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The boom, not the slump, is the time for austerity

Osborne in a money showerThe following is a letter by Professor John Weeks and Ann Pettifor, published today, 15th March 2016 in The Guardian

Andrew Harrop’s article on John McDonnell’s public borrowing for investment points out its improvement on the chancellor’s deficit obsession (John McDonnell’s new fiscal rule is strong, but it’s no election winner, The Guardian, 11 March). Of particular concern is George Osborne’s determination to “balance the books” by cutting current spending on the disabled. To McDonnell’s widely accepted principle of borrowing to invest so as to expand the nation’s income at a time of private sector weakness, we add a complementary guideline for macroeconomic stability: adjust current expenditure for demand management. If as is now the case, interest rates are low, exports contract and demand remains weak, responsibility falls on the public budget to prevent recession by expanding income. Once started, investment expenditures are relatively inflexible to adjust, making current (day-to-day) expenditure the rational choice for demand expansion. Come that happy day when the economy starts to overheat, current spend should be reduced.

As Keynes argued: the boom, not the slump, is the time for austerity. It is that simple.
Ann Pettifor Prime Economics
John Weeks SOAS, University of London


  1. David Pavett says:

    As Keynes argued: the boom, not the slump, is the time for austerity. It is that simple.

    Is it?

    There seems to be something of a conflict between economists supporting Corbyn from very different standpoints. In earlier articles Michael Burke spoke of

    … the accumulated confusions of ‘keynesians’ (who have little to do with the views of Keynes) who believe governments can perpetually borrow for consumption, rather than as a temporary measure to avert crisis. As this entails debt and interest on it without raising the level of output, so it becomes a drain on the economy and slows growth.

    … Of course, the ‘keynesians’ are opposed to austerity and its effects (unlike Osborne and Reeves) but they lack a credible framework to achieve an alternative because they refuse to clearly distinguish between the economic consequences of borrowing for consumption and borrowing for investment.

    Whereas Ann Pettifor has put what she sees as a Keynesian case. She quotes Keynes:

    For the proposition that supply creates its own demand, I shall substitute the proposition that expenditure creates its own income” (JM Keynes Collected Writings, Volume XXIX, p81)

    And goes on to say

    Keynes’s simple proposition is compelling: that expenditure will expand national (and international) income (including tax income) and thereby reduce the deficit.

    There are clearly very big differences between economists in the Corbyn camp. Is it not important therefore that they take the time to explain their differences in a non-jargonised way to non-economists who would like to understand the different assumptions behind the different standpoints so that they can think through the issues for themselves. I suggest that Left Futures should commission some articles with this specific aim.

  2. Bazza says:

    Fair enough but I personally am not really interested in Keynes.
    Perhaps we should start from the premise that the rich and powerful legally nick the surplus labour of the working billions and we should get this wealth back.
    So yes I am all for state-led public investment but also for windfall taxes on big business, more democratic public ownership, taxes on the rich, and land, an EC Financial Transation Tax, closing tax loopholes and off shore banking – all as a transition as we consult working humanity in designing a fairer, non-expolitative, greener global economy.
    It is the working billions of the world who create the wealth and make societies work and together we should find solutions.

  3. Mervyn Hyde (@mjh0421) says:

    When the mega rich use their wealth to suppress the population at large; in order to get even richer, then it is time they started to feel the pain they wilfully inflict on others.

    The left need to start driving the political agenda not following like sheep. The idea we need to borrow to invest is totally unnecessary.

    The evidence is now there for all to see, Henry Ford said:

    It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. Henry Ford
    Read more at:

    So lets stop talking about how we raise the money and start spending it where it is needed.

    Money is created out of thin air and to regulate the economy, we raise interest rates and tax.

    This final quote from Alan Greenspan:

    Alan Greenspan:

    “Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank. That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit. To be sure, if a central bank produces too many, inflation will inexorably rise as will interest rates, and economic activity will inevitably be constrained by the misallocation of resources induced by inflation. If it produces too few, the economy’s expansion also will presumably be constrained by a shortage of the necessary lubricant for transactions. Authorities must struggle continuously to find the proper balance”.

    So there we have it, lets start changing the narrative, just like Thatcher did when she came to power and start telling people why they are being lied to.

    1. David Ellis says:

      You wish to avoid the class struggle like the Wiemar Republic that tried to print away Germany’s debts and wound up giving us Hitler. Only by dispropriating the super rich and socialising the profits of commerce and industry will we have the resources to build proper public services and provide human levels of welfare to those who need it.

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