George Osborne’s Misconceptions About Countercyclical Fiscal Policy

Britain's Chancellor of the Exchequer George Osborne attends the Lord Mayor's Dinner For The Bankers And Merchants Of The City of London

George Osborne just came out in favour of counter-cyclical policy — saving more in the boom, and spending more during a “rainy day”. This is consistent with John Maynard Keynes’ notion that “the time for austerity at the Treasury is the boom, not the slump”.

The thing is, George Osborne seems to believe that right now we are moving toward a boom and need to adopt the policies of the boom:

Chancellor George Osborne has said he wants the government to be running a surplus in the next Parliament and can get there without raising taxes.

He told the Conservative conference the public finances should be in the black when the economy was strong as insurance against a “rainy day”.

His comments were taken as suggesting more years of spending restraint.

Business welcomed the goal but Labour said Mr Osborne had missed targets before and could not be trusted.

The BBC News Channel’s chief political correspondent Norman Smith said Mr Osborne’s underlying message was that austerity would continue after the next election despite the return to growth.

If 7.8% unemployment and a smaller real economy than 5 years ago doesn’t constitute a rainy day, I’d like to know what does. To me, and to many economists this kind of thing doesn’t just constitute a rainy day, it constitutes a full blown great depression. Eventually, sooner or later, someday the economy will return to growth and full employment. With the right luck — technology breakthroughs and other exogenous shocks etc — that could be two or five years from now. The experience of Japan, however, who have endured a 20 year depression suggests that it could be much later rather than sooner.

The safer alternative is to use fiscal policy — as Osborne himself implies — during the rainy day to directly bring back full employment sooner, rather than later by engaging in infrastructure projects and the like. Even if a government hasn’t saved money during the boom, interest rates are so low during the slump that it is cheap to do so, even in the context of soaring national debt levels as is the case in Japan today.

Getting the economy to a point where the government can run a budget surplus, of course, is still a noble ambition. But Osborne has shown no awareness whatever of the steps that need to be taken to get to that position. Infrastructure and housing investment and a jobs program would be a start. So too would liberalising planning laws and lending to and deregulating business startups so that more houses can get built and more businesses can get started. For now, Osborne is preaching responsibility while doing something deeply irresponsible — prolonging a depression with unnecessary demand-sucking job-killing austerity. The boom, not the slump, is the time for austerity at the Treasury and this (for the love of God) is not the boom.

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