What was the Fiscal Multiplier in 2008?
Martin Wolf adds his voice to that of those ignoring monetary policy and calling for a splurge of public sector investment spending as the cure-all for demand deficiency:
Yet if not now, when? As Jonathan Portes, director of the National Institute of Economic and Social Research, argues in a recent blog post: “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 macro-economics, it is common sense.”
Jonathan Portes had said on investment:
Meanwhile, public 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.
The answer to “Yet if not now, when?” is pretty simple. We did it already. Public sector net investment went from £26bn in 2007 to £38bn in 2008, then £52bn in 2010.
The capital spending plans laid out in Alastair Darling’s budgets always had PSNI returning to more “normal” levels, with his March 2010 budget cutting from £40bn in 2010-11 to £29bn in 2011-12 and falling even in nominal terms beyond that. (Yes, that graph is in nominal terms – presented as a proportion of NGDP it does not paint a different picture. Deflating using the GDP deflator is probably not the best way to show “real” capital spending, in any case.)
Portes, of course, only presents the post-2008 view of that data, carefully framing the debate as a “slashing” of PSNI. This seems somewhat disingenuous. Must all fiscal “stimulus” in fact be a permanent increase in the level of government expenditure? Is that the argument now?
And what was the fiscal multiplier when the government did engage in that massive “splurge” of capital spending? Oh, that’s right – it coincided almost exactly with the biggest crash in nominal GDP since the 1930s.
Naturally, we will be left with the argument that of course things are different now because of the “zero lower bound” on monetary policy, based on the bizarre proposition that it becomes impossible to raise NGDP (or inflation, or whatever) when interest rates get near 0% – or because monetary policy only works through bank lending or similar gibberish.
And those who continue to ignore monetary policy are blind to the fact that our monetary policy makers are currently actively trying to disinflate, that they see AD growth as “about right” – or perhaps even “too fast” – as dictated by the government’s own inflation target.
To be clear, I have nothing in particular against the government doing capital spending. Maybe it really is “common sense”, though I doubt the Pembury road will ever get priority over the expensive white elephants. But it is insane to pretend we should try to boost AD using fiscal policy whilst holding the inflation target in place.
At least Adam Posen has returned from the dark side.