I am half way through Vince Cable’s paper on the fiscal situation. Now, I know you expect a liberal economist to say this, but I’ll say it anyway: it is brilliant, by far the most lucid, forthright and above all educational piece on the fiscal situation so far. This is sad for me, because I had hoped that my effort might squeak into top place, for a while.
There is plenty of debate or abuse about Nick’s more political-philosophical effort in the Blogosphere, while fiscal attention has focussed on the somewhat trivial question of leaked Treasury documents pointing out the mathematically obvious. This is a pity, although Nick’s effort deserves a lot of debate. For, in truth, political philosophy is very interesting, particularly for Westminster types who’ve spent their whole lives arguing about it: but the fiscal appraoch is what will define policy possibilities in the next few years.
Vince writes well, an seldom-noticed but vital fact given the nature of his subject matter. Here are some excepts:
The idea that the semi-nationalisation of RBS has increased public debt from 80 per cent to 230 per cent of GDP makes debt measures largely meaningless from a policy standpoint.
There are two broad approaches to the current fiscal crisis which reflect both party political differences and differences of economic philosophy; one is fairly relaxed and plays down the seriousness of the problem; the other is more apocalyptic and shades into hyperbolic language about “national bankruptcy”. As is often the case, Britain’s dialectic approach to debate and political allegiance obscures the fact that the truth is somewhere in the middle.
His commentary on fiscal and monetary policy is an excellent education for the financially and economically illiterate on the Right who want to judge the whole thing “morally”. (and if you think Fraser sees things a bit simplistically, read the comments below: they make him looks a Treasury Mandarin of perfect equanimity)
Some of the conditions which led to Keynes’ original analysis are undoubtedly present. Monetary policy has been actively and aggressively used but may not be adequate to sustain demand at a level consistent with something like full employment. Interest rates have been cut to near zero. Money supply has been expanded by means of quantitative easing but, so far, appears to have been largely hoarded as liquidity by banks: the “liquidity trap” as Keynes described it.
The Keynesian remedy is the use of a deliberate fiscal stimulus to supplement monetary stimulus. Such a stimulus raises output and employment (together with government tax yields) and thereby “pays for itself” in economic terms. In fact, despite the strong advocacy, defence and criticism of “Keynesian” measures the UK has used very little discretionary stimulus and monetary policy has been much more important. The much hyped and debated VAT cut, together with the acceleration of capital projects amounted to just over 1 per cent of GDP and is to be reversed in 2010-11.
He deals swiftly and dismissively with the Ricardian/Crowding-out-crowd who fail to understand the nature of expectations or the dynamics of a deflationary bust. His simple 2X2 for future policy possibilities is an excellent heuristic
Finally, he explains why spending cuts, not tax rises, need to take the lead:
That emphasis is right. That is not because public spending is inherently undesirable . . . In the UK public spending has been allowed to grow very rapidly on the back of what was a windfall in tax revenue. Tax revenue depended to an unhealthy degree on a “bubble” economy in financial and housing markets. Much of that revenue has now been lost and, though it may return in part
and at some stage, it would be foolish to base future spending commitments upon it. (and while there is a case for some tax rises) to commit to additional tax revenue raising from the outset undermines any commitment to setting priorities in spending.
Vince’s role in this bust has been of the Great Educator to the British Public. Reflecting on how little his huge popularity has rebounded on the Party, some have wanted him to be more of a dirty partisan fighter. But educating the public is an important role, and reemphasises in the minds of the thoughtful that we would be better off with this man as Chancellor. And who knows? The Conservatives are not as strong as Labour were in 1997, by some way:
And, psephalogically, the voting system is still anti-Tory – more votes to win a Conservative seat. You never know!