OECD wants tighter money, easier fiscal policy.

In the past I’ve frequented discussed a strange sort of schizophrenia among macroeconomic commentators.  They talk as if fiscal stimulus affects RGDP growth whereas monetary stimulus affects inflation.  (Of course both affect NGDP directly, and the effect on each component depends on the slope of the SRAS.  This often leads to people being skeptical of both fiscal austerity and monetary stimulus.  Now the The Guardian reports:

George Osborne has been told by an influential economic thinktank that his drastic deficit-cutting plans may have to be watered down if Britain’s economy remains sluggish.

Pier Carlo Padoan, chief economist of the Paris-based Organisation for Economic Co-operation and Development (OECD) told the Times there was “scope for slowing the pace,” after the thinktank cut its UK growth forecast for the second time this year.

“We see merit in slowing the pace of fiscal consolidation if there is not so good news on the growth front,” he said. “We have seen that [the growth numbers] are a bit weaker than expected. Should that continue to be the case, there is scope for slowing the pace.” The OECD had previously expressed its support for the government’s deficit reduction plans.

The thinktank now predicts the British economy will grow by 1.4% in 2011, downgraded twice from 1.5% in March and a previous forecast of 1.7%. Next year the economy is expected to expand by 1.8%, instead of 2%.

Interest rates, which have been held at a record low of 0.5% for more than two years, will need to start rising this year to stave off high inflation, it added.

Pain without purpose.  Let’s make the UK budget deficit even larger, imposing crushing future tax obligations on an already over-taxed economy, and do so in a way that is assured of having absolutely no positive impact on growth.  That’s conventional macroeconomics circa 2011.

PS.  The OECD later disavowed Padoan’s comment.  But it is still quite revealing that a prominent macroeconomist thought the solution to a growth slowdown is more government spending, rather than slowing the expected pace of monetary tightening.

HT:  W. Peden.


Tags:

 
 
 

8 Responses to “OECD wants tighter money, easier fiscal policy.”

  1. Gravatar of Benjamin Cole Benjamin Cole
    7. July 2011 at 12:11

    “Pain without purpose. Let’s make the UK budget deficit even larger, imposing crushing future tax obligations on an already over-taxed economy, and do so in a way that is assured of having absolutely no positive impact on growth. That’s conventional macroeconomics circa 2011.”

    Sub in “USA” for “UK” and what have you got? Same story here.

    Oh, but there is a purpose to federal spending: To pour money into parasitic and coprolitic federal civilian and military agencies, and into the pockets of the gaggle of grifters and subsidy-suckers attached thereto.

    Here is an odd one for purported “conservatives”: If I pay money into a system, and eventually get my money back (yes, with problems, but still)–ie Social Security–you want to cut that program.

    But if I pay money into a parasitic federal agency, and never get any money back–such as Agriculture or Defense–you don’t want to cut that.

    This is smaller government?

  2. Gravatar of johnleemk johnleemk
    7. July 2011 at 12:55

    Scott,

    Brilliant post. It’s absolutely horrific to think that sane people can nod their heads at the recommendation to simultaneously boost government expenditure and tighten monetary policy. Have we lost our minds?!

    Benjamin,

    To be fair to the more wonkish calls for Social Security cuts, defence and old age entitlements are by far the most troubling parts of the US budget, as far as cutting the deficit goes. Agriculture subsidies are a waste, but form a relatively small part of federal spending. Those concerned about the deficit should be most concerned about cutting defence spending and restructuring old age entitlements.

  3. Gravatar of Benjamin Cole Benjamin Cole
    7. July 2011 at 13:14

    Johnleemk:

    I will concede Medicare needs a hard look–although no one wants to say the real solution, and that is less care for people who are both terminally ill and aged.

    Social Security can be fixed with less SSDI, and trimmed retirement payouts. It’s good to 2047, and can be made good beyond that rather easily.

    Meanwhile, we are spending double on national defense compared to 10 years ago, and the DoD was a swollen ossified Cold War-relic back then.

    Did you know that B2 bomber cost $3 billion each? And we have used it Kosovo, Iraq and Afghanistan–you know what fierce air defense systems those countries have.

    VA outlays have tripled in last 10 years–and no one calls for voucherizing the VA. The whole Homeland Security boondoggle needs to be sliced in half.

    Do not underestimate the power of the rural lobby; rural Red States are huge net beneficiaries of federal taxes and spending.

  4. Gravatar of johnleemk johnleemk
    7. July 2011 at 14:23

    Benjamin,

    Yes, I think we agree. The point I was making is that you still need to touch Social Security, because as it is structured, it isn’t sustainable. There should be no sacred cows in the budget, but the political consensus so often is that Social Security, Medicare, and defence are all third rails in the federal budget. That’s a recipe for long term fiscal disaster.

  5. Gravatar of Scott Sumner Scott Sumner
    7. July 2011 at 16:07

    Benjamin and Johnleemk, I partly agree with both. i think Social Security can get by with modest adjustments. The health care industry is an economic disaster, which needs to be reformed in almost every dimension. And we can make big cuts in the favorite programs of the GOP (defense, space, ag, homeland security, war on drugs, etc.)

  6. Gravatar of W. Peden W. Peden
    10. July 2011 at 02:23

    There’s a complex story to be told as to how we came to think that monetary policy affects inflation and fiscal policy affects growth. For example, from 1993-2001, UK fiscal policy gradually tightened to the point where we were running significant CA surpluses. This was also one of the strongest and most stable periods of growth we’ve ever had; to my knowledge, the strongest. (All, incidentally, with inflation at 1.6%-3.5%.)

    It amazes me, therefore, that people in Britain still believe that fiscal consolidation and economic expansion are in some sense contradictory. What matters for growth is not fiscal policy alone, but AD and the supply-side.

  7. Gravatar of Scott Sumner Scott Sumner
    10. July 2011 at 06:54

    W. Peden, They are relying on common sense, which is almost 100% unreliable in macroeconomics. You can visualize government creating jobs, not more NGDP creating jobs.

  8. Gravatar of W. Peden W. Peden
    11. July 2011 at 00:27

    Prof. Sumner,

    Absolutely. The fact that people still think of monetary policy purely in terms of interest rate effects and bank lending suggests that explanation.

Leave a Reply