Letter to the Financial Times - September 18th 2012

Letters to the FT


Sir, Professor Lawrence Summers sets out a fairly standard Keynesian analysis and policy prescription for the British economy (“Britain risks a lost decade unless it changes course”, Comment, September 17). However, his starting point that Britain’s problem is a lack of effective demand and therefore the public sector must create that demand misses two key factors.

The first is that the reason for the lack of effective demand is the private sector’s desire to deleverage and the second is that his approach would merely substitute public sector debt for private sector debt as has been the case in Japan over the past 20 years.

The growth rate of the overall economy is greatly inhibited at high levels of public debt to gross domestic product (not an issue that Keynes faced in the 1930s).

Dealing with a debt overhang usually requires the borrowers to curtail spending or the lenders to realise losses, both of which contribute to a lack of effective demand.

A more thoughtful policy approach comes from Professor Steve Keen with the idea of a “modern debt jubilee”.

Instead of the money created from quantitative easing going into the banking system and the financial markets but doing little for the real economy, this money is given to everyone in the country and must be used to repay debt.

In this way the private sector deleveraging is accelerated and effective demand will return to the economy sooner without further increasing public sector indebtedness and its deleterious effects on growth.

As Japan has found to its cost, it is the overhang of debt that is constraining demand, and debt-funded public sector spending has not dealt with that problem.

Dealing with the debt problem is the only way to enable sustainable effective demand to return.

Jeremy Beckwith, Sutton, Surrey, UK