You are here:   Economics > The Keynesian Versus The Monetarist: A Lost Decade
In these circumstances, the priority was a rapid recovery. That meant going slow on fiscal austerity, while using monetary policy as actively as possible. For this reason, I argued that the coalition government's emphasis on the need to eliminate the structural fiscal deficit in the current parliament was a risky and unnecessary gamble. In particular, I argued, there was no need either to impose a significant upfront increase in taxation or to slash public investment. On the contrary, never would the UK enjoy a better opportunity for a big increase in investment in infrastructure.

Mr Congdon insists the recovery the economy has experienced shows I was wrong. Indeed, he suggests, if George Osborne, the Chancellor, had listened to people like me, the recovery might even have been wrecked.I reject these charges, for the following reasons:

First, the alternatives to relying at least partly on fiscal policy were highly problematic. A striking feature of the post-crisis UK experience, for example, has been the stagnation of broad money. (In November 2014, Mr—broad money—was 5.4 per cent below its level in January 2010.) Given this, the strength of demand has surprised me and ought to surprise Mr Congdon.

Second, according to forecasts from the Office for Budget Responsibility (OBR), continued rapid growth now depends on driving the indebtedness of the household sector to record highs: it is forecast to be 184 per cent of income in 2020, up from the pre-crisis peak of 169 per cent. This may not worry Mr Congdon. It worries me.

Third, this has still been the weakest recovery for a century. In the fourth quarter of 2014, the UK economy was just 3.4 per cent larger than it had been in the first quarter of 2008, the pre-crisis peak. In 2014, GDP in the UK was at least a sixth below its pre-crisis long-term trend. Indeed, real GDP per head will probably match 2007 levels only in 2016. This will have been a lost decade.

Fourth, the economy has also performed far worse than was forecast in June 2010, just as I (and others) warned. The OBR then forecast that the economy would expand by 11.1 per cent between 2010 (the government's first year in office) and last year. The latest data show growth of just 6.7 per cent over these four years, even though the starting point was a deep recession.

Fifth, contractionary fiscal policy did indeed lead to contraction. Using a standard model, the OBR concludes that the coalition government's discretionary fiscal policy decisions reduced GDP, relative to the trend in potential output, by about 1.7 per cent in 2011-12 and the same again in 2012-13, by 1.5 per cent in 2013-14 and by about 1.2 per cent in 2014-15. Moreover, this analysis implausibly assumes away any longer-term negative impact of the persistently weak output.

Sixth, while recent jobs performance has been remarkable, that is the mirror image of the collapse in growth of labour productivity. If the latter had not occurred, unemployment would be far higher than it now is. This was good luck for the policymakers, although only in the short run.

View Full Article

Post your comment

This question is for testing whether you are a human visitor and to prevent automated spam submissions.