Politicians act with good intentions. But they rarely seem to grasp that intentions are not the same as outcomes. The social and economic worlds are both complex and change rapidly. This places inherent limits on our ability to understand them. There are many, many examples to choose from when outcomes differed from intentions. We could select from virtually the whole of human history. But two topical ones will suffice.
Liz Truss and Kwasi Kwarteng took what they believed were good decisions. Their massive energy price subsidy would protect people from the cost of living crisis. They thought that cutting taxes would boost growth and prosperity for everyone. It is easy for people to sneer at the latter after the event. But the plain fact is that no-one has discovered a sure fire plan to deliver economic growth. If they had, running the economy would be easy.
As we now know, the markets took fright at the further proposed increases in government debt. Interest rates on the debt soared and the pound collapsed. The Truss government was wrecked. This had always been a risk, ever since in 2019 the government piled up massive amounts of public debt with the furlough scheme. At some point as government debt rises, confidence really drops and interest rates really do double, or even more. But this point is inherently unknowable in advance. It bears little connection with the objective facts.
For example, interest rates were in the 6-8% range in several Mediterranean Eurozone countries in the mid-2010s. But the amount of government debt relative to the size of the economy in, say, Spain, was lower than it is now in the UK. Even now, the UK’s debt position is much better than that, say, of Italy. But it was the UK which the markets attacked and not Italy.
Many commentators on the Left maintain that all this was obvious in advance, that the Truss-Kwarteng policy was bound to end in rapid and ignominious failure. But we might reasonably ask, if this is the case, why these same commentators are not now enormously rich, having used their insight to short UK government bonds.
All this was anticipated by Keynes, a much more subtle economist than many of his followers grasp. In his magnum opus, the General Theory of Employment, he championed the idea that extra government spending could help keep an economy out of recession. But he qualified this with two key points. When government deficits rise as a result of increased spending, Keynes wrote that: “The method of financing the policy may have the effect of increasing the rate of interest and so retarding investment in other areas.” He went on to suggest that the psychological effect on “confidence” might also depress private sector spending. The psychology, he asserted, was often “confused”, by which he meant it could move in ways entirely contrary to what a rational assessment of the evidence would suggest.
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