New Labour has become a paragon of misinformation. One of their most insulting claims is that to cut spending now would 'choke' recovery. Here is American historian, Thomas Woods, writing about the economic situation in 1920's America, ''The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover — falsely characterized as a supporter of laissez-faire economics — urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.''
This is very true. President Warren Harding cut the government budget by 50% over two years. The national debt was reduced by 1/3 and taxes were cut at all income levels. The results were marvellous. Unemployment stood at 2.4% in 1923, compared to the 14% average during the fiscally excited years of New Deal. The newly created Federal Reserve was mostly idle. Even though I am an advocate of the Austrian School, I accept central banks are here to stay, and therefore should be used to full effect, but they should be careful not to inflate a new bubble.
Academic economists are a useless bunch. They failed to predict the crisis, and now they expect us to adopt their wildly expansionist policy prescriptions. Keynesian economics has been constantly disproved by the economic evidence of the last 70 years. The past is a good reference point in planning for the future , but we must be careful to absorb the right lessons. Politicians and economists seem destined to repeat their mistakes in perpetuity.