Wednesday, November 19, 2008


Brown Plays for Worryingly High Stakes

Forgive me if I cannot raise much enthusiasm for Labour's 'recovery' in the polls. Only 3% behind looks better than 20 points but, I'm depressed to note, this has unleashed yet more speculation about a possible election in the spring. Why so miserable? Well, I'm sceptical unfunded tax cuts will do a great deal for us despite the consensus from which Cameron seems to be disengaging. It was a mountain of debt which caused our current problems in the first place and merely adding to it- which these tax cuts most assuredly will do- just does not seem logical to me.

If Gordon's Keynesian solution of an invneted 'fiscal stimulus' succeeds, he will prove the hero of the hour and the financial crisis his very own Falklands crisis which saved and then made Thatcher's reputation. But if the medicine fails to work, there is a run on the pound and a much deeper recession begins to bite those poll figures might represent the relieved false dawn of popularity Chamberlain enjoyed after signing the Munich agreement. I hnope I'm being too pessimistic but right now Brown's gamble is beginning to look a little too reckless I fear.

And instead you would have done... what, Bill? Adopted Cameron's solution of funding tax cuts through public sector cuts? Which ones... the military? Schools? Hospitals? Then with less people in work earning nothing, claiming benefits and paying less tax we get what, exactly?

If taxes are reduced now to stimulate the economy, and then increased to the current levels in 18-24 months time to reduce the extra borrowing, will that be such a hardship?

I don't know, I'm no economist, but providing an alternative analysis should be a minimum requirement to criticising Brown's plans, surely. At least even the Tories are doing that.
I'm not an economist, though hope I have some understanding of the interface between politics and economics, but I'm merely saying I'm doubtful if Gordon's recipe is going to work out. Unfunded tax cuts are what Tories might prescribe si it sits bit ill and there can be no doubt that they will require tax increases to pay for them sometime in the future. There is no guarantee they will work in stimulating the economy as you suggest. I wish I did have an answer; all I'm saying is I don't nedcedssarily think this is it and that it's a big gamble. Surely one is allowed to say that Bob?
We'll need to polls to settle down a bit before we can trust them, but if Labour enters the New Year ahead, the speculation will get silly once again.

On debt, we need to be careful not to accept the Tory line.

The last Tory government made net repayments in four years totalling £17bn. Labour has made net repayments in three years totalling £41bn.

In 1993, the Tories borrowed £51bn. Had borrowing increased in line with inflation and economic growth it would stand at £110bn, but Labour is expected to borrow only £64bn.

As a proportion of GDP, borrowing is at less than half of its 1993 level. This is the more sensible measure; just as a £5k loan is more significant to someone earning £20k than to someone earning £40k.

All this stuff about not putting something aside is nonsense. We can afford to raise borrowing significantly.

That doesn't guarantee success, but it does show that Brown is nowhere near as reckless as the Conservatives would have you believe.
Debate between Keynesians and monetarists is reaching fever pitch, which is a surprising throwback. In the economics trade there aren't really any Keynesians or monetarists any more, but the blogosphere appears to be full of them.

Most empirical studies show that expansionary fiscal policy can have a positive effect on demand over the short term (less than two years) if properly targeted. Much of Japan's spending in the 1990s ended up financing boondoggle infrastructure projects which had little long-term worth and an indirect and limited effect on private consumption.

The government is making the right noises re tax cuts for social groups with a higher marginal utility of income and which are most likely to experience money illusion, specifically poorer people.

So I'm a bit more optimistic than you are, Bill. What's more, Cameron appears to have been wrong-footed politically. For once, politics and economics appear to be moving in the same direction.

boondoggle infrastructure projects

There is a lot of ideological noise being made
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