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Friday 17 April 2009

A Question of Balance

Balance and equilibrium. Two words that encompass much of the way that economists used to think, and of the way that some still do. The depression of the 1930s changed some perceptions, but some lessons take a lot of learning.

Economies were believed, before the depression, to have a natural tendency towards a state of equilibrium, at which point anyone wanting to work would be employed, and the laws of supply and demand meant that all goods produced were sold. Increased unemployment was thought of as some kind of temporary state; a passing phase.

Then came the depression, and it became obvious, even without the advocacy of John Maynard Keynes, that economies could reach a state of equilibrium with a high level of unemployment if left to themselves. This thought, however, was not allowed to disturb the presidency of Herbert Hoover, who was therefore unable to face what, for all too many citizens of the USA, was the issue that concerned them most.

The Hoover administration in fact ran a budget surplus as banks failed across the country, unemployment headed towards 25% of the workforce, and shares lost 89% of their value. Small wonder, then, that once Franklin Roosevelt had committed himself to tackling the issue, he was elected President in a landslide.

But unemployment remained high both in the USA and here in the UK. And, despite his commitment to addressing the issue, Roosevelt was reluctant to maintain a budget deficit. So, in 1937, measures were taken to bring the budget back into balance, and the result was as Keynes had warned: the economy slumped. It’s a lesson that, today, many politicians and economists are also reluctant to recognise.

The balanced budget is still, to some, the touchstone of credibility. Margaret Thatcher drove towards it in her first term, and gave the UK a decade of appallingly high unemployment as a result. Now there are signs that David Cameron and his ostensibly new and caring Tory Party will also be so committed, if returned to power.

Should they do so, the result will be, more or less, as Keynes told: any recovery will stall, and unemployment will rise. The mistakes of the past will be needlessly repeated, but those that make them will not have to suffer the consequences.

And that would not be good enough.

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