Oxford University Professor Simon Wren-Lewis reckons George Osborne is determined to continue his ‘Starve the Beast’ policy of shrinking the state – no matter who it harms – by continuing his “scarcely credible”, “illiterate” policies that “virtually no-one wants”. Writing in his Mainly Macro blog, he tells us:
Yesterday I spoke at the Resolution Foundation’s launch of their analysis of the UK political parties’ fiscal plans post 2015. I believe this analysis shows two things very clearly.
First, there is potentially a large gap between the amount of austerity planned by the two major parties.
I would add one other charge – Osborne’s plans are illiterate in macroeconomic terms.
The UK economy desperately needs more growth. There remains plenty of slack in the labour market, and real wages are continuing to fall. This and the inflation numbers tell us that the problem comes from the demand side. Yet monetary policy can do very little about this lack of demand, because interest rates are at their lower bound and – judging the Bank’s actions – the power of QE is largely spent. This is not a short term problem that is sure to disappear in a year. The risks that world developments will make the problem worse are real – as David Cameron has recently warned.
In this situation a Chancellor should not plan to reduce growth further. I have yet to come across a single macroeconomist who argues that Osborne’s plans for renewed austerity will not in themselves reduce aggregate demand. So doing this when the recovery could go much further but is still fragile is just plain dumb. It is even dumber if you have done this once before, in a very similar situation, and the risks I outlined above have indeed materialised.
So why is the Chancellor proposing to make the same mistake twice? My problem is that I cannot come up with a coherent macroeconomic explanation that fits his words and deeds. So let me list three possible justifications and why each fails.
You’ll have to visit Mainly Macro to see who those justifications are. Back to Professor Wren-Lewis for his conclusion:
I cannot think of any way to rationalise what the Chancellor is planning in macroeconomic terms. But perhaps I’m looking for something that does not exist. Perhaps he does not have a coherent economic framework. Instead he has a clear political framework, which has so far been remarkably successful. The goal is to reduce the size of the state, and because (with his encouragement) mediamacro believes reducing the deficit is the number one priority, he is using deficit reduction as a means to that end. However another priority is to get re-elected, so deficit reduction has to take place at the start of any parliament, so its impact on growth has disappeared by the time of the next election.
But this explanation would imply we have a Chancellor who quite cynically puts the welfare of the majority of the UK’s citizens at major risk for ideological and political ends, and I do not think I have ever experienced a UK Chancellor (with possibly one exception) who has done that. But as Sherlock Holmes famously said …
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