A market economy in recession, left more or less to itself to adjust to circumstances, will find its way back to growth and full employment within a year, a year and a half at the outside. That same economy, under the administration of managers unsympathetic to the market, may travel in the desert for a very long time before coming good, assuming it comes good. I would like to come back to a post put up yesterday, The Next Phase of Economic Stagnation, which contains the transcript of a debate between a defender of Quantitative Easing in Europe and someone who thinks it is a very bad idea. But what I particularly wanted to comment on was this, stated in defence of QE:
If you’re in a situation where aggregate demand is very weak and that’s a position I think the eurozone is in and you are in danger of slipping into the sort of deflation which I at least and some other judges think is pretty damaging, then this is a mechanism for fending that danger off. And I have to say, I don’t think that there will be much impact from quantitative easing within the Eurozone, apart from through the exchange rate. In driving the exchange rate lower that’s going to help to boost eurozone net exports. It will boost aggregate demand. It will tend to keep up the price level. On balance I think those are pretty good things to be aiming at.
Anyone who invokes aggregate demand as part of an economic argument is wrong. Once universally understood, now universally disregarded, there is no independent force in an economy called aggregate demand. You can shift who gets to do the spending – and in every case where aggregate demand is invoked it is the government that gets to do the extra spending – but you cannot increase the rate of growth or employment. In fact, over time, it weakens an economy’s structure so profoundly that you are frequently worse off than when you began.
Recessions are inevitable, and there are actions a government can take, but increased public spending and higher levels of public debt are not amongst them. The sad part is that economists have so comprehensively invested in this nonsense theory, governments find it perfectly in tune with their basest political desires, and the public cannot understand why it shouldn’t work and like to see more spent on them by government. So here we are, a perfectly constructed downwards spiral based on the latest most up-to-date theories, in which no one can ever quite see the way out again.