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Too Poor for War

Decades of deindustrialization have hollowed out the UK economy and made it woefully ill-prepared for wartime disruptions. As the financial speculators who funded its current-account deficits turn against the pound, policymakers should consider Keynesian taxes and increasing public investment.

LONDON – A wartime economy is inherently a shortage economy: because the government needs to direct resources toward manufacturing guns, less butter is produced. Because butter must be rationed to make more guns, a war economy may lead to an inflationary surge that requires policymakers to cut civilian consumption to reduce excess demand.

In his 1940 pamphlet “How to Pay for the War,” John Maynard Keynes famously called for fiscal rebalancing, rather than budgetary expansion, to accommodate the growing needs of the United Kingdom’s World War II mobilization effort. To reduce consumption without driving up inflation, Keynes contended, the government had to raise taxes on incomes, profits, and wages. “The importance of a war budget is social,” he asserted. Its purpose is not only to “prevent the social evils of inflation,” but to do so “in a way which satisfies the popular sense of social justice whilst maintaining adequate incentives to work and economy.”

Joseph E. Stiglitz recently applied this approach to the Ukraine crisis. To ensure the fair distribution of sacrifice, he argues, governments must impose a windfall-profit tax on domestic energy suppliers (“war profiteers”). Stiglitz proposes a “non-linear” energy-pricing system whereby households and companies could buy 90% of the previous year’s supply at last year’s price. In addition, he advocates import-substituting policies such as increasing domestic food production and greater use of renewables.

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