Virtue of Keynes

You rightly attribute current serious economic problems (Bankruptcies hit highest level since 1960; Barclaycard cuts credit limits as debts rise, August 6) to the huge accumulation of household debt. This raises intriguing questions for the chancellor.

One of the simple but at the time "revolutionary" Keynesian ideas was the contrast between private and public financial prudence. It makes economic sense for an individual household facing financial difficulties to behave with prudence and not engage in deficit spending. The same cannot be true of the economy as a whole. What is a private vice (financial imprudence) becomes a public virtue in Keynesian terms, in the short run (in the long run, as Keynes reminds us, we are all dead).

Gordon Brown continually extols the virtues of sound public finances. But private individual budgets have seemingly moved in the opposite direction. What are we to make of this? Is economic stability the result of sound and prudent public finances or of individuals living beyond their means, or both? Perhaps this is a new policy combination: sound public finance and private insolvency. What is bad for the individual is good for the whole economy. In that case, do we need to worry about the possible black hole in public finances and whatever "manoeuvre" the chancellor might contemplate?

Since the chickens are soon coming home to roost in the private sector (record bankruptcies and a slump in retail sales spending), is it not time for the chancellor to revert to good old Keynesian public virtues and become imprudent and not raise taxes to cover the black hole? The recent cut in interest rates might help, but monolithic reliance on monetary policy surely is not sufficient.
Philip Arestis
University of Cambridge
Yiannis Kitromilides
University of Greenwich