I’ve been struck by the activities of the Conservative Party Twitter rebuttal machine on economics, ‘Tory Treasury‘ on Twitter, who Danny Blanchflower calls ‘aka Rupert Harrison’. (He being Osborne’s chief of staff).
One theme today was portraying the Labour fiscal plans as incautious. Tory plans to target a falling debt to GDP ratio were cautious because this would provide room for a subsequent, repeat fiscal expansion to counter another crisis. I find this somewhat ironic, because their plans also fail to establish that reduction in the actual deficit will be contingent on the economy lifting off from the zero bound, so that we can be confident monetary policy has room to compensate. One might regard that as being oblivious to risk too.
The Autumn 2014 updated Fiscal Charter which the two parties are agreeing to implement and arguing about at the same time, stipulates that ‘The Treasury’s objectives for fiscal policy..’ include the obligation to ‘support and improve the effectiveness of monetary policy in stabilising economic fluctuations’.
Both parties should take note of this. If that is an objective of fiscal policy, then it cannot be the case that deficit reduction proceeds come what may, or proceeds at all right now. With interest rates at their natural floor, further forward guidance likely of limited impact, quantitative and credit easing of questionable impact so far, and some regarding QE at least as close to the point where costs exceed benefits, there may be no scope to compensate for the contraction in aggregate demand that fiscal consolidation would entail. Theoretical analysis, and ungenerous readings of recent Japanese history suggest that there is the chance to get trapped at the zero bound. Attempting now to contract the fiscal stimulus, with headline CPI inflation at least heading in the wrong direction, is hazardous.
The card that both parties are playing is the worry about long-term fiscal credibility. But it is not credible to promise to do something that is obviously not in our interests, and, judging by the stalling in deficit reduction that happened in this Parliament, likely not to happen anyway. And concerns about credibility are hardly consistent with not specifying how these plans will be met.
Deficit-reduction-come-what-may has resulted from a strange kind of pernicious electioneering, under the spotlight of media commentary that also, so far, has not broached the likely reality of fiscal policy in the next two or three years. I suggest that this lends weight to arguments that the role of fiscal stimulus, particularly at the zero bound, should be codified further in the direction of Wren-Lewis style fiscal councils. We used to think that fiscal independence was necessary to stop pre-election booms and post-election busts. But right now we need fiscal independence to protect the economy against the opposite problem: populist austerianism.