Letters | 6 December 2008

Nancy and the Keynesians

Sir: Nancy Dell’Olio is a Keynesian (‘John Maynard Keynes, my hero’, 29 November), but if Keynes were alive today, he would be revising his doctrine. In the 1930s government expenditure was a much smaller proportion of GDP than it is today. So was the tax take. Then, with the private sector devastated by the slump, increasing government expenditure was the strongest lever to change sentiment and reflate the economy. Now, both the private and the public sectors are crippled with debt. Increasing government expenditure threatens the nation’s credit-rating, and tweaking VAT to encourage people to spend is at odds with people’s desperate desire to save. With the tax take today amounting to such a high proportion of gross domestic product, the strongest lever is to take large numbers of private individuals and businesses out of the tax net altogether. Because cash is king, people will use their extra cash to reduce debts and increase bank deposits, thereby reducing the banks’ need for government funding. This means that the government deficit will not increase. Of course government expenditure has a place in the economy, but today Keynes would be making a very ‘un-Keynesian’ suggestion, namely to improve sentiment at a stroke by massively raising the thresholds at which private individuals and businesses start to pay tax, hugely increasing private saving. The sooner the private sector has repaired the holes in its balance sheet, the sooner people will spend and the sooner they will pull the economy out of recession.

Matthew Quirk

Chiddingstone, Kent

Sir: Your new economics correspondent Nancy Dell’Olio might like to consider another economist, Kondratieff, who postulated an 80-year cycle in economic events: 1929 marked the end of a decade noted for bright young things, financial excess, limitless confidence, loose morals, alcohol and cocaine. If that rings any sort of bell, consider the ten years that followed, with poverty, authoritarianism and, ultimately, war.