Sunday, 14 July 2013

The earth is flat and other fiscal fairy tales

Pesky facts and actual experience having comprehensively destroyed the supposedly practical arguments once presented in support of fiscal austerity, the question now is why are they still at it. The answer, scanning thru George Osborne’s recent mansion house speech, is simple; dogma.

So why are we having to endure “a tough, credible fiscal policy that bears down on our excessive deficit”?  Previously, it was to preserve Britain’s AAA credit rating, the notion fiscal austerity promoted growth and the Rogoff and Reinhart claim that beyond a certain level government debt undermined economic growth. Oh and there was probably scope for runaway inflation too. Now that each these notions has turned out to be utter pants, Osborne says its because we have “a public sector that was too big, paid for by a private sector that was too small” and that “(t)here are more difficult decisions. There have to be when the country is living way beyond its means.”

So there you are then. Why are libraries closing? The public sector’s too big. Benefits being cut? Again, because the public sector is too big. Roads a pot-holed mess? The country was living beyond its means.

Obvious really, except this is moralising tosh that only merits attention because of who is trotting it out given (a) the long-term damage to Britain’s productive capacity fiscal policy continues to wreak (as per the recent growth in long-term unemployment), (b) the strong negative correlation - pointing to causation - between fiscal austerity and economic growth and (c) as examples of rank rotten nasty dogma.

As ever, big dods of Keynes are needed here. One, because, as he observed, an increase in debt funded public sector spending on infrastructure is needed to take up the slack left by a cautious private sector and two because, in place of dogma, as he wryly observed, "When the facts change, I change my mind. What do you do, sir?

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