George Osborne continues the sense of strategic confusion about Conservative fiscal policy with a column in the Financial Times today, in which he argues for – surprise surprise – early cuts to the deficit.  Although the conclusions at the end are mild (‘a medium-term fiscal framework, with the first steps starting this year’), the rhetoric is uncompromising – a determination to emphasise the possible virtues of cuts, regardless of whether the conditions are right:

The general notion that delay is beneficial in the short term because it provokes more spending today – irrespective of future debt burdens – is also wrong, in theory and in practice. If the starting position is a large structural deficit, further fiscal “stimulus” can darken consumer and business confidence by creating fears about future debt burdens. These fears may be translated directly into higher borrowing costs today for government and the private economy.

You will have read with avid interest my post on non Keynesian effects, so already know that these things can happen.  More committed fans will have read ‘A Balancing Act’ in which I support  what Maggie et al (boo, hiss) did in the early 1980s, when they uncrowded the economy from government’s clammy control.

But all these qualifiers about what ‘can’ or ‘may’ happen are beside the point. What matters are the conditions on the ground.  Knowing that it CAN work if we have 1976 conditions, or if we are like Ireland and Iceland and too small and open to enjoy much fiscal encouragement, is really beside the point.

There is also the most phenomenal slaughter of straw men. The position opposite Osborne’s is not to say ‘irrespective’ of debt burdens the deficit should rise.  This Labour government is already presiding over the first fiscal tightening amongst any major OECD country.  It is not proposing further stimulus, just a less rapid withdrawal than the Tories (see IFS Green Budget).  Neither is the government arguing that “future job creation can come simply from the public sector payroll”.  All parties by implication expect these rolls to shrink.

While I share Osborne’s suspicion that Brown would have allowed the deficit to take the strain regardless, collapsing demand and zero rates (and beyond?) made this policy right.  A fluke, perhaps?   But the Keynesian view was not: ‘this is always right’ – and in the next two years as growth returns – if growth returns – the conditions for fiscal support will disappear.

Between Brown and Osborne we have two economic and fiscal strategists who seem determined to make policy according to ideal archetypes from their glory days.  For Osborne it is always 1980; for Brown, it is always 1996, and Labour investment versus Tory Cuts.  Thank goodness  we have two empirical pragmatists in Alistair Darling and Vince Cable to hold the sensible middle.  Oh, and that merciless cutter Hopi Sen; see LibCon:

“I believe that a widening of the short run deficit at the moment would be recieved negatively by both the markets and the media, and end up being an expensive and politically disastrous mistake, with little economic benefit”

UPDATE:  I forgot another straw man. Or, in fact, outright misinformation. The column writes “Blaming our predicament on financial markets ignores the awkward truth that governments have enabled if not enthusiastically promoted recklessness, through chronic deficits and lax regulation”.

How does that work?  I thought the overleverage came from rates being too low?  But I thought that deficits made rates too high?  And I thought our deficits were about 2-3% before, and have since become chronic? If the government had run no deficit in 2005, it might have seen LR rates 1% lower, and even more housing and financial speculation. Or are the deficits he means trade deficits that underly imbalances? Mr Osborne, please work out where you stand on this one.


4 thoughts on “Straw men slaughtered in today’s FT

  1. I think you might be giving George Osborne too much credit by looking for an economic rationale for that last straw man. What he’s trying to do is plant the seed of thought in the public mind that government deficits now and private sector recklesness during the credit bubble can be equated and that both are equally undesirable. It It looked like the penny had dropped in Osborne’s Mais lecture when he said: “While private sector debt was the cause of this crisis, public sector debt is likely to be the cause of the next one”. But he’s clearly back to beating the same old tiresome and misleading drum.

    1. I have tried to give as much benefit of the doubt to Osborne et al, even going so far in A balancing act as to say that while their rhetoric was all ‘cut now’, they would probably not have done so, given what the IMF was saying, which now seems extraordinarily generous; I allowed Osborne’s “we must let the automatic stabilizers function” be wonderfully extended into full Keynesian sensible-ness. There seems to be so much exaggeration of the opponent’s view on the blogosphere that I wondered whether there was a competitive advantage to be gained by being fair minded.

      But you are probably right – and thanks for reminding me of the Mais lecture. What I don’t get is what Sachs is getting out of this relationship ….

  2. It reads to me like Osborne wrote the first half of the article (“We can’t expect ‘credibility’ by succumbing to temptation just one more time”) and Sachs the second (“the public sector has a critical role in ensuring that the conditions for sustainable growth are in place”). Very odd.

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