J P Floru: Growth does not equal spendthrift government

With the election of Francois Hollande Keynesian folly is back to the fore.  Down here, socialists continue to hoodwink the long-suffering population into believing that the government’s spending cuts cause the continuation of the economic crisis.  BBC journalists repeat it as if it is mere fact.  Those profiting from state profligacy in Greece shout it while throwing petrol bombs.  Only Britain keeps its course – for now.

Keynes famously believed that in times of crisis government should stimulate demand by greater spending in things like infrastructure.  This would land wages into people’s pockets; who would in turn spend it and further fire up the economy.  The folly lies in that such spending needs to be paid for through taxes, money printing, or debt (deficit-spending). The first destroys private sector jobs; the second creates inflation which is a silent tax and therefore destroys private sector jobs; and the third pushes the bucket to the next generation which will therefore achieve lower growth. 

Increased state spending to create growth is the Great Smoke and Mirror Theory of 20th century economics.  The growth it creates is entirely illusory: public sector expansion at the expense of the private sector; and growth today at the expense of our children’s.  Not that Keynes cared: “In the long term, we’re all dead”, he cynically quipped.

The centre right answer to Keynesian folly is supply-side economics.  We believe that growth is created by stimulating producers into producing more.  Their increased production will lower prices for consumers and foreign buyers; and will lead to greater innovation through competition between more players.  The Keynesian mirage we replace by responsible government: the reduction of hindrances to business through deregulation and tax cuts.  The latter is paid for through state spending cuts, which allows to leave more tax money into businesses’ and peoples’ pockets so they, rather than the state, produce growth.

The Coalition government has applied supply-side economics to some extent, but could do far, far more.  Below are three measures which will achieve growth.  It is likely that none of them would initially cost the government a great deal of money, with the possible exception of tax cuts – but these would be earned back through economic growth within one or two years.  Observe that some of these measures are pretty radical – but as our softly-softly approach has returned few results a more dramatic approach is called for.

1. A dramatic reduction of red tape, through a de minimis rule: abolish red tape for companies who employ fewer than twenty people.  Draft an Act which will exonerate small companies from a list of previous acts, especially employment legislation. Cost: nil.

2. A dramatic cut of corporation tax to Irish levels (12.5%), in addition to a promise that it will not be increased in the next ten years.  It is essential that this is done as soon as possible; to attract companies fleeing the continent, and to attract non-Europe investors who want a foothold in the EU though not in the Eurozone – in fact, the euro’s decline could be a great opportunity.  We could even introduce a 0% tax rate for new companies for a few years.  The tax cut would cost some money at its inception, but the economy would grow so fast that it would be earned back by way of tax income at the lover rate – the so-called Laffer-effect which was achieved after the Kennedy, Reagan, and Thatcher tax cuts.

3. Reduce state spending further to allow companies and people to keep more money in their pockets.  Private sector investment is far more efficient than public sector investment as the state is more wasteful.  The cut in growth through reduced state spending would be more than earned back through growth in the private sector.

All of these measures are common sense: it is the application of the economics people apply in their own household to the state.  Not living beyond one’s means; trying to obtain maximum benefit from scarce income and resources; and encouraging enterprise by rewarding work. 

The only thing that grows when the state spends more of your money is irresponsibility.  And that is emphatically not the Conservative Way.