Douglas Carswell's Blog

Simon Jenkin is wrong - we cannot spend our way out of a debt recession

Economic growth follows demand, says Simon Jenkin in the Guardian.  I believe Simon has it precisely the wrong way round. 

Our economy does not grow because people consume more. We consume more because the economy grows. 

Simon’s idea – which to be fair is pretty much conventional thinking with the elite - is that government should give people lots of cash. That way they’ll go out and spend it. As they buy things, the economy will get moving again and all will be well.

The trouble is that it is precisely this sort of thinking that landed us in the mess we are it. Printing off extra cash does not generate wealth – not in Zimbabwe, not in Britain, not in America.

Handing out wads of cash might stimulate demand, in the sense that folk will think they are richer than before, and spend it. But it does not solve the underlying cause of economic problems, which is that we over consume and over borrow relative to what we produce and save. A consumer spending splurge will hardly fix the underlying problem of debt.

In a healthy economy, the amount of credit around is linked to the amount of saving. In other words, someone deciding to defer consumption by saving enables someone else to borrow more. Western economies are in trouble because we created a system that enabled credit to be conjured out of nothing. It no longer required someone to defer consumption in order for someone else to borrow. 

The consequence has been a spectacular long-term misallocation of resources. Yet since the credit crunch hit, we have done everything possible to try to prevent the painful reallocation of resources that will eventually have to happen. 

King Canute is still sitting on the beach trying to turn back the inevitable. 

In the US, President Obama threw an $800 Billion stimulus package to try to hold back the tide – but produced almost zero growth. Even in Britain, too many commentators still presume that a bit more government spending might be the answer.

It’s time to stop kicking the can down the road .....

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