Home > Fiscal Policy, Monetary Policy > Chris Giles Gets It

Chris Giles Gets It

The excellent Chris Giles is worth his weight in FT subs:

This week Ed Balls, shadow chancellor, again said: “Cutting spending and raising taxes too far and too fast has backfired, with the resulting slow growth and high unemployment meaning the government is set to borrow an extra £150bn.”

Let’s apply his logic and calculations to an earlier period. In late 2008 Labour cut taxes and raised public spending and this too-far and too-fast “fiscal stimulus” resulted in an unemployment surge, meaning the government had to borrow an extra £273bn. How can you generate such a glaring contradiction as to the effects of fiscal policy?  Simple. The calculation is an irrelevance because, guess what, other things affect the economy as well. Blaming changes in deficit forecasts on the pace of austerity alone is not worthy of a serious politician.

There’s more good stuff in there.

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  1. Tom C
    May 23, 2012 at 21:01

    Well, up to a point, Lord Copper.
    Obviously other factors influence the deficit, but given the situation in 2008, and the situation now, what’s the right thing to do?
    Accusing Balls of not being serious, because he didn’t go into wonkish detail in a public speech, is at best naive. I must admit I haven’t tried to breach the paywall so I may be totally unreasonable here, but it sounds to me the only fault Ed Balls is guilty of is not going into more macro economic detail, and frankly, he’s trying to get heard outside econ blogs.
    Osborne’s cuts are the wrong policy, and they’ve caused the deficit to increase. Yeah, there’s a whole bunch of other stuff going on, but Osborne’s made it worse.

  2. May 23, 2012 at 22:51

    Hi Tom – there’s a lot to respond to there. I take the Market Monetarist position here: the cause of the current UK demand deficiency was bad monetary policy in 2008, and the solution will be in good monetary policy, specifically in targeting a higher level of nominal GDP, rather than the CPI rate. And fiscal policy is mostly irrelevant to aggregate demand management whilst the Bank of England carries on targeting a 2% CPI rate.

    The blame game is complicated. If we blame Osborne for bad aggregate demand management in 2011 (which is not totally unreasonable), I think we should blame Alistair Darling for bad demand management in 2008.

    As to the deficit, you’ll have to be more specific on what you mean. The current data have the deficit falling as a % of GDP in 2011/12 vs 2010/12 (from 9.3% to 8.2%).

  1. May 25, 2012 at 11:38

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