More of the Same: Keynesian Monetarism
By Andrew White
More of the same has been the abiding message of this budget. For some this has been an insult hurled at the Chancellor; ‘fiddling at the edges rather than taking action to bring growth’ is the accusation thrown by his opponents on the left. Those on the right argue that far from consolidating the nation’s fiscal position the chancellor is failing to properly get a grip on the growth of spending, and that bold action to actually cut spending and cut the deficit is needed to shock the economy out of its malaise.
To an extent George Osborne’s critics are correct; the budget is more of the same. There were relatively few new ideas in this budget and all the fiscal changes which were in there were generally marginal.
These fiscal measures however slot in exactly with what the Chancellor’s Keynesian policy has been since he walked in the door; namely to spend as much money as he dares so as not to take any more demand out of the economy than is necessary to maintain an expansionist monetary policy. Although few not of the left point it out, it remains a known fact that removing government spending from the economy impacts national income, and often by more than the money removed.
In most situations there is at least some countervailing expansion of the other components of aggregate demand like investment and consumption which compensates for this. This is generally prompted by the lowering of interest rates stimulating these sources of demand. This cannot happen in the current climate so each pound taken away from the economy is unlikely to be replaced, and worse the Keynesian multiplier goes fully into reverse and yet more demand is taken away as less money circulates around the economy.
The kicker however, and it’s a real kick in the stomach of a whole generation kicker, is that this process isn’t symmetrical. Lowering spending cannot lower interest rates since they’ve hit their lower bound, but raising spending most certainly can raise interest rates. If greater spending raised interest rates, by even a small amount, consumption and investment would be leeched from the economy as people’s mortgages get more expensive and the return on investment goes down. In the worst case this could elicit a free fall in output as the amount of demand lost is larger than the government spending injected and the Keynesian multiplier screws down on the economy anyway. This is essentially what happened when Zapatero tried to spend the Spanish out of recession in 2008 and the result was more than 50% youth unemployment.
Our nation went into the depression in the most indebted state of any industrialised country accept Japan. The public and private stock of debt was worth almost five times the value of the British economy. The danger posed by a rise in interest rates is as such far graver here than anywhere else. The government must therefore rely on its monetarism rather Keynesianism to salvage the country.
This actually what I mean by more of the same. The second leg of the Government’s economic policy is, as it has stated in every budget since 2010 “Monetary activism to support demand and keep interest rates low”. The more is actually the “New steps to ensure active monetary policy continues to play a full role in supporting the economy with an updated remit for the Monetary Policy Committee”. This is a huge change to the economic government of the country. How it will pan out exactly is not yet set out. What is likely to happen is that the MPC targets things other than inflation, which will probably mean that it runs even higher and for longer.
The government has moved on to more of the same, more of what it was already doing; an even more expansionist monetary policy and the only real way to add demand to the economy.
The change is potentially huge. It is a really bold idea. It is also, more of the same.