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Saturday, May 12, 2012

"Incredulous and Horrified"

Jonathon Portes bangs his head against the wall over economic policy in the UK:

Four charts and why history will judge us harshly, Not the Treasury View: When I'm asked in interview or articles to sum up concisely why I think the government should change course on fiscal policy, I usually say something like this:

"with long-term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest. This is not just basic macroeconomics, it is common sense. "

The charts below (click on each to enlarge) try to illustrate this. ...

[P]ublic sector net investment - spending on building roads, schools and hospitals - has been cut by about half over the last three years, and will be cut even further over the next two. Hardly surprising that the construction sector has been a heavy drag on output and jobs recently.

[Source: OBR, March 2012]

But, at the same time, the cost to the government of borrowing money - the real interest rate on gilts - is at historically low levels. Not to put too fine a point on it, the government can borrow money for basically nothing. ...
What does this mean in practice? It means that if the government were, as I suggest, to fund a £30 billion (2% of GDP) investment programme, and fund it by borrowing through issuing long-term index-linked gilts, the cost to taxpayers - the interest on those gilts - would be something like £150 million a year. To put this in perspective, it's roughly the revenue the OBR estimates will be raised by the "loophole-closing VAT measures" in the last Budget. In other words, we could fund a massive job-creating infrastructure programme with the pasty tax.
Twenty, or fifty, years from now, economic historians will look back at the decisions we are taking now. I cannot imagine that they will be anything but incredulous and horrified that - presented with these charts and figures - policymakers did nothing, international organisations staffed with professional economists encouraged them in their inaction, and commentators and academic economists (thankfully, few in the UK) came up with ever more tortuous justifications. In Simon Wren-Lewis' words, they will ask why "a large section of the profession, and the majority of policymakers, appeared to ignore what mainstream macro [and, I would add, basic common sense] tells us". Their judgement will be harsh.

Regarding a recent debate, that sure looks like a form of austerity to me (though the graph begins in 2008 and I'm not sure what a longer series would show). But in any case, the same comments about the need for public investment apply here in the US, and the judgment of history will be just as "incredulous and horrified."

    Posted by on Saturday, May 12, 2012 at 09:06 AM in Economics, Fiscal Policy, Unemployment | Permalink  Comments (72)


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