in order to exhibit coffers with bullion at their funeral. Saving is postponed spending. Individuals may hoard their pennies now, but will spend when trust returns. Brown’s future tax rise promise will make them leave it under the mattress for longer. Thanks to Brown the crisis will be prolonged.
Spending on big infrastructure projects is the same as putting money under the mattress. The projects will come to fruition after the crises is over. Too much, too late.
If the state underwrites business loans it will pay up when companies fail. This will be done with money from healthy companies. The state generally picks losers, not winners. Only private sector prudence should underwrite loans – and any lack of prudence is punished by the market. State underwriting of loans will induce banks to lend to unsound companies. State-induced easy credit landed us into this crisis - why go for it again?
A tax rebate may be the solution. Not by a VAT cut – you need to spend before you benefit – but by a cheque in the post. A rebate may allow mother A to buy her son a new pair of shoes (which makes the economy grow). Or it may allow B to invest in the new small company he set up after he lost his job in the City (which makes the economy grow). Your spending boosts the economy in the same way as state spending does – only more so. As Hayek pointed out: your spending and saving decisions will be based on your knowledge of your particular situation. Therefore it will be more efficient than the state’s, which lacks that information.
Politicians generally prefer your money to be channelled through the state system, rather than to allow you to boost the economy in accordance with your own priorities. As Adam Smith Institute Director Madsen Pirie says: “Politicians are usually praised for visible new jobs, without being blamed for those which quietly disappear from the private sector. “
If the state backs off, the economy will grow.
