Duncan’s Economic Blog

Jenkins & the wrong kind of stimulus

Posted in Uncategorized by duncanseconomicblog on October 29, 2009

Vino notes Simon Jenkins article in yesterday’s Guardian.

Jenkins is full of praise for ‘cash-for-clunkers’ style packages to support car sales in Germany and the US and criticises the Government’s smaller scale actions here. He calls for the programme to be extended to other goods.

However as Vino notes:

Furthermore, I think British manufacturing no longer products many of the household goods we buy. They are made in China and elsewhere. We would need to boost our manufacturing capacity before we could meet our domestic demand for consumer goods. Otherwise, the demand for more consumer products would lead to increasing imports.

He’s quite correct.

In 2006 Germany produced 5.4mn cars and the US 4.4mn. The UK only produced 1.4mn.

The pattern is similar with other consumer oriented goods. The UK’s comparative strengths (services, pharmaceuticals, advanced manufacturing, creative industries, etc) are not that easy to stimulate through consumer spending.

Any stimulus of the type Jenkins advocates would increae consumption but also increase imports (which subtract from GDP). The net impact would probably be a marhinally higher GDP but much higher government debt.

Focusing on consumption ignores the crucial point – investment. Increasing investment not only raises GDP in the short run, it helps long run growth and helps rebalance the economy.

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8 Responses

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  1. Tom said, on October 29, 2009 at 11:47 am

    On the other hand, the boss of the bus manufacturer ADL is on record as calling for a scrappage scheme for polluting old buses, where we do still have a significant domestic production capability. They’re keen on the idea for exactly the same reason; the alternative is cutting future investment to stay afloat.

    [it also makes bus travel more attractive, so is doubly green. Oddly we already subsidise new alternative fuel/hybrid buses]

    • duncanseconomicblog said, on October 29, 2009 at 11:54 am

      Tom,

      I’d happily back that policy. Firms/government replacing buses is investment – which is what we need to support. Trains too…

  2. dannyboy said, on October 29, 2009 at 4:58 pm

    While I agree with much of what you write duncan you seem to suffer from the same obsession with growth as almost all other economists. i.e. if we invest right growth will always obtain.

    Nope.

    Not if demographics, wage arb or increasing energy costs get in the way, or even if imports simply get more expenseive due to a rebalancing of global demand and purchasing power. The answer to demographic issues seems to be to import more people when we have not got enough jobs for those already here.

    Why must we flog ourselves to death chasing ever tinier amounts of growth rather than do the sane thing which is to configure our economy for the inevitable ending of growth?

    • duncanseconomicblog said, on October 29, 2009 at 5:22 pm

      Dannyboy,

      Demographics is a long term problem. Japn may have had a lost two decades but GDP per capita has continued to grow – i.e. demographics have played a big role in falling GDP. Of course Japan could fix this either through immigration or more participation in the work force from women (very low currently).

      We’ll probably need higher immigration – I agree.

      As for energy – I do worry about peak oil and of course climate change. The world will face resource shortages on the coming decades (or sooner). At risk of sounding like a one trick pony – the answer for me is investment. We need to find viable alternatives.

      I do though think the economy needs to grow, albeit it in a more sustainable manner. Either we grow or the debt burden becomes ever larger. Without growth how do we deal with an aging population?

      • dannyboy said, on October 29, 2009 at 5:54 pm

        “Japn may have had a lost two decades but GDP per capita has continued to grow ”

        Only because foreign borrowers stepped up to suck up japanese savings.

        “We’ll probably need higher immigration – I agree.”

        Noooooooooooo! That is not what I was saying at all. The idea of cramming in another few londons just to chasing vanishing growth or tread water is INSANE. Where will it end? If peak oil is coming along we need less people not more for heavens sake. Growth driven by population growth driven by immigration is a ponzi scheme and will end in tears and starvation.

        “I do though think the economy needs to grow, albeit it in a more sustainable manner. Either we grow or the debt burden becomes ever larger. ”

        What if we can’t grow ad infinitum? Have you looked at the projected pop pyramids for 2030, 2050? The population is dominated by the over 65s and young kids, with the largest single constiuency being little old ladies over 80.

        “Without growth how do we deal with an aging population?””

        Well, you are the economist and my whole point is people like you need to think of a way of dealing with an aging population by targetting a GDP-capita increase even as total GDP falls, or even better, a system that works even if we get GDP-capita and total GDP falls. We could get falls in both but still in theory have a happy country.

        I find it hard to believe that you can’t see any way forward for aging nations like the UK, (which will by 2050 almost 100% certainly be loosing population) except to reccomend MORE GROWTH!! Surely you can put your thinking cap on and come up with something that sounds like it might have at least small chance of succeeding to the end of the century?

        Sorry for the shouting but I feel the need to rant about this.

  3. duncanseconomicblog said, on October 29, 2009 at 6:06 pm

    Dannyboy,

    This deserves a fuller reply. Expect one next week!

    And no probs about the shouting.

    • dannyboy said, on October 29, 2009 at 6:10 pm

      Excellent. I feel much better now :)

      Time to go home and smile at the kids!

  4. VinoS said, on October 29, 2009 at 10:23 pm

    Thanks for linking to my blog post. I do think that, the fact that more consumption will suck in more imports does mean that we need to prioritise _government infrastructure investment_ to boost aggregate demand rather than rely on consumer spending to do it.


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