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.