That well known organ of left wing populism, The Economist, has published a survey of the world economy. It’s well worth a read. Someone should probably buy George Osborne a subscription.
Bits I especially enjoyed include:
In assuaging these worries, governments will have to balance two risks. They may tighten their purse-strings too soon, withdrawing a stimulus that is still needed. But if they keep spending heedlessly, they will saddle the economy with a heavy burden of public debt which may crowd out private investment.
According to Richard Koo of the Nomura Research Institute, the first risk is the greater. Governments, he argues, have to borrow the money that banks, businesses and households save or repay because no other part of the economy is willing to do so. If the funds go unborrowed, the flow of income will be interrupted, and anything that weakens GDP only makes the government’s liabilities harder to sustain.
Mr Koo is right that the public finances should not be considered in isolation from the rest of the economy. If households are determined to save and businesses are not prepared to invest, it falls to the government to borrow and spend. The government’s debt must rise so that the private sector’s can fall. They are on opposite sides of a see-saw.
This give-and-take between public and private debtors helps explain why the yields on government bonds in many rich countries are still well below their pre-crisis levels. Indeed, economists find it surprisingly hard to demonstrate the clear link between heavy public debt and higher bond yields that would justify fears of crowding out. There may be a threshold of debt beyond which bond markets suddenly take umbrage. And buyers may also balk at so much borrowing from so many governments at once. Nonetheless, a recent study by Silvia Ardagna of Harvard and her co-authors showed that an increase in public debt from about 120% of GDP to 145% raises long-term interest rates by a mere 0.86%.
In its latest Economic Outlook the OECD shows that a 1% increase in underlying unemployment increases public debt by up to 3% of GDP over ten years. One way to keep the bond market quiet is to keep the labour market healthy.
(All my emphasis)
Time to welcome The Economist to the ‘Crazy People Gang’.
That last paragraph I’ve quoted is important. The Tories say they are serious about cutting public sector debt. But if Danny Blanchflower is correct (and he has been thus far throughout the crisis), then by my reckoning a Tory Government that increases unemployment to 5 million increases the debt/GDP ratio by around 15%! Once more ideology trumps economic common sense.