Hammond's neo-Keynesian budget threatens us all

Hammond's neo-Keynesian budget threatens us all

by Eben Wilson
article from Monday 5, November, 2018

A NUMBER of commentators have pointed to the oddity that Conservative Chancellor Philip Hammond appears to have succumbed to a worldview in which Her Majesty’s Government is the owner of all our money, and it is his beneficence that allows us to keep some of it. 

Combined with an ethic that puts the state at the heart of decency and compassion by being in charge of the money bags required for collective goods and services this non-Tory view of the world plays directly into the hands of Corbynite and Sturgeonite socialists who believe it is their right to have omnipotent control of our money, our lives and our liberties.  

Historically, Tories do not win elections this way – the purchase of votes through pecuniary promises and aspirational Utopianism is a socialist methodology. 

As a liberal economist I have a deeper anxiety; Mr Hammond appears to be deeply infected with Keynesianism demand management and believes that it is he who can adjust policy levers to create economic progress and deliver for the common good. A lot of us thought that this bunkum had died in what is sometimes called “the great mediation” of the 1980’s in a process initiated by Prime Minister James Callaghan who admitted to a Labour conference that “We used to think that you could spend your way out of a recession, and increase employ­ment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists”. Yet Mr Hammond’s promise of having a fiscal armoury suggests he believes he can. Not only is this galling, it’s extremely dangerous to prosperity. 

The issue here is that we have an independent monetary policy governed not by Mr Hammond but by the Bank of England. In its dedicatedly slow and ponderous way that institution has managed to retain some sort of control over inflationary expectations in today’s economy. That in turn, has held inflation rates low, and also managed to neuter policy interventions that might otherwise have created rising inflation or higher unemployment.  Instead, the UK economy has settled into a slow growth path, without inflation increasing by the year, nor unemployment creeping upwards. 

Profligate Keynesian politicians, aided and abetted by Keynesian Treasury officials – pumping money into an economy with independent constraint on money supply – risk adverse outcomes. A general stagflation, alongside diversion of money into financial assets and the distortion of financial gains towards those with access to globalised asset instruments, usually in London or Edinburgh, is the most likely.  The benefits to the people of Buxton or Workington, Dunbar or Irvine will be few as no meaningful supply-side capital deepening will take place from the state stimulus.  Income inequalities will worsen. 

Worse, the political pressure for a more powerful plan to “improve things” then increases; with little real idea of what those things might be, just a general distaste for another failed government; that then sends votes elsewhere. 

Since the Jim Callaghan era the way economies react to state intervention has been recognised by economists to be much less about the actual money being spent than the expectations of its effects and commercial reactions to policy change.  If a new government – and I am sure you know what one I am talking about – takes power and tries a massive stimulus, and in the process obtains a form of tacit control of expectations about how well the money supply is being controlled, all hell could break loose. 

Socialists still live in a world of train sets, water pumping facilities, power stations and other infrastructures; monuments to their genius in spraying money towards building a tomorrow built on the technology of yesterday. 

But who cares when today’s entrepreneurs create tens of thousands of jobs in digital trading platforms and their associated services; applications of private capital across a diverse and highly-granulated cohort of businesses that are fast developing into an entirely new organic eco-system of nested and growing contractual trading relationships.  

These real, long-term and cash flow generating processes are real economic growth based on capital deepening.  Socialist stimulation is merely subsidy of old hat monuments at the expense of organic ventures. It does not create growth and improve lives; especially if the monuments are monoliths that offer tax-funded monopoly services without market prices. 

Which brings us to a horrible truth in all this. Tax rates and the total tax burden matter.  Keynesianism needs fuel, and that fuel is either tax or borrowing. In Scotland, higher taxes than England now hold, in England a slow-down in borrowing reduction has been agreed. The state still has a vast intrusion into financial flows that is not dissipating. Effects will follow.

Every single actual or proposed tax imposition changes the expectations, plans and behaviour of the private sector. More than that, the perception that those impositions are not dissipating generates creeping changes in the allocation of entrepreneurial effort and capital.  Those changes are faster and deeper where higher marginal tax rates apply; we are talking here about a cumulative distaste for taking risks and taking on the challenge of putting capital to work on new ideas. There appears to be some evidence that this diversion of human and financial capital is accelerating in Scotland and parts of both the North and the South West of England. 

Which brings us back to the lassitude of Philip Hammond and Theresa May in offering any notion of an alternative worldview. The former is fiddling with spreadsheets rather than re-engineering our tax leeching public service institutions; the latter appears to have generalised good intentions driven by essentially socialist egalitarian ethics. The McDonald and Corbyn duality offers voters a rather more rigorous approach to the same ambitions.

Taxing digital platforms is not only bonkers if you want economic growth, it strikes me as immoral if it is not a general tax applicable to all traders but rather a punitive raid on one specific innovation in trading practice.  It cannot be right that the state, having attempted to tax the chimera of “profit” through hugely complex corporation taxes and failed, then decides to stick its claws into digitally earned private revenue streams just so that it can feed the NHS (to gain political brownie points for doing so).  That’s not “fairness” it’s totalitarianism.

A truly liberal Conservative government should take a different route; scrap Corporation Tax in its entirety and recognise that global businesses often need to move revenues around to serve both their billions of customers and their millions of investors. If social equity demands that the benefits of gains from owning a bit of Google should be re-distributed then tax corporate income when it moves using a Capital Income Tax; that would optimise the balance between re-investment for more growth in each country which creates jobs, and shuffling funds about globally; with that balance decided upon by Google, not state Treasury mandarins. 

At its root, Keynesianism breeds state interventionist thinking; that’s why the Scottish state is imbued by it. It fits with their interfering, state-driven view of governance. To have a UK government equally imbued is equally galling.  Individuals are not secure in their freedom to retain their own property when the worst excesses of Keynesian interference emerge. True liberalism rejects that path, putting individual consumers and energetic producers first.  National income is our money, not that of the state. 


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