The Chancellor’s Odd Claim – a Quick Analogy
Whilst I was down in Bournemouth at the TUC’s Congress, the Chancellor made a very odd speech. His basic argument was that the recent pickup in economic data proves he was right after all and the stance of fiscal policy has been correct for the last three years.
What we now have is a recovery that is coming three years later than expected, with unemployment higher than expected, little evidence of rebalancing (yes manufacturing is doing better but the recovery is being led by consumer spending, business investment remains weak), the deficit much higher than anticipated and living standards undergoing a severe squeeze.
If this is the definition of successful economic policy, I’d hate to see a failure.
The most important point to remember in this ‘debate’ is that those who supported looser fiscal policy in 2010-2013 never argued that the economy would never grow again without a fiscal stimulus.
The economic case for a fiscal stimulus has always been that, faced with a large output gap, looser fiscal policy would lead to faster growth and higher employment than would otherwise be the case. This argument is not proved wrong by a pickup in growth. The point is that growth and employment could have been stronger than they were between 2010 and 2012.
To go back to economic motoring analogies, it is as if the Chancellor was a driver faced with two possible routes a destination.
The first route, let us call it Route A, would get him to his destination in around 4 hours. The second route, or Route B, would take less than hour. Many experts advised that the second route would be the better option.
The Chancellor instead decided to press ahead with route A. Route A actually turned out to be even longer than anticipated and the drive has taken the Chancellor around 6 hours. Some of this additional delay being due to external factors such as bad road conditions, but the primary reason for the late arrival being the choice of route in the first place.
At several points along the way, he could have turned off to route B, but each time he refused.
Now, hours later, arriving at his destination the Chancellor is shouting at passersby, “Ha! I’ve arrived and it only took six hours. Those people advising me to take route B were a bunch of idiots and the fact that I am finally here proves that beyond any doubt”.
As I said, it was a very odd speech.