The usual fascinating discussion at the Shadow MPC. Here, for me, is the nub. Or one of the nubs:
Roger Bootle said that business investment would not occur in the face of strong excess capacity. Peter Warburton disagreed and said that businesses do not view investment potential in the same way as macroeconomists do. The potential for profitable investment is large and the faster potential pay back is the main driving factor.
I don’t get the Warburton view. Most of the participants (this is an IEA outfit) advocate: tighter fiscal, more QE if necessary. You know my view; the two need to work together.
Here is Hamish McRae in an unusually vacillating piece:
One theory holds that public spending, financed by borrowing, boosts the overall demand in the economy. The other holds that, beyond a certain point, more borrowing may undermine confidence, and push up interest rates, and accordingly cut private-sector demand. … What is cause and what is effect? Is the UK doing badly because the size of the deficit has undermined confidence? Or is it because we are, for other various reasons, having a serious downturn that the deficit is so large? It will be a bit of both. My own instinct is that the former argument carried more weight, but at this stage it is a judgement that cannot be supported by evidence.
Too right it can’t be supported by the evidence. Look at interest rates. Are LT rates of 4% the problem?