So what does lie behind the deficit-reduction mania?
This belongs in the “I’m-not-a-conspiracy-theorist-but..” department. I’ve been reading an interesting blog post by
Simon Wren-Lewis, the Oxford economist, who is as puzzled by the apparent illogicality of the Coalition’s current economic policies as I am. He writes:
I have searched hard to find a macroeconomic rationale for Osborne’s policy stance. A belief that QE is as effective as conventional monetary policy (there is no liquidity trap) comes close, but as I explained here it does not really fit with what Osborne has said (or not said). Osborne is certainly no market monetarist, as he has shown no interest in nominal GDP targeting. So there does not appear to be a coherent case for Osborne’s fiscal proposals that a macroeconomist could take seriously.
Second, the idea that the real motive is a small state is not the preserve of some small group of left wing conspiracy theorists. Here I quote Jeremy Warner, economics editor of the Telegraph (for non-UK readers, a newspaper firmly to the right): “In the end, you are either a big-state person, or a small-state person, and what big-state people hate about austerity is that its primary purpose is to shrink the size of government spending.” He also wrote: “The bottom line is that you can only really make serious inroads into the size of the state during an economic crisis. This may be pro-cyclical, but there is never any appetite for it in the good times; it can only be done in the bad.” I also think many of my non-UK readers will wonder why I am having to justify what is obvious in their countries.
Third, it must have become clear to many people now that reducing the deficit cannot be the overriding priority when there have been so many tax giveaways (50p rate, Help to Buy which creates large contingent liabilities, Cameron’s conference commitments, stamp duty changes that are far from fiscally neutral, pensioner bonds). Putting these down to ‘politics’, but counting spending cuts as ‘economics’, will not wash. (See Brad DeLong for the equivalent in the US). You cannot pretend that deficit reduction is driving government policy, when that driver only operates on the spending side of the accounts.
Economists in the media are beginning to realise this. It is really important that political commentators do so as well, so that those without an economics background get a clearer idea of the nature of the choices they will have to make in 100 days time.
Of course, it’s also conceivable that Osborne & Co don’t really know what they’re doing. It’s been known to happen with British governments.