Saturday 26 January 2013

The turn of the economic policy tide? Or maybe not..

Nick Clegg now admits that the cuts in the coalition's investment expenditure may have been too severe, a Tory MP on BBC 1's "Question Time" agrees with him, Boris Johnson calls for an end to the "austerity rhetoric"  and the figures show that for the last quarter of 2012 the UK economy shrank.

In any sane world this would now lead to an urgent  reversal  of economic policy.  Keynesians, from this humble blog to distinguished  Nobel prizewinners, have been saying  for the last two and a half years that the austerity programme would lead to economic stagnation or worse, others, including the IMF, have eventually  joined in the chorus, and the results confirm our views.

There is no economic difficulty in reversing the policy.  My own version of a plan B  was published on this blog in August 2011 and I stand by it.  Briefly, and with one or two modifications in the light of current circumstances:

  • projects for the improvements of the existing infrastructure (filling up the many potholes which will be left when this snow melts, improvements to the northern rail network, expenditure on schools and hospitals, measures to clean up the beaches, countryside and   urban areas.) These would have a much more immediate Keynesian multiplier effect than fancy projects such as the HS2 railway, where much of the early expenditure goes on land purchases and lawyers' fees;
  • massive investment in housing, both improvements to make empty properties habitable and new housing  on sites where planing permission has already been given.  There is absolutely no need for scrapping planning regulations to stimulate the housing industry.  What is lacking is the demand.  This can be stimulated by a combination  local authorities house building for letting, along with affordable mortgages from one of the largely state-owned banks;
  • reversal of cuts to the probation, revenue collecting,  border agency and other essential public services;
  • investment in green technologies and energy sources;
  • investment in  universities and the arts,  sectors  where the UK still has international competitiveness;
  • expansion of genuine craft based apprenticeship schemes and technical training;
  • a cut in VAT back to 15%, balanced by a land value tax, or its less comprehensive  poor relation, a mansion tax.
No problem if the government had the will.  I hope it is not true (I know a lot of Conservatives who are really very nice and well-meaning) but, given Osborne's arrogant refusal to face the evidence and change course, it is hard not to suspect that the Cameron-Osborne strategy has not failed but succeeded:   that their real policy is to roll back the sate and hand over more and more provision to a profit hungry private sector, and that they  have used  "unavoidable austerity in order to austerity to the deficit"  as a heaven-sent excuse.


  1. Does public spending ever increase private sector growth?

    If you look at the actual data, it is surprising see: Sydenhams Law of public expenditure and GDP growth

    Whether the public spending is for wars, economic intervention or welfare the answer is NO, furthermore the New Deal seems to have been a myth, there was a strong private sector recovery in the USA before the New Deal.

  2. Thanks for your comment John, and apologies for taking so long to respond.

    I've looked at the site you recommend and the graphs certainly seem very convincing. I have neither the time nor the expertise to check on the interpretations myself and have looked for peer reviews of the findings., but failed to find any. Do you know of any?

    The claim is for "crowding out": that public expenditure crowds out private investment This is a concept popular with monetarists but for which, according to my textbook, the evidence is "scanty." Certainly, if the reverse is true, that a cut in public expenditure gives space for the private sector to expand and fill the gap, which is Osborne's thesis, then after two and a half years nothing much has happened as yet.