I find myself asking the question: "what is work?" I have narrowed it down to two definitions:
1. Raising ten kids in one house on benefits.
2. Writing an article for a tabloid newspaper about how the parents raising ten children in one house on benefits "have never worked a day in their lives".
Friday, October 01, 2010
Because I had some rudimentary training in economics, people often ask me about questions about areas of economics I do not know a huge amount about. I know more than, say, my parents, or probably the average Oxford PPEist (concerning, given the education of most of the front bench of both government and opposition, so let's hope experience counts for something). Large swathes of macro policy often fall into this category.
So when people ask me about the current government's deficit reduction plan, I tend not to have a definitive answer. As far as I see it, the basic argument for deficit reduction now (rather than in two years, say) is that the size of our debt has created an atmosphere of uncertainty in the UK amongst consumers and business, maybe about the timing of future tax hikes, possibly about a Greek-style default (although this is silly). Anyway, confidence is low, so reducing the deficit and (eventually) the national debt in a transparent way may restore some certainty and allay the worst of these fears and get people spending again. Government spending, if too large, may "crowd out" private sector spending, which may be undesirable - there is no guarantee that government spending is the best (most efficient, most wealth-creating) type of spending.
To me, the flip side always seemed to be more tangible. A spending cut (which isn't one of those politically convenient efficiency savings) takes money away from somebody - either an employee of the government, or someone who sells something to the government. That's somebody who goes out and spends less money, either because they no longer have a job, or their business has lower profits. Less spending has a knock-on effect - if a large group of government employees are laid off, and all of them reduce their spending, that's leads to other business earning less revenue. Maybe some of those businesses have to let some staff go because they just don't have as many customers as before. And so on. It's called the multiplier, and it's been known about since Keynes.
The reason that I dither is that evidence is limited and, even if there are lessons from the past, they may not apply to this particular moment in time as easily. This recession is special, both in origin and in depth and length. However, the Economist this week drew my attention to two very different recent papers giving some indication of the possible effects. The first they describe as the intellectual justification for many government's programmes of deficit reduction - published by two Harvard economists, it finds adjustments to the structural deficit lead to short-term growth (increases in the national output). This is great news for Mr Osborne and Mr Cameron, who were also boosted last week by the IMF's backing of their "bold" deficit reduction plan. This approval is all the more surprising when you see that the second paper picked out by the Economist this week was written by the Fund itself. They have severe criticisms of the methodology of that Harvard study, which, when corrected using their own data on deficit reductions, reverses the conclusion.
Firstly, they find deficit reduction of 1% leads to a 0.5% fall in national output, and a 0.3% increase in unemployment. Secondly, deficit reduction by spending cut is less severe - however, this has usually be accompanied by lowering interest rates at the same time. It's worth noting that in the UK's current situation, there is ZERO scope for doing this, as the base rate is, to all intents and purposes, as low as it can go.
As I say, the current set of circumstances are special, so this is by no means conclusive, and actual answers will only be known looking backwards. In fact , if you ask me about it at some point down the line... well, I'll still dither. But I'll have a more pessimistic face on.
So when people ask me about the current government's deficit reduction plan, I tend not to have a definitive answer. As far as I see it, the basic argument for deficit reduction now (rather than in two years, say) is that the size of our debt has created an atmosphere of uncertainty in the UK amongst consumers and business, maybe about the timing of future tax hikes, possibly about a Greek-style default (although this is silly). Anyway, confidence is low, so reducing the deficit and (eventually) the national debt in a transparent way may restore some certainty and allay the worst of these fears and get people spending again. Government spending, if too large, may "crowd out" private sector spending, which may be undesirable - there is no guarantee that government spending is the best (most efficient, most wealth-creating) type of spending.
To me, the flip side always seemed to be more tangible. A spending cut (which isn't one of those politically convenient efficiency savings) takes money away from somebody - either an employee of the government, or someone who sells something to the government. That's somebody who goes out and spends less money, either because they no longer have a job, or their business has lower profits. Less spending has a knock-on effect - if a large group of government employees are laid off, and all of them reduce their spending, that's leads to other business earning less revenue. Maybe some of those businesses have to let some staff go because they just don't have as many customers as before. And so on. It's called the multiplier, and it's been known about since Keynes.
The reason that I dither is that evidence is limited and, even if there are lessons from the past, they may not apply to this particular moment in time as easily. This recession is special, both in origin and in depth and length. However, the Economist this week drew my attention to two very different recent papers giving some indication of the possible effects. The first they describe as the intellectual justification for many government's programmes of deficit reduction - published by two Harvard economists, it finds adjustments to the structural deficit lead to short-term growth (increases in the national output). This is great news for Mr Osborne and Mr Cameron, who were also boosted last week by the IMF's backing of their "bold" deficit reduction plan. This approval is all the more surprising when you see that the second paper picked out by the Economist this week was written by the Fund itself. They have severe criticisms of the methodology of that Harvard study, which, when corrected using their own data on deficit reductions, reverses the conclusion.
Firstly, they find deficit reduction of 1% leads to a 0.5% fall in national output, and a 0.3% increase in unemployment. Secondly, deficit reduction by spending cut is less severe - however, this has usually be accompanied by lowering interest rates at the same time. It's worth noting that in the UK's current situation, there is ZERO scope for doing this, as the base rate is, to all intents and purposes, as low as it can go.
As I say, the current set of circumstances are special, so this is by no means conclusive, and actual answers will only be known looking backwards. In fact , if you ask me about it at some point down the line... well, I'll still dither. But I'll have a more pessimistic face on.
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