William Keegan: ''Mr Osborne's Economic Experiment''

Written by Searching Finance Sunday, 23 February 2014 18:13
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Published, January 2015.


''William Keegan forensically demolishes fashionable orthodoxies and challenges lazily held assumptions with insight and wit.


Every voter in the country should read this book.''


Steve Richards

The Independent



In his book "Mrs Thatcher's Economic Experiment" William Keegan won acclaim even from critics for the virulence of his attack on the government's monetarist policies of the early 1980s. These, in his opinion, produced an unnecessarily severe recession and much social damage.

His new book, "Mr Osborne's Economic Experiment " is a conscious echo of that earlier work. Keegan believes that, although the circumstances are different, there are parallels in the way that unnecessarily deflationary policies aggravated the recession that was initially brought on by the financial crisis,and have caused needless social hardship. 

In Part One ,entitled " From Attlee and Cripps to Cameron and Osborne" , Keegan argues that austerity was justified ,indeed unavoidable , in 1945-51, because, after the second world war, Britain was almost broke. He explains how the sudden end of Lend Lease in 1945 emphasised how dependent the UK had been on that flow of money from the US - equivalent to a fifth of our gross domestic product. The crisis was alleviated by the subsequent American loan and Marshall Aid, but, as the economy move from a wartime footing to peacetime, the Attlee government was entirely justified in its austerity  programme, because it took time to rebuild productive resources.

By contrast, the Osborne "austerity programme" was, according to Keegan, unjustified. So far from needing to restrict government expenditure, the Chancellor should have recognised the need to fill the gap in demand opened up by the financial collapse. 

In fact his austerity policies exacerbate the crisis.

In Part Two, Keegan explains the domestic and international background to the economic situation inherited by Cameron and Osborne in the summer of 2010. He argues that , although the new Government was very adroit politically in blaming the budget deficit on the previous government, by far the major cause ( the " truest cause " in Thucydidean terms ) was the banking crisis. Gordon Brown had indeed been less "prudent " than he promised , but the scale of this imprudence was much exaggerated, and much of New Labour's public spending did a lot of good - for example, in the sphere of health and education.

In Part Three, Keegan describes the economic policies of the incoming Government,and explains how Cameron, Osborne and indeed the Liberal Democrats were egged on by the Bank of England. The author argues that Osborne was the most forceful figure in the Conservative -led Coalition, and that he made a cynical calculation : no matter what the hardship involved in his attack on the budget deficit, he calculated that ,when recovery eventually came, he would be rewarded for his putative strategic vision. As for the Bank of England: its officials  panicked. Comparing the budgetary position of the UK to that of Greece was a mistake: whereas the Greek government hardly knew where the next loan was coming from, the average maturity on British government debt was 14 years,and the Government Debt Office was having no difficulty in financing the deficit. 

Also, historically , the size of the deficit was by no means unusual for an economic crisis.

In later chapters the author argues that shadow chancellor Ed Balls and economists such as Paul Krugman and Martin Wolf were absolutely right to blame the period of stagnation in 2010 -2013 on the Government' s austerity policies. Indeed, the "austerity budget " of June 2010 knocked an incipient recovery on the head .That there was indeed an eventual recovery does not, Keegan argues, justify what went before. Output in 2014 is still below its pre- depression peak,and some 20 percent below the level that might have been expected from a continuation of the historical trend. 

Keegan addresses full -on the argument that the Government's critics have been proved wrong simply because there has been a recovery,albeit one that even the Chancellor  and Governor concede is an " unbalanced " one. The central point is that the austerity policy delayed and impeded  recovery, something that even Osborne's nominee forGovernor, Mark Carney,has publicly acknowledged. Keegan explains that observers such as the economist Brian Henry (a distinguished retired public servant) and himself had long suspected that the real motive for the austerity policy was an extreme right wing desire to shrink the public sector using the financial crisis,and Labour's alleged profligacy, as a pretext. Then , hey presto, both Cameron and Osborne have since  gone on record admitting that the reduction in the size of the state is a prime objective of theirs. 

Keegan concludes with the observation that, by  proclaiming a further attack on the "welfare budget" at a time of putative recovery, George Osborne has come out in his true colours.


Table of Contents


Part i Postwar Austerity
Chapter 1 Attlee and Cripps – A Personal Loan that led to a Premiership
Chapter 2 Grants and Loans to finance War and Recovery
Chapter 3 Years of Shortages and Rationing
Notes: chapters 1–3.
Part ii Austerity in the Twenty First Century
Chapter 4 Enter Mr Osborne and Governor Carney
Chapter 5 Treasury and Bank Policy at Odds
Chapter 6 The Limits to Monetary Policy
Chapter 7 Panic Stations
Chapter 8 How to Delay a Recovery
Chapter 9 Economies Recover – Eventually
Part iii Austerity – The Osborne Experiment
Chapter 10 An Obsession with Deficits
Chapter 11 A Crisis Aggravated by Housing Shortages
Chapter 12 What About the Workers?
Chapter 13 The Importance of the Exchange Rate
Chapter 14 Keynesians versus The Rest
Chapter 15 Bubbling House Prices
Chapter 16 Interest Rate Dilemmas

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