A New Policy in Britain, but Beware of Crony Keynesianism

George Osborne, the chancellor of the Exchequer and the architect of Britain’s austerity policies, has just done an about-face (without, of course, admitting it).

Jonathan Portes has the goods: In a recent blog post, the director of Britain’s National Institute of Economic and Social Research pointed out that the assumptions under which the government’s new policy of subsidizing private investment — including infrastructure investment! — through loan guarantees makes sense are exactly the same assumptions under which debt-financed government spending on, say, infrastructure makes sense.

“The government has now conceded the intellectual and economic argument,” Mr. Portes wrote in his blog on June 15. “Let us hope that they proceed to deliver the meaningful policy change that we have been calling for, however it is labeled.”

So why funnel the money to private corporations via loan guarantees rather than simply doing the obvious and restoring the huge cuts that have recently taken place in public investment?

One answer, of course, would be that doing that would be an implicit admission that David Cameron’s government has just wasted two years doing exactly the wrong thing. It has, of course, and apparently realizes its mistake; but presumably the government hopes that privatizing the process will confuse enough people that it can escape blame.

But let’s also note that funneling funds through the private sector offers an opportunity to lavish favors on friends. Now, to be fair, so does government contracting; but that’s a familiar enterprise, with well-established rules and safeguards in place. This will be something new, which may make it possible to slip in some big giveaways that nobody notices.

It sounds to me as if Mr. Osborne has come up with a new wrinkle in policy that I hereby dub Crony Keynesianism — putting in place policies whose logic calls for government spending, but take the form instead of incentives to favored private-sector interests.

From a macroeconomics point of view, even Crony Keynesianism is better than continued destructive austerity. But we should be aware how basically strange it is, and how subject to abuse.

A Mythical Anniversary

We’re coming up on the second anniversary of my column, “Myths of Austerity,” in which I tried to knock down the simply insane conventional wisdom then gelling among Very Serious People. Intellectually it was, I think I can say without false modesty, a huge win: I (and those of like mind) have been right about everything. But I had no success in deflecting the terrible wrong turn in policy. Moreover, as far as I can tell, none of the people responsible for that wrong turn has paid any price, not even in reputation; they’re still regarded as Very Serious, treated with great deference. And the political tendency behind that terrible economic analysis has at least a 50 percent chance of triumphing in America. Oh, well.

Meanwhile, Ed Balls — who I gather was nearly forced out of a leadership position by the Very Serious members of the Labour Party — has been right all along, and now has a great term for the failed policy prescription: since it was advocated by Mr. Cameron, German Chancellor Angela Merkel and former French President Nicolas Sarkozy, he calls it “Camerkozy” economics.

Well done.