« Happiness inequality & divorce | Main | Productivity slumps »

February 15, 2011



Isn't Osborne just implementing the kind of plan advocated by Scott Sumner? That is, he's holding down fiscal spending and placing responsibility for economic growth on the shoulders of the BoE.

Osborne's belief is thus as follows:

The BoE has a target level of growth, (some balance of inflation and unemployment; Sumner would propose simply targeting NGDP). If, for any reason, including fiscal policy, the economy deviates from the BoE's target, the Bank is responsible for ensuring that it returns to it. It is assumed at all times that the economy is growing as the Bank wants it to, or that the Bank is actively taking measures to ensure that it does.

With this assumption in mind, if the Treasury boosts economic growth by running a higher deficit, the BoE will implement a tighter monetary policy to compensate. This makes Keynesian fiscal stimulus ineffective. The corollary of this is that Osborne is also free to slash spending to levels where fiscal policy is having a negative effect on growth, safe in the knowledge that the BoE will respond with looser money.

This is a bold idea, given that it relies on the BoE being able to provide the necessary growth. But if it works, it changes the game in terms of fiscal policy: it removes the argument that government spending can be justified on purely stimulatory grounds. It means that all government spending would be subject to a simple cost/benefit test with no macroeconomic considerations whatsoever. I would imagine that Osborne's strategy is to demonstrate that activist fiscal policy is unnecessary for economic growth, followed by the proposal for some kind of balanced budget rule (or similar) to "lock in the hard-won benefits of austerity" or some such. I don't know nearly enough macroeconomics to know if this is remotely sane, or even if my reading of the situation makes sense, as I'm looking at it purely as a political strategy (and from this perspective it looks like a pretty neat trick).

Ralph Musgrave

Chris, You are normally clued up politically. The idea that there is anything remotely as complicated as the above going on in Osborne’s head is an uncharacteristic bit of political naivity.


Osbourne is applying the theory that you should lie and lie and lie some more.

Every event will be explained in terms of how clever Osbourne is to have become the new Philip Snowdon and how cutting spending is a universal panacea for every ill proscribed by Dr. Cuts.

If you keep telling the lie frequently enough everyone will believe it.

I agree by the way that the supposed long term advantages of Consolidation or austerity are wihout any convincing justification in terms of theory. Rational expectations seem to always produce the results the author thinks are "rational". And depend on so many assumptions that cannot be falsified or proved as to make the exercise futile. At least as an attempt at science. So a very large range of levels of borrowing may be equally good or bad for the economy over time.

Should not the Government worry about the real harm caused now by cuts to people; rather than remote dangers connected to financial management of the state finances that economists all disagree about?


I tend to agree you are over interpreting this, Chris, but I find Rob's comment above pretty iinteresting as a hypothetical rationalization. Have to dust off the manuals on instruments and targets.

The comments to this entry are closed.

blogs I like

Why S&M?

Blog powered by Typepad