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Myth: “Governments need to cut back in times of economic crisis and spend in good times”

Myth: “Governments need to cut back in times of economic crisis and spend in good times”

Photographer:Fotograaf: Joey Roberts

Myth busters

Governments need to cut back in times of economic crisis and spend in good times, so the thinking goes. On the contrary, says economics professor Tom van Veen. “When things are going well with the economy, people spend money and companies want to invest. The government doesn’t need to stimulate the economy, it just runs by itself. When things are going badly, people hold on to their purse strings and start saving. The business sector notices that because sales figures drop immediately, and so they hold off on new investments.” That’s when the government has to take action to keep the wheels of the economy turning. “Think of investments in new police cars, highway construction or housing insulation. And yes, national debt then rises, but you can pay it off when the economy picks up again. This is the lesson the English economist Keynes taught us.”

So why do we all believe in the myth? “As an individual, it’s wise not to spend more than you have coming in and to cut back if your income goes down. But the government has a different role; it serves as an emergency generator when the other engines fail.”

Van Veen is among the post-Keynesians who are directly opposed to neoliberal economists. The latter want to leave everything to the free market and keep the government on the side lines as far as possible. This is fine, Van Veen says, in the case of “normal fluctuations, but not in times of crisis”. He chuckles. “In the nineties American neoliberal thinkers declared Keynes dead, but now people are talking about ‘the return of the master’.”

He refers to an ING report from 2016 which reviewed the austerity policy of the first and second Rutte cabinets (2010 and 2016). “There were 40 billion euros in cutbacks, and that cost us 5 percent of economic growth and 360,000 jobs. As a result, the crisis lasted unnecessarily long. Of course we were tied to the European Union’s limit of 3 percent government deficit, but many economists agree that that figure is much too rigid; you have to be flexible about it. So it was inconvenient that with Minister Dijsselbloem the Netherlands set itself up as the strictest kid in the class and stuck bloodymindedly to that standard.”

What should the current cabinet do? “Run a budget surplus and pay off debts. That’s what this third Rutte cabinet is doing, although it’s difficult for politicians not to spend in good times, like now. It’s a hard message to sell. If things take a turn for the worse – it goes in cycles, after the good years come the bad – then the deficits have to be allowed to increase again.”

Myth busters is a series in which academics shoot down popular myths on complex topics



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