I spotted this earlier but was at work and couldn’t comment, but its on Liberal Conspiracy via Sunny, and now I’m home.
What have the Lib-Con achieved in their time in office?
Business confidence among UK firms has seen its biggest drop since 1995 due to the government’s rhetoric on spending cuts, a survey suggests.
This leads Brad DeLong, admittedly a man not given to subtlety, to label them Herbert Hoover and Andrew Mellon, the men who helped turn the roaring 20s into the depression 30s.
At the moment monetary policy in this country is tight and is overwhelmingly unlikely to get looser. Our main trading partners are either subduing domestic demand by necessity or through choice. Our domestic sector is still highly indebted and repairing its balance sheet.
However, at the moment the state can borrow cheaply and boost demand, running deficits for a year longer until the recovery is ingrained will not significantly increase the national debt but it could shave a percent off the unemployment figures.
Moreover, reducing deficits too soon could damage demand to such an extent that we are dipped back into recession, a nightmare scenario unless you’re Hayek or Schumpeter and wish to purge the rottenness from the system. Well you and I am that rottenness, and I think purging us is a dreadful idea.
Running a deficit in a situation where we cannot (will not) use monetary policy to stimulate demand will boost aggregate demand and help stop the economy slipping back into recession.
What would stop us running a deficit longer?
1. Well perhaps we would be unable to afford it, but that isn’t the case, as the markets are offering us very low interest rates on 10 year bonds and our average debt maturity at around 13 years gives us a lot of room to manoeuvre. The interest on our debt is high, but not onerous.
2. Government borrowing may crowd out private borrowing, meaning that inefficient public sector pet projects replace efficient private sector businesses. But we are not in normal times:
Under the kind of conditions we’re now facing, the main determinant of business investment is the state of the economy, as evidenced by the plunge in investment shown in the figure. This, in turn, means that anything that improves the state of the economy, including fiscal stimulus, leads to more investment, and hence raises the economy’s future potential. That is, under current conditions deficit spending doesn’t lead to crowding out — it leads to crowding in. In fact, you could argue that the worst thing we can do for future generations is NOT to run sufficiently large deficits right now.
3. Alternatively you can pontificate on intergenerational justice while shafting aforementioned generation.
The coalition are running the wrong fiscal policy for the situation. They are doing so through choice. Lots of metrics are pointing to this – interest rates, business confidence, the electorate didn’t mandate the cuts to be proposed.
When they write the history of this episode they will ask how we could have let them get away with it, and ask whether it was them or us who were more stupid.