Wednesday , December 2 2020
Home / Simon Wren-Lewis / Starve a kid to save a quid [1]

Starve a kid to save a quid [1]

Summary:
One of the myths perpetuated by mediamacro is that management of the public finances is all about controlling our debt by keeping deficits down. As with so much of mediamacro, this is something no academic macroeconomist would say. Econ 101 (first year undergraduate economics) tells you that the deficit should rise and fall with the economic cycle. In particular in major recessions deficits rise rather a lot, and that is exactly what they should do. Econ101 also tells you that in a recession caused by collapsing demand, it makes sense to increase the size of an already large deficit through fiscal stimulus. It becomes absolutely necessary to do so when interest rates can no longer stimulate the economy because they are stuck at their lower bound. Fiscal stimulus is the way you get out of

Topics:
Simon Wren-lewis considers the following as important:

This could be interesting, too:

Menzie Chinn writes “Trifecta”

Menzie Chinn writes Business Cycle Indicators as of December 1st

José De Gregorio writes Memo on strengthening the role of the International Monetary Fund to enhance global resilience to crises

ocanuto writes The two sides of capital flows to Brazil

 

One of the myths perpetuated by mediamacro is that management of the public finances is all about controlling our debt by keeping deficits down. As with so much of mediamacro, this is something no academic macroeconomist would say. Econ 101 (first year undergraduate economics) tells you that the deficit should rise and fall with the economic cycle. In particular in major recessions deficits rise rather a lot, and that is exactly what they should do.


Econ101 also tells you that in a recession caused by collapsing demand, it makes sense to increase the size of an already large deficit through fiscal stimulus. It becomes absolutely necessary to do so when interest rates can no longer stimulate the economy because they are stuck at their lower bound. Fiscal stimulus is the way you get out of recession much quicker, and according to some models the only way to get out of recession.


Much the same applies to a national crisis. No one worries about rising debt in a war, and no one should worry about rising debt in a pandemic. Government debt and monetary financing are all about being able to spend big in emergencies without having to worry about running out of money. Worrying about debt and future generations is particularly inappropriate in the current circumstances, when new borrowing attracts a fixed interest rate that is below, and sometimes well below, the underlying rate of growth of the nominal economy. For more on all this see here.


In contrast mediamacro (macroeconomics as understood by much of the media) treats the economy as a household. The government is not like a household, and trying to treat it like a household causes huge damage. Mediamacro’s failure cannot be put down to the simplicity of their message. Here is an equally simple one that is much nearer the truth than mediamacro: worry about the deficit in booms but not recessions. [2]


George Osborne acted as if he didn’t understand that, and it would seem Rishi Sunak does not understand that either. And like Osborne, Sunak too is already causing a lot of damage by worrying about a deficit in a recession. Worse still for Sunak deficit obsession seems to have taken on a religious dimension. In his conference speechhe said the government has a “sacred responsibility” to balance the books for future generations.


When the pandemic hit things seemed as if they might be different. Sunak followed other European countries in rolling out a generous furlough scheme (although some fell through its cracks). It is as if he has been regretting that policy ever since. [3]


Let’s look at some of the damage Sunak has already caused. At every opportunity, he encouraged Johnson to end aspects of the lockdown quickly, thereby ensuring that lockdown would finally end with a significant amount of COVID around. He then undertook a stimulus measure then would inevitably increase infection levels, just before a period when first returning schools and then universities were bound to put pressure on the test and trace regime. As we saw a second wave, he announced a support scheme that was less generous and far more limited than his original scheme. Since then he has had to backtracksomewhat (nothing to do with London going into Tier 2 of course), but many will have been made unemployed before his change of mind. He continues to refuse to increase statutory sick pay, even though this would helpfight the pandemic. Perhaps worst of all, he encourages Johnson to think about balancing health and the economy (balancing SAGE with Sunak), when this just ensuresthe second wave will grow.


Then we have Marcus Rashford’s appealto continue free school meals in the holiday period to stop some children going underfed as parts of the economy collapse. What was provided during the summer following Rashford’s first appeal is apparently no longer necessary, even though the pandemic is now at least as bad as it was in the summer. The decision to ignore Rashford’s appeal was terrible in so many ways, including politically. Putting Conservative MPs into the limelight to reveal all their prejudices about the poor is never a good idea.


It is a very human instinct to protect those who are most vulnerable in a crisis. Yet many Conservative MPs talk about parental responsibility and feckless parents, as if extending free meals to school holidays would significantly encourage such behaviour. Instead such arguments reveal that these MPs would see no problem in getting rid of free school meals completely. The truth is that Conservative governments have installed a benefit system that fails to provide some of its recipients enough to live on, and those failures become more acute in a crisis. That these failures are pervasive even outside a crisis is clear from the huge growth in food banks.


Why is this failure built into universal credit and our welfare system more generally? In part it reflects governments responding to stories of irresponsible parents with large families that regularly appear in the Tory tabloids. But it also reflects George Osborne’s obsession with the deficit. He cut universal credit supposedly in an effort to balance the books, while at the same time cutting various taxes. (For a good discussion of the impact of policy measures on the distribution of income since 2010, see here - HT Jonathan Portes.) Using concern about the deficit to make the poor poorer was pure deceit on his part, deceit mediamacro were happy to go along with.


The tax giveaways under Osborne tell us why he used to obsess about the deficit. It isn’t that he really believed cutting the deficit in bad times is a good idea. If Osborne was really so concerned about the deficit why did he cut taxes so often? Sunak seems to be following a similar path, showing no attempt to exert some control over the government wasting money on a defunct centralised and privatised test and trace system, or trying to stop the government overpaying for PPE.


This suggests that Sunak, like Osborne, only pretends to misunderstand the nature of government debt. I used to saythis deficit deceit was really a pretext to reduce the size of the state, but I think we need to be more precise in the current climate. Many Conservative MPs today seem quite happy about the state paying too much money out to corporations who have previously or will subsequently give Conservative politicians seats on the board, and/or have given the party financial support. What they fear is government money going to the wrong people, people who are not their friends, donors or the very rich, and who are unlikely to vote for them.


[1] Title credit https://twitter.com/BremainInSpain/status/1319948693169209344?s=20

[2] For MMT devotees. You say governments should focus on how much resources are used and not the deficit. But that is only true if interest rates are unable to control inflation in booms or you prefer to use fiscal policy to control booms. As most people think interest rate policy is both effective at dealing with booms and should be used, then controlling the deficit in booms is important to prevent deficit bias. Try imagining most people are right, and think outside your MMT box.

[3] Stephen Bush suggeststhis change of mind is because Sunak now thinks the cavalry, in the form of a vaccine, will no longer arrive. However the alternative to a vaccine is not permanent lockdown, but reducing cases to near zero and keeping them there using an effective test and trace system. The problem here is in getting the government to admit that their world beating test and trace system is a failure.


Postscript (27/10/2020). I could have added so much more examples of inappropriate penny pinching going on right bow. Adding VAT on PPE equipment for example, or reducing the number of laptops schools get to help children.


Simon Wren-lewis
Professor of Economic Policy at the Blavatnik School of Government, Oxford University, and a fellow of Merton College. This blog is written for both economists and non-economists.

Leave a Reply

Your email address will not be published. Required fields are marked *