By Alasdair Macleod*
The Keynesian policy of stimulating an economy through a temporary budget deficit relied on deceiving economic actors into thinking there was more demand in the economy than existed. Like all confidence tricks, it eventually fails. Governments end up with perpetual budget deficits, which trend larger with every unresolved credit cycle.
Expanding money and credit as a means of funding government spending through the creation of debt has now become central to state finances everywhere, including the UK.
The advantage for governments is very few people understand that this form of finance transfers wealth from the producers in an economy to the state. But the government is eating its own seed-corn by impoverishing its tax base, which if continued leads inexorably toward the destruction of its currency.
Any politician who claims to be a free-marketeer is not one unless sound money, devoid of inflationary financing, is embraced. Taking into account the importance of sound money and the reasons trade imbalances arise, a Johnson government that understands these issues will be equipped to fashion economic and monetary policy for the future.
It is not enough to merely pay lip service to the necessary objectives, but to grasp the economic theory behind them, so that socialist and neo-Keynesian claptrap can be fully exposed in reasoned debate.
These are two objectives to strive toward, and will necessarily take time, because changes in government policy must steer the electorate along with it. They should be pinned up as mission statements on the notice boards in Downing Street.
That being accepted, the following supporting policies must be implemented to re-orientate the ship of state toward economic success:
- Tax policy. Tax cuts should be broadly financed by reductions in government spending, not through increasing the budget deficit in the hope that the economic stimulus will generate higher taxes. Welfare must only support people in genuine need, not those with just a sense of entitlement.
- Government spending. Means must be found to reduce the proportion of government spending in the economy as a whole, to reduce the burden on the productive private sector. A financial and economic crisis requires departmental spending to be slashed, not just future planned increases cut, as was the case under Gordon Brown in 2009.
- Encouragement to save. Taxes should be removed from savings and capital gains. Inheritance tax must be abolished. This is to allow people to accumulate personal wealth and to reduce the need for the state to provide.
- Trade. Trade agreements with other nations should be viewed as a first step toward wholly free trade. By exploiting the comparative advantage of allowing people to buy what they want from providers of goods and services irrespective of location, capital resources will naturally be redeployed toward their more efficient use. This is why understanding that trade imbalances do not arise from currency differentials is so important.
- Monetary policy. Steps must be taken to restrict the Bank of England from manipulating the economy through monetary policy. Targeting inflation and employment must be abandoned, and markets allowed to set interest rates. Credit expansion should be curtailed by ensuring that UK banks and branches of foreign banks operate to stricter capital rules. Goal-seeking stress-testing must end. In the longer-term, banks should lose the protection of limited liability, which has allowed bankers to make rash lending decisions without bearing the ultimate cost.
- Gold. The Treasury must replenish the nation’s gold reserves. The risk of a global currency crisis is increasing by the day, and foreign currency reserves will need to be reallocated at least in line with those of other major nations.
Brexit is an opportunity to reset economic, monetary, and trade policies.
The implications of getting rid of the EU millstone go far beyond the leaving date of 31 October.
Assuming a Johnson government has a good grasp of why free trade benefits the economy and why trade imbalances exist, combined with the courage to steer Britain toward the long-term prosperity offered by free markets, it will derive its future power from a strong economy instead of merely claiming it based on the past.
*About the author: Alasdair Macleod is the Head of Research at GoldMoney.
Source: This article was published by the MISES Institute