Good news for the Government: 67 leading economists have publicly backed Alistair Darling’s plan to delay spending cuts until 2011, one of the clear dividing lines in policy between Labour and the Tories. Various pointy-headed luminaries have signed up to the two letters in today’s FT, including Lord Skidelsky, Lord Layard, David Blanchflower, Nobel laureate Joseph Stiglitz and assorted top professors. It’s an impressive roll-call – but then we thought the same thing about the group who signed up to a letter making precisely the opposite argument in last week’s Sunday Times. If even economists with house-sized brains can’t agree on the right thing to do, what hope do the rest of us have?
This all kicked off last weekend, when the likes of Roger Bootle, Tim Besley, and MT diarist Sir Howard Davies wrote to the Times arguing for a ‘credible plan’ to reduce the deficit. Otherwise, they said, it could result in ‘higher long-term interest rates and/or currency instability, which could undermine the recovery.' As such, they said: 'There is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year.’
However, some of their colleagues beg to differ. The first letter in today’s FT, from LSE professor Layard et al, argues that while ‘unemployment is still high, it would be dangerous to reduce the government’s contribution to aggregate demand in 2010-11’ – particularly since households are still saving, and the national debt is not particularly high relative to the rest of the G7. The existing plan, to start reducing the deficit next year, ‘appears sensible’, they argue – whereas a ‘short sharp shock’ would be ‘positively dangerous’.
Letter two, penned by Lord Skidelsky and co., makes more or less the same point: that the timing of any ‘fiscal consolidation measures’ (economist-speak for tax hikes and spending cuts) must depend on the strength of the recovery. Why should we try to reassure the financial markets, they ask, since it was their mistakes that precipitated the crisis in the first place? (A rather odd argument if you ask us – whatever you think of the credit raters, they still determine the cost of our debt.) Tipping us back into recession would be much more damaging, so the priority has to be to restore growth, they argue.
So what have we learned, except that economists argue a lot? (We're minded of that Churchill quote: 'If you put two economists in a room, you get two opinions' - and let's face it, the profession hasn't exactly covered itself in glory lately) Well, we suspect that the two sides aren’t actually that far apart. Everyone seems to agree that we need a more detailed deficit reduction plan, and even the Sunday Times lot accepted that any measures ‘should be sensitive to developments in the economy’ - all they seem to be saying is that we should at least make a start in 2010-11, if only as a sop to the markets. That doesn’t sound too fundamental a split to us.
Nonetheless, politically speaking, this has to go down as one in the eye for the Tories, after they claimed that there was a consensus of intellectual opinion behind them...
In today's bulletin:
Good call, Darling: economists back Chancellor's deficit plans
Retail sales dive - but we're still buying Kit-Kats
Senior public sector managers 'ill-equipped' to handle cuts
Could fit notes (not sick notes) save UK plc £240m?
How growing businesses can keep their personality