Cameron and Clegg lie when they say we need to cut now to pave the way for ‘healthy growth’ later. The effect of austerity will be to cut demand, deflate the economy, and deepen the slump.

If you sack workers, freeze pay-levels, shrink pensions, and slash benefits, you reduce the amount people have to spend. If, at the same time, you cut spending on schools, hospitals, and social housing, you reduce the amount government spends.

That reduces the demand for goods and services produced by private industry. That spreads the downturn to the whole of the economy. The cutbacks are then self-feeding. You create a vortex of collapse.

It was this experience in the 1930s that inspired John Maynard Keynes, the greatest liberal economist of the 20th century, to argue for public spending during a downturn. When this happened on a sufficient scale, with a state-funded war economy, the Great Depression ended.

US national output in 1940, the last year of peace (for the US) was $97 billion. By the end of 1943, it had doubled to $185 billion.
War expenditure accounted for half the output. But war demand cut unemployment from nine million to one million, so people had more to spend and there was a consumer boom as well. The whole economy grew at breakneck speed.

The ‘military Keynesianism’ of the Second World War was funded by deficit spending. This was not considered a problem for two reasons. First, there was a war to win. Second, the boom paid for itself. Keynes had argued that anything you could do, you could fund – because growth produces income to pay debts. The war economies of 1939-1945 show that he was right.

Today, Britain’s public-sector debt is around 64% of GDP. At the end of the Second World War, it was around 180% of GDP. The huge war deficit boosted the economy. British aircraft production, for example, rose from 8,000 in 1939, to 15,000 in 1940, to 26,000 in 1944.

The huge expansion in output had nothing to do with ‘free markets’. The government borrowed money and placed orders. The arms manufacturers fulfilled the orders and made large profits.

During the war, no-one said the priority was cutting the deficit: everyone said the priority was increased production. Getting into debt to make guns, tanks, and bombers was okay in 1944. Apparently, getting into debt to educate children, heal the sick, or house the homeless today is not.

Because of all this, there are arguments within the ruling class and among mainstream economists about the right thing to do. Some back Cameron and Clegg. Others say what they are doing is madness.

According to leading academic economist David Blanchflower, a former member of the Bank of England Monetary Policy Committee, ‘the consequences of cutting too soon is to drive the economy into a depression’.

Commenting on the austerity imposed on Greece, The Guardian’s economics editor Larry Elliott notes that ‘… the slump will deepen. Greece, without the benefit of stronger growth, will be unable to meet its ambitious targets for reducing the deficit, which in turn will lead to demands for even deeper budgetary cuts, which will weaken demand still further. That is not a recovery plan. It is an economic death spiral.’

For Greece, read Europe as a whole. Italy has frozen public-sector pay, raised the retirement age, and plans E24 billion of cuts in 2011. Spain has cut public sector pay by 5% as part of this year’s E15 billion tranche of cuts. France has imposed a three-year spending freeze.

German Chancellor Angela Merkel has announced a total of E80 billion of cuts between now and 2014. ‘The crisis in Greece has shown the importance of good housekeeping,’ she announced. ‘Germany has a responsibility to set a good example.’

Never underestimate the stupidity of the ruling class. A national economy is not a handbag. Production is not the same as consumption. When a government spends money, it stimulates economic activity and generates more wealth because of the ‘multiplier effect’. This is ABC economics. It is the lesson of the Great Depression.

The third reason to fight the cuts is that they will do the opposite of what is needed: they will destroy jobs, depress demand, and make the slump deeper and longer. They may even plunge us into a full-scale depression.