Exit Strategy Redux

by the Sandwichman,

In his New Statesman column yesterday, This crisis is far from over yet, David Blanchflower talks about his travels to Paris last week to deliver the keynote address at a meeting of OECD employment and labor ministers. He takes a swipe at George Osborne, the Conservative Party's shadow chancellor of the exchequer, who, in last week column, he lambasted for Tory proposals to cut government spending through public sector pay cuts and layoffs.

The Sandwichman posted the following comment to the column:

David,

In the backgrounder to your keynote address in Paris last week you concluded with a quote from Keynes's biographer, Lord Skidelsky, which included the following observation:

"Over time, as the returns on further additions to capital fell, the high-investment policy should yield to the encouragement of consumption through redistributing income from the higher to the lower-saving section of the population. This should be coupled with a reduction in the hours of work."

Let's call that "the exit strategy". Evidently Osbourne's stimulus exit strategy is to go cold turkey. The US experience with that approach in 1937 doesn't bode well. Between September 1937 and January 1938, US industrial production fell as much as it had in the 20 months from October 1929 to July 1931.

Keynes wrote, in a 1945 letter to T.S. Eliot, that the "ultimate solution" to unemployment was working less. He saw investment as first aid. So, yes, the stimulus is a start. But what are the next steps? More stimulus, then more and more and yet more? What is the exit strategy?

Keynes proposed an exit strategy: redistribute income and reduce hours. But nobody is talking about that yet. All we hear is, on the one hand, "more stimulus!" and, on the other "restraint!". I would like to hear your views on the specific exit strategy that Keynes proposed. See, in particular, his 1943 memorandum, "The Long-Term Problem of Full Employment" and, of course, his 1945 letter to T.S. Eliot.