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The government must inject money into our ailing economy - there is no alternative

In considering how best to bring Britain out of recession with maximum speed and minimum pain, Gordon Brown and Alistair Darling should start by ignoring the 16 free-market economists who wrote to the Sunday Telegraph arguing that higher public spending risks "seriously misallocating resources". It is not the government, but the privately owned financial services industry, that has been misallocating resources on a grand scale. The surprise is that these economists have the audacity to make public statements at all, instead of going away for a few years to rework their discredited theories.

A more plausible objection to Keynesian solutions - which include the acceleration of capital projects such as upgrading schools, building London's Crossrail and developing alternative energy sources - comes from Conservative politicians such as the former chancellor Kenneth Clarke. They argue that Mr Brown spent and borrowed too much in the boom years so that Britain cannot now afford more public-sector debt. It is true that money was wasted - notably on an over-paid bureaucracy to supervise target-driven public services and on funding war in Iraq - and Mr Brown might have borrowed less and taxed more. It is true, too, that high public debt risks damaging confidence in the soundness of government finances and further weakening the pound.

But Mr Clarke's criticisms in particular are disingenuous. For one thing, he well knows that a falling pound (after Britain's withdrawal from the Exchange Rate Mechanism) stimulated recovery in the 1990s. For another, it was thanks to his spending limits, which Brown accepted in order to reassure the electorate in 1997, that the Tory neglect of public services extended to more than 20 years, requiring urgent action to rescue crumbling schools and a creaking health service. Had Labour raised taxes rather than borrow to finance improvement, Tory objections would have been vehement and possibly fatal to the government's chances of re-election. Moreover, it is private sector, not public sector, debt that got us into our present mess. It is hard to see why the latter should be thought more reprehensible than the former, which has done little more than fuel a boom in house prices and enrich bankers. With lenders now so distrustful of the private sector, and stock markets in freefall, this is an ideal moment for governments to borrow on good terms.

Indeed, the claim that UK public debt is high is simply wrong. In the current fiscal year, it is estimated the budget deficit will be 4.5 per cent of GDP, which is high by international standards but barely half what it was in the early 1990s. Total government liabilities are well below the OECD average, and scarcely in the same league as those of Italy, the US and Japan. Mr Brown may have been foolish to say he had abolished boom and bust - as daft as saying he'd abolished flood and drought - but his claim that he combined prudence with necessary public investment isn't as discredited as his opponents like to pretend.

The arguments for increased public spending are strong, even overwhelming. When people cannot or will not spend for themselves, governments should do so on their behalf, "writing cheques to citizens", as the Financial Times puts it. Where should the money go?

In hard times, the better-off tend to hoard extra money; if anything, there is an argument for raising taxes on the rich, perhaps by introducing a wealth tax as well as higher taxes on incomes above, say, £150,000 a year. (This might help keep the social peace, as well as easing strains on the Exchequer.) So tax cuts or tax credit rises should be aimed chiefly at the poor, along with increases in unemployment benefits, which will lead to fewer protests about subsidising idleness as more members of the professional and executive classes join the dole queues. Capital spending on infrastructure, though it comes on stream slowly, is also important. Labour has projects planned - or already under way - and all it has to do is bring them forward a year or two, taking advantage of a growing surplus of labour and resources.

No economic policy - including, as we have seen this year, allowing the free market its head - is without risk. It is just possible, though very unlikely, that the Keynesian approach could end with Britain, too, calling in the International Monetary Fund. But cautious approaches - for example, the Bank of England's long reluctance to lower interest rates for fear of stoking inflation - have proved inadequate. The greatest risk of all is a 1930s-style deflation, where people stop spending because they think goods will soon be cheaper.

Free-market economists, such as the 16 who wrote to the Sunday Telegraph, who argue the government's role should be confined to monetary policy, have not grasped the nature of the crisis. Lower interest rates, though essential, will not by themselves ease the credit crunch that has brought world economic activity perilously close to standstill; rather the contrary. The US has discovered that rates as low as 1.5 per cent won't do the trick and the view that monetary policy is sufficient is now not shared even by the Federal Reserve. Mr Brown and Mr Darling should opt for bold injections of money into an ailing economy. As another prime minister once said, there is no alternative.

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This article first appeared in the 03 November 2008 issue of the New Statesman, Israel v Hamas