Keynes is in many people’s minds at the moment, as uncertainty about the course of the economic recovery is high.
In May 1933, at roughly the same stage in the cycle as we are today, Keynes wrote in the Times: ‘Confidence has been restored and cheap money established both on long and on short term [the equivalent of zero interest rates and quantitative easing from the Bank of England today]. Yet unemployment has not declined. Where are we to look for the explanation? Not in the international sphere; for our net foreign trade position, though still bad, is much improved [the equivalent of the increase in net exports caused by the 25% depreciation of sterling since 2007].
We can find it nowhere, I suggest, except in the decline in our loan expenditure, as the result of our no longer borrowing for the dole and of our restraining the capital expenditure of all public authorities’.
Keynes made the case for tax cuts and infrastructure spending to boost growth and reduce unemployment. He made it clear he had little time for fiscal masochism, noting : ‘Unfortunately the more pessimistic the chancellor’s policy, the more likely it is that pessimistic anticipations will be realised and vice versa. Whatever the chancellor dreams will come true!’.
Here is what happened to growth and unemployment:
So, yes, no sooner had Keynes written these words that confidence was indeed restored. The economy boomed and unemployment nearly halved.