I can’t get enthused one way or the other about Ed Balls’ call for a temporary cut in VAT. This is because of a more general point - I’m not sure just how much good or bad any feasible macroeconomic policy can do.
I say so for four reasons:
1. Balls’ proposal is, as Duncan says, “modest”. But modest policies generally have modest effects. Although a temporary VAT cut might raise demand, would employers really take on more workers in response to this, or undertake expensive expansion?
A similar thing is true for monetary policy. It’s insufficiently appreciated that the sort of interest rate moves considered by the MPC would have very small effects.
2. From the mid-90s to mid-00s, a mix of macroeconomic policy and good luck gave us low inflation and stable growth - the best outcomes that macro policy can feasibly achieve. But even at its low point unemployment, on its wide measure, barely fell below four million. And business investment, at least in current prices, was weak. This all vindicated a point made (pdf) by Ed Balls himself back in 1997:
Macroeconomic stability may not be sufficient to deliver the government’s growth and employment objectives.
3. “Successful” macro policy might be inherently self-defeating, as Hyman Minsky pointed out. This is because stable growth and low inflation might lead to speculative financial bubbles before they generate full employment. This in turn might cause a financial crisis or - depending on the policy response - tighter policy even at a time of quite high unemployment.
4. Even if macro policy could technically generate full employment, governments might not be able to follow such policies. This is because as Kalecki said back in 1943, these would not be in the interests of a capitalist class which needs unemployment in order to depress workers’ militancy.
5. There are lots of very important things that monetary and fiscal policy cannot do: up-skill the workforce, create a sustainable entrepreneurial spirit, or reliably increase the rate of (profitable) technical change.
Now, I don’t say all this to mean that monetary and fiscal policy are completely irrelevant. It’s just that they are - within reasonable parameters - second-order issues. For example, I am sceptical about Osborne’s deficit reduction plans not because I think fiscal policy can make the difference between triumph and disaster, but rather because I don’t think the economy here and now is sufficiently healthy to take such medicine.
For me, the really important issues concern that underlying health - the reluctance of capitalists to invest and hire - rather than small tweaks to macro policy.