Sunday, 26 October 2008

You can't spend your way out of a recession

No sir, that has been tried many times before.

I have been dismayed by the lack of criticism of Darling's plans from economists, at least until today. The Telegraph carried this short but welcome letter. It is from a group of leading economists who describe the Government's spending strategy as "misguided and discredited".

Read on.....

It is misguided for the Government to believe that it knows how much specific sectors of the economy need to shrink and which will shrink "too rapidly" in a recession. Thus the Government cannot know how to use an expansion in expenditure that would not risk seriously misallocating resources.

Furthermore, public expenditure has already risen very rapidly in recent years, and a further large rise would take the role of the state in many parts of the economy to such a dominant position that it would stunt the private sector's recovery once recession is past. Occasional slowdowns are natural and necessary features of a market economy.

Insofar as they are to be managed at all, the best tools are monetary and not fiscal ones. It is inevitable that government expenditure and debt naturally rise in a recession but planned rises in government spending are misguided and discredited as a tool of economic management.

If this recession has features that demand more active fiscal policy, which is highly disputable, taxes should be cut. This would allow the market to determine which parts of the economy shrink and which flourish to replace them.

Personally, I would have liked to have seen more emphasis on monetary policy, which I believe is also misguided. Nevertheless, a robust attack on Darling's expenditure plans is a start.


aSteve said...

Monetary policy is not misguided, it is simply missing in action.

Mark Wadsworth said...

I dunno. How about 'spending' that money on tax cuts?

mike said...

I think spending money on tax cuts in the right places is the best way forward. I saw this suggestion on a message board and makes sense. GB is already thinking about this (apparently). Perhaps reducing VAT on essential items to help would be a direct way to help the poorest. Also increasing VAT on non-essential items such as boats, tv's, etc:

dearieme said...

Send everyone a rebate on the income tax they paid in 2006-07.

Mitch said...

I would think that VAT rates and rules are set by the EU and because our idiot leaders love it that's a none starter.
From a purely common sense approach there are lots of ways of reducing the tax on the lower paid which would encourage them to spend but politically gordon cant do it.So its blinkers on,fingers in ears and headlong to oblivion.

Anonymous said...

These economists deal in half-truths; unemployment costs money, and the dislocation caused by building, building supply and haulage companies going bankrupt loses taxes and does long-term damage to the economy.

The local government obligation to rehouse homeless families caused by e.g. repossessions is very expensive for the taxpayer.

So there's a strong argument for the government taking a lead in keeping house-building going. It's labour-intensive, and still very needed.

And, as any motorcyclist knows, many of our roads are so pot-holed and badly patched that they badly need serious attention.

What's wrong with some infrastructure attention that will close the gap with our continental neighbours re. our poor quality housing stock and ghastly roads?

B. in C.

James said...

Didn't we try to spend our way out of trouble in the 1970s?

Anonymous said...

I remember a letter written by a bunch of tosspot economists in the 1970s. They criticized thatcher for being too tough on inflation. Where are they now, I wonder.

Anonymous said...

I think the 70's are irrelevant in the present crisis - we do not have the same inflation problem - the relevant analogy here is the 30's, when too much hard money policy helped force a destructive deflation. Think Hoover dam, think whole swathes of the US in which houses were virtually worthless - that's what happened in the 30's and is knocking on our door.

This bubble is way, way worse than the others since the 70's; this is the 1930's coming round again.

B. in C.

Nick von Mises said...

That fraudster Keynes has a lot to answer for. He's given an intellectual fig-leaf to all kinds of despicable state theft and largesse in troubled times

electro-kevin said...

We were a far hardier, prouder and more pragmatic people in the '70s for a start.

Anyone remember the Bay City Rollers ?

Anonymous said...

Electro-Kevin, cheap flights only started in 1975, that was probably why.
The British people have always had the government they deserve, the problems of the 70s were because too many people had their hand out doing fake jobs. Same as today.
Whatever happens we voted for it. (not me personally).

Mark Wadsworth said...

Dearieme for once misses the point. Retrospective tax rebates are silly. Cuts in future tax rates will encourage people to work harder/invest more wisely in future.

Art Laffer (who has his detractors) explained all this donkeys' years ago.

Anonymous said...

One of the many problems is that we now have a press/government/people who think that an economy runs on spending and consumption and not saving and production.

Coupled with the fact that low interest rates cure more ills than Viagra (and no glass of water required) and I can see decades of flogging a dead horse.

And the wrong dead horse to boot...

APL said...

Mike: "Perhaps reducing VAT on essential items to help would be a direct way to help the poorest."

Two things: VAT is the European Union tax, Neither Brown nor Darling can change it without interminable discussions with Brussels, that means years not weeks.

Second. The poor are getting plenty of help from the benefits system already. Not many poor employ anyone, other than indirectly through the government benefit office.

Mike: "Also increasing VAT on non-essential items such as boats, tv's, etc:"

Tokenism! As such redundant. Tell me, the stock market has just dropped by one third, even folk who you might have thought of as rich, are selling assets. Not too many people are buying stuff, boats are the least of priorities.

Cut tax, the government should put 2 fingers up at the EU and zero rate the UK for VAT.

Markbaldy said...

Anonymous said "One of the many problems is that we now have a press/government/people who think that an economy runs on spending and consumption and not saving and production."
I agree - the root of the problems is that the UK economy is based on consumer spending... of borrowed (not earned !!!) money.
This is ONLY possible if their main asset goes up in value and people borrow against that... that is why Brown is desperate to kick start house price inflation (again)... he will bankrupt the UK in doing so.

Anonymous said...

Successive uk governments have relentlessly encouraged and enabled the indiscriminate increase in asset values by falsely stimulating demand and falsely restricting supply .
I do not however believe we have reached the final disaster that some predicate.
The current bubble is similar to that of the 1930’s in that property , real interest rates , and production are sychronised in decline for several years possibly . However the underlying trend is contrary to this decline unlike the 30’s .It seems quite likely that the final and awful global disaster will be visited upon our grandchildren in the mid 2020’s unless there is some fortunate intervention however unlikely it may seem.
Appropriate , appropriate , appropriate has been without question the code of ethics that has generated these periodic disaster situations . It seems reasonably certain that in a matter of several years from now we shall enter a global boom period of unprecedented and epic proportion.leading to an ultimate unrecoverable global disaster .
In the meantime the only viable short term remedy would seem to be the adoption of a device that would effectively put the clock back in such a way as to serve everyone’s perceived vested interest . This can be done and would give considerable respite and could possibly considerably delay the eventual decline of the global system .

Anonymous said...

It will all end in tears.