Cable's terrible excuse

There's one response to this week's poor GDP figures that hasn't had the criticism it deserves. It's this from Vince Cable (5'37" in for the Flanders-phobics):

No one was expecting that the situation across the channel would deteriorate as much as it has done...Everybody concerned under-estimated the enormous damage that had been done to this country as a result of the collapse of the financial system.

As statements of fact, these are reasonable, but as a defence of tight fiscal policy, they stink.

I say this because any sensible future-oriented plan - fiscal policy, business investment, household financial plans, whatever - must ask: would this plan be sensible if things turn out different from expectations? Is it resilient to shocks?

The fundamental fact about the future is that it is unknowable. Any policy which does not start from this premise is stupid.

If a man loses all his money at the roulette table and says "I didn't expect red to turn up" we don't sympathize with him. Likewise, it's no excuse that the euro crisis worsened. A plan that works only if everything turns out well is not really a plan at all.

Of course, the government could not have foreseen the worsening of the euro crisis. But it could, and should, have asked: if the economy is hit by an adverse demand shock, would fiscal tightening make sense?

At risk of sounding like a Monday morning quarterback* the answer to this question is surely: no.

This is not just because such a shock would increase the case against tight fiscal policy. It's because a world of weak growth is one in which investors want to hold government bonds, and thus is a world in which the cause for austerity - to avert a sell-off in gilts - diminishes.

Conversely, sensible policy-making would also have asked: would fiscal austerity be a good idea if we get a positive demand shock? The answer to this would not necessarily be: "yes". Granted, such a shock would see gilt yields rise simply as investors switch into riskier assets. But the sell-off would be mitigated by the fact that unanticipated growth would reduce the deficit more quickly than anticipated. And such a shock would also allow the government to change plan and tighten by more.

These considerations suggest that a sensible fiscal policy would not have been as tight as the one we have. What I'm saying here is just an expression of the Brainard principle - that uncertain policy-makers should tread cautiously.

In this context, Cable's words (if they are sincere, which I doubt) should be shocking. They suggest that the coalition did not undertake basic contigency thinking - that, as Hopi says, policy was based upon hubris and overconfidence. 

* Some American sporting metaphors are good. My favourite is Barry Switzer's "Some people are born on third base and go through life thinking they hit a triple." Which is also relevant in this context.

Comments

[Anonymous]

Hopefully, he and his unprincipled colleagues will be wiped out at the next election.

[Chris Purnell]

Once infaltion was ignored for policy reasons and ultra low interest rates were established policy could have been driven by these two 'unique' events. Why have external funding of infra-=structure if government can borrow at vanishing low rates? The government has failed the Keynes Test i.e. changing their mind when the facts change.

[Keith]

I am not so sure that the euro crisis was unforeseeable. The hard money approach of the euro treaties and policy announcements by ECB officials and German and French politicians seem very clear. The implications for growth are dire. Just like the policy of the British Coalition. The coalition has the same policy as the euro policy elite so they cannot blame johnny foreigner for following their own policy in a slightly different form. Also close attention to the statistics of the euro area show the enormous divergence brought about by the EURO currency. Interest rates set for German economic conditions producing a boom in Spain with huge vanity projects in both the private and public sector. The poisoned dish has been simmering away for years.

Margaret Thatcher and Alan walters seemed to anticipate the problem many years ago. Unlike the Liberals and new Labour with their economic heads up their A*se.

[Donald Pretari]

Good Post.

[Account Deleted]

Re "Cable's words ... suggest that the coalition did not undertake basic contigency thinking". No shit, Sherlock. And when did a political party last do that? Since Thatcher we have been saddled with fools who promote conviction above evidence. To admit ignorance, and the need for analysis, is fatal. Did Major do a contingency analysis re ERM, did Blair/Brown do one re dropping their pants for bankers?

Hopi Sen is hardly a good reference re the dangers of hubris. The man is still selling the same Blairite snake-oil: "It will involve a focus of resources and a renewed religion of priorities. It will mean a politics able to say no more often than it can ever say yes". Nope. It will mean a politics that says work for your own interests.

Labour will not regain power until it delivers power. Delivering to capital and rent-seekers, while buying off labour with public sector investment, will no longer work. It's time to get serious and say yes to labour. (How weird does that sound?)

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