© Phil Noble/ReutersDavid Cameron is to urge the public to pay off its credit card and store card debts.
In 1931 Andrew Mellon, then the secretary of the US treasury, advised President Herbert Hoover thus: "Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate ... it will purge the rottenness out of the system."
To our ears that sounds both callous and wrong. But that's partly hindsight - Mellon was speaking before Keynes wrote
The General Theory of Employment, Interest and Money. David Cameron has no such excuse. He is set to tell us today in his conference speech that "the only way out of a debt crisis is to deal with your debts. That means households - all of us - paying off the credit card and store card bills".
But with fiscal policy set on what Martin Wolf has rightly described in the
Financial Times as "kamikaze tightening", the UK needs the private sector to pick up the slack. If all sectors - the government, firms and households - increase saving simultaneously, in an effort to reduce debt, it will further depress domestic demand, reduce output and jobs, and we will end up in a downward spiral. This is what Keynes described as the paradox of thrift.