In my previous post, I pointed out that, given the inflation target, a less tight fiscal policy implies higher official interest rates. This means that the choice between the two main parties isn't just about fiscal policy, but about the fiscal-monetary mix: Labour offers looser fiscal and tighter* money than the Tories. Which poses the question: what should be the right mix?
Simon is, of course, right:
It is stupid to commit to further significant fiscal contraction (‘austerity’) when interest rates are still at or close to their lower bound. It means we become more vulnerable to adverse shocks to demand.
Let's suppose, however, that the OBR's forecasts are right and that the economy can grow decently and that inflation will rise even with a tight fiscal policy: this is, of course, a strong assumption as economies are inherently unforecastable. If this is the case, we might well be pulling away from the zero bound midway through the next parliament; markets are pricing in a 1.5% Bank rate by 2017.
Which poses the question: what should be the policy mix then? If we could achieve the same growth and inflation with different fiscal-monetary mixes, which mix should we prefer?
The argument for fiscal tightness is straightforward. We need to stabilize or reduce the debt-GDP ratio sometime. Intergenerational equity counts for something, and there's a risk that global real interest rates will trend up, adding to debt service costs. There's also a case for raising real interest rates: a long period of low rates risks creating a social norm against saving.
There are, though, three issues here.
1. Inequality. For a given level of unemployment, loose money and tight fiscal policy might generate more inequality. This is because loose money raises the prices of assets, which are - by definition - held by the rich. Also, the burden of fiscal austerity is likely to fall upon welfare claimants. (Yes, many of the poor are in debt - but the interest rates they pay aren't related to Bank rate.)
This, though, isn't a knockdown argument. If a loose money/tight fiscal mix does have adverse effects on equality, the solution lies in changing taxes and benefits - not necessarily in altering the policy mix.
2. Secular stagnation. If low interest rates stimulate productive capital spending, they are to be welcomed. However, if there's a dearth of monetizable investment opportunities, low rates might instead fuel bubbles and malinvestments. In such a world, looser fiscal policy might be preferred precisely because it would crowd out the private sector.
Again, though, it's not clear how relevant this is. On the one hand, the housing market seems to be cooling and the stock market isn't in a bubble: if it were, I'd have retired by now. But on the other hand, the fact that business investment fell in Q3 suggests that real investment opportunities might still be limited.
3. Practicality. One argument against a sharp tightening is that it implies cuts in public spending which are too big to be credible. A slower pace of cuts would have the virtue of giving the government time to research ways of improving efficiency; make the organizational changes which could deliver services more cheaply; and create more of a political consensus on which functions the state should relinquish.
Now, I don't have especially strong views here. Which is my point. The best fiscal/monetary mix depends upon the context. As Edmund Burke said:
Circumstances (which with some gentlemen pass for nothing) give in reality to every political principle its distinguishing colour and discriminating effect.
I fear, though, that my view is a minority one and that many others' positions (on both sides) are more fixed. But then, that's the thing about us Marxists - we are so much less dogmatic than others.
* By tighter money, I mean a higher real Bank rate. I find arguments about the definition of "tight" money tiresome.