Sunday, June 29, 2014

Chris Dillow — Fiscal idiotarianism

Politically, if not intellectually, the austerians have won. As Aditya says, both main parties are commited to "fiscal impossibilism". The IPPR's Condition of Britain report, for example, takes ongoing austerity for granted.
Sectoral balances.
To put this another way, think about financial balances. One aspect of euro stagnation would be that the region will continue to run a big current accountsurplus (pdf); this would be the counterpart of tight fiscal policy in the region, plus weak capital spending. If our biggest trading partner runs a current account surplus, we will probably have to continue to run a current account deficit. The counterpart to this is that some domestic sector must also run a deficit. But who? The OBR foresees companies continuing to run a surplus. This means that the government can return to balance if and only if households become huge net borrowers. But what if this doesn't happen - say because tighter macroprudential regulation prevents it or because households prefer to reduce debt? In this case, the government will have to run a deficit, possibly a big one. Attempts to bring even the current budget into balance would run into the paradox of thrift and simply depress demand.
Government as big household analogy.
It's not good enough to argue that counter-cyclical policy should be done by monetary policy alone. This might be tricky if we are at or near the zero bound - or at least, if MPs think large-scale quantitative easing is the best counter-cyclical policy they should say so, and explain why.
You might think the answer lies in the word "credibility". It does - but not in credibility with financial markets; the fact that long-term real yields are negative tells us that, for practical purposes, this exists. Instead, the two parties are competing for "credibility" with a media and public that has fallen for idiotarian talk that the public finances are the nation's credit card. And we get the governments we deserve.
Stumbling and Mumbling
Fiscal idiotarianism
Chris Dillow | Investors Chronicle

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