In my letter to the FT today, I take issue with the implication in Philip Stephens' article of the day before, which tries to draw parallels between Brown and the divisive 1970's. Therefore:

"Mr Cameron has been studying the early 1980s to see how Margaret Thatcher’s government handled its dismal inheritance after the 1979 election"

But the differences between these eras easily outweigh the similarities (read the letter). 

Some might protest that this is obvious: surely politicians will not sleep-walk into the same policies that seemed to work 30 years before? But the debate on fiscal policy is tangled, mired in politics and far from achieving any kind of consensus: read the exchange between Kobayashi and Krugman on the Japanese experience, and this snippet from a voluminous debate triggered by Eugene Fama claiming that national accounting identities somehow prove that fiscal stimulus cannot stimulate.  (For the record, I think Andy Harless has done the most thorough job of destroying this fallacy; Greg Mankiw presents a more reasonable conservative case than Fama).  Against this backdrop of conflicting advice, and with few politicians as confident with macroeconomics as Nigel Lawson was, it is depressingly easy to imagine them falling for some sort of rough rule of thumb, like "It worked for Maggie" or "Those 364 economists were wrong in 1981* - therefore they would be wrong now.  Cutting government spending will boost confidence."

Unfortunately, in the context of a financial/asset price crunch, the government is currently the only provider of economic demand: even The Economist , hardly an enemy of free markets, sees this.  Cutting the government's contribution to demand too soon, for ideological reasons or because of a false belief in it 'crowding out' private markets, might restart the demand-deflation spiral just as we start to recover from it. Of course, the size of the fiscal mess will still make the decision terribly hard: but (ironically) the risk of a gilt-market stop will only become real once financial investors recover the confidence to invest in other instruments - i.e. when the private economy has started to show some life.  It will be a tough call. But too soon might risk repeating what FDR did in 1938: cut back too soon and strangle the recovery. 

 Let's hope that a new government pays attention to the conditions of 2010, not 1980, when it makes this call.

*I recommend Nigel Lawson's enormous memoir of his time in the Treasury as a guide to the government thinking of that era. Nigel Lawson was once the editor of the Spectator. It is rather depressing to contrast his expertise with the simple-minded thinking that constitutes public debt analysis there nowadays.  Hopefully it is no longer the incubator of future Chancellors.