Good lord ... we have a surplus of noble economists
Biff!’ Last week, a letter demanding a credible reduction in the UK's budget deficit was published in the Sunday Times, written by Professor Tim Besley and other eminent economists. ‘Bish Bash!’
In response, two letters turned up in the Financial Times written by, respectively, Lord Skidelsky and Lord Layard, each signed by an even longer list of eminent economists, suggesting that Besley and Co didn't know what they were talking about.
‘Wham!’ Lord Mandelson then jumped into the debate, in effect suggesting that the monetarist cabal responsible for the first letter was not to be trusted under any circumstances (even though many of the policies used in the UK and elsewhere to deal with the crisis could be found in any monetarist's toolkit).
My initial conclusions from all of this are, firstly, that the collective term for eminent economists is ‘surplus’; secondly, that the term ‘eminent economist’ might be something of an oxymoron; and, thirdly, that there are too many lords a-leaping.
Messrs Besley and Co are making a perfectly reasonable, and not particularly controversial, point. They are asking for “a credible medium-term fiscal-consolidation plan’’. There is nothing wrong with that. They also note that the plans set out in the 2009 pre-Budget report may not be sufficiently credible.
One way to assess fiscal sustainability is to look at movements in the ratio of government debt to gross domestic product (GDP).
The Government's own numbers suggest the ratio will continue to rise through to 2014-15. There is a vague intention to reduce the debt-to-GDP ratio in later years, but there are no concrete plans: in other words, the fiscal position, as it stands, is not |very credible.
To reduce the deficit to zero, as Besley suggests, is not taking too many additional risks, especially given that the extra effort would be spread over five years.
Admittedly, it is not obvious why the cuts should start to |come through immediately, but Besley accepts that “the exact timing of measures should be sensitive to developments in the economy.”
For Lord Skidelsky, fierce spending cuts are the big risk and for Lord Layard, it's sharp shocks. They may be right, but I could not find anything of the sort in the original Besley letter.
Japan's experience over the last 20 years is, for me, the big worry. Japan has witnessed a huge |increase in its budget deficit and its ratio of government debt to GDP has grown at a remarkably rapid pace.
The good news so far has been that bond yields have remained very low and, for the most part, the Yen has been strong. Thus the concerns expressed by Besley and Co have not materialised in Japan.
Persistent increases in government borrowing have simply underlined the inherent weaknesses in Japan's economy and dampened entreprenurial spirit.
Lord Skidelsky's letter |argues that “the first priority must be to restore robust economic growth”.
Japan hasn't managed that after two decades of rising budget deficits. Keynesian demand management policies may well prevent recessions from turning into depressions but, after a debt-fuelled boom, I remain unconvinced that they can deliver the “robust economic growth” that Lord Skidelsky craves.