Three must reads
Just three links today I’m afraid.
Two of these aren’t new, but were published whilst this blog was “on a break”. In each case I’ve pulled out some highlights but I would seriously recommend reading all three in full.
First up Chris Giles, writing back in March on the FT money supply blog, on the debate around fiscal policy. A superb and very balanced piece:
In this big debate, there are two sorts of people: fundamentalists and equivocators.
The fundamentalists include almost all politicians. Gordon Brown insists fiscal tightening now is dangerous for the recovery. On the opposite side, the equally fundamentalist David Cameron asserts that the truth lies with the reverse argument. “To get the economy moving you’ve got to lift the black cloud of the deficit,” he says repeatedly. Business organisations, such as the CBI and IoD are fundamentalists. And many economists have also been overcome with fundamentalist tendencies, as evidenced by the spate of letter writing to newspapers.
The other group are equivocators. These people are reasonably sure there needs to be a credible plan to reduce the deficit, but are unsure about its timing, its effects, and whether history tells them very much. Many Treasury officials I know are equivocators, so was the recent Green Budget from the Institute for Fiscal Studies, so are significant elements of the Monetary Policy Committee and, to my surprise, so is the governor of the Bank of England. Mervyn King is often portrayed as a fundamentalist on fiscal policy, but his answers at the latest Inflation Report (pages 7 to 9) can be summarised as: ‘The effect of fiscal policy on the economy? Well, it depends’. I am also firmly in the equivocators’ camp.
Although I might occasionally sound rather fundamentalist on this blog, I am actually far more of an equivocator, my arguments yesterday on the danger in a four year timetable reflect this. It would probably be too fast, there is a chance it may be too slow. It all depends on the state of the economy, and setting a timetable based on your forecast of the economy 36 months out seems to me to be inviting problems.
Staying on the same debate, Barry Eichengreen, a noted macreconomist and economic historian, has an article on this topic today:
Finally there are borderline cases, like Britain. Chancellor of the Exchequer George Osborne insists that his country’s fiscal trajectory is dangerously unsustainable, and he has proposed draconian cuts. Others strongly disagree, noting the continued low level of interest rates, and that even under the previous government’s plan, net borrowing costs were already scheduled to fall by nearly two-thirds between 2010-11 and 2014-15.
It is almost as if governments like Britain’s are attempting to manipulate the private sector into believing that the dire conditions required for an expansionary fiscal consolidation have already been met. It as if they are trying to terrorize the private sector, so that when the fiscal ax actually falls, consumers and investors will be sufficiently relieved that disaster has been averted that they will increase spending.
If so, leaders are playing a dangerous game that depends on encouraging more future spending by exciting consumers and investors now, while depressing actual spending just when it is most urgently needed.
Or maybe politicians don’t believe any of this and are simply intent on cutting spending for ideological reasons, irrespective of the economic consequences. But who would be so cynical as to believe that?
Last, but certainly not least, I highly recommend John Ross’s article from a few weeks back on the global nature of the collapse in investment and the drivers of the recession.
‘Decline in fixed investment accounts for approximately 96% of the fall in GDP in the OECD area as a whole and for 76% of the decline of GDP in Europe. In three countries – the US, Spain, and Portugal – the decline in fixed investment was greater than the decline in GDP. In Japan, France and Greece the proportion of the fall in GDP due to the decline in fixed investment was over 70%, 80% and 90% respectively. In every country except Germany the fall in fixed investment was the single biggest component of the decline in GDP. In short the decline in fixed investment entirely dominates the Great Recession’