Monday, 12 August 2013

Ending the obsession with deficit reduction

Most politicians are economically illiterate, preferring homespun wisdom to intelligent macroeconomic analysis.

Thanks to Liberator Collective member Gareth Epps, who (via Mark Pack) spotted an article by Professor Simon Wren-Lewis on his blog mainly macro. Wren-Lewis explains why Nick Clegg’s economics motion at this September’s Liberal Democrat conference is wrong-headed. He summarises the motion as asserting that:
...the best thing that has happened to the UK economy recently has been that the deficit has come down. The message seems clear: reduction of the budget deficit is the number one priority and all else has to be subsumed to that.
Now you might in Clegg’s defense say that he has to put it this way, as he has been part of a government which has made deficit reduction the overriding priority. I think that is simply wrong. He could say instead that the focus on deficit reduction was appropriate given all the uncertainty as the Eurozone crisis broke. However now it is clear that this was a crisis specific to the Eurozone, and with interest rates on UK borrowing really low and likely to stay there, the UK can make reducing unemployment the priority, while still of course operating a prudent fiscal policy in the longer term. In other words, he could begin to de-prioritise deficit reduction. The fact that he chooses to do the complete opposite suggests he is content to see fiscal policy as an extension of household financial management. We will see in September whether the Party as a whole is happy to follow its leader in ignoring 80 years of macroeconomic analysis.
So the conference will be faced with a choice between Clegg’s Tory-lite folk wisdom or intelligent macroeconomic analysis. If ever there were a case for delivering a humiliating defeat to the leader, this is it.

1 comment:

  1. If I have one criticism of this Liberatory blog post it is that you quote the criticism of the motion without also quoting the very interesting alternative Simon Wren-Lewis suggests - more borrowing for investment when borrowing is cheap.


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