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The IMF on UK macroeconomic policy: Part 1
Martin Wolf, Financial Times
May 25, 2012 4:43 pm
How long then is a change in policy supposed to wait?
I find it hard to believe that the Fund staff disagree that action is needed right now. It is far more likely that they (and, not least, the IMF’s Managing Director, Christine Lagarde) felt unable to take on the government of what remains an important member country. That is also what the BBC’s Stephanie Flanders suggests in her excellent post, “IMF: ‘Great Policies: Shame about the Economy‘.”
The time for aggressive fiscal consolidation is when the economy – by which I mean spending by the private sector – is strong, not weak, as it is now. What, then, is the argument against using fiscal policy more aggressively, to support the economy now? As Jonathan Portes, director of the National Institute for Economic and Social Research, notes, it is very hard to make one.
The principal argument against any fiscal action now, apart from the hope against implausible hope that monetary policy is going to do the job, even though interest rates are almost zero and the Bank of England has indulged in substantial “quantitative easing”, is that it will destroy the government’s credibility, lead to a rapid spike in interest rates and so weaken the economy, rather than strengthen it.
The IMF on UK macroeconomic policy: Part 2
Martin Wolf, Financial Times
May 28, 2012 5:52 pm
(A) willingness to make determined use of fiscal policy should also reduce the uncertainty of decision-makers about the likely direction of the economy. If businesses think the authorities are not determined to sustain demand, they are right to be more cautious. Ultimately, the government insures business against the macroeconomic risks of investment, via its determination to sustain demand in a slump. But the government has shown no such determination, with effects on the willingness of business to invest that we now see. Thus, the very determination to act might make a huge difference to the outcome for the economy.
In brief, the endlessly repeated “credibility” arguments against a change in fiscal policy are feeble. The UK has fiscal levers at its disposal and should use them.
What is true, however, is that a change would weaken the government’s credibility. But this is because the government made an unwise commitment.
(h/t Herr Docktor)
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