Frenzied cost-cutting will not fix our economic crisis

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Frenzied cost-cutting will not fix our economic crisis | Society | .

The following is by Andrew Simms of the New Economics Foundation and a fellow member of the Green New Deal group:

Cuts, cuts, cuts… The word is chanted in politics until we work ourselves into a frenzy. We're transfixed by a large and growing public debt brought on by banking failure. But does it make sense, now, to cut public spending? Can we even afford to? History suggests not.

For three years after Roosevelt announced his New Deal in 1933, regulating the banks and launching a bold programme of public spending, things went well. But then he blinked. Afraid of rising debt, he cut spending — and made the depression worse. It was only later, when there was a surge of production for the war effort, that things turned around again.

Public spending creates jobs and has a positive, "multiplier" effect in the economy. There are more economically active people to pay taxes, in turn reducing the public debt. It is a false economy and counterproductive to cut in a downturn.

It's also a schoolboy error to think that a national economy should be managed just like a personal budget. Governments can issue and manage money for a wide range of purposes, individuals can't.

But, of course, that doesn't just mean the government should go ahead and spend on just anything. On the contrary, some spending can do more harm than good.

It's hard to be precise, but it's very likely that most of the benefits from the blanket cut in VAT and the bung given to the car industry through the scrappage scheme leaked out of the UK — not to mention encouraged environmentally wasteful consumption.

Targeted spending, however, in the face of climate change and risingenergy insecurity, could do an awful lot of good, creating jobs, cutting carbon and fuel poverty and helping to reduce the public debt.

A new report The Cuts Won't Work by the Green New Deal group (of which I am a member) shows that earmarking just £10bn in "green quantitative easing" (that is, releasing more money into the economy on the condition it is spent on low-carbon initiatives) could create 60,000 long-term jobs in the energy efficiency sector (a total of 300,000 years worth of employment). The same amount could multiply by five the contribution to the UK's electricity supply of onshore wind power.

Spending on some things creates more jobs than spending on others. Spend on public transport, housing and energy efficiency and you will create far more jobs, pound for pound, than you would if you opted for unproductive military expenditure. Cancelling the Trident replacement and spending instead on the great low-carbon transition would create 105,000 jobs according to a York University study.

So, should the chancellor implement cuts when he announces the pre-Budget report on Wednesday?

Medieval doctors used to think that the best way to cure patients of a wide range of ailments was to drain their blood. More often than not it killed them.

The government and the opposition parties all need to understand that economic bloodletting will not work. It's far more likely to kill the ailing, carbon-addicted economy.