The half-hearted Keynesians at The Economist

Those who read The Economist (my favorite magazine, BTW) know that on macroeconomic issues it’s mode of analysis is mostly Keynesian.  Of course it is a rather conservative form of Keynesianism, as they are more skeptical of fiscal stimulus than someone like Paul Krugman.

Yesterday I criticized a typical mainstream media article on monetary policy, which seemed to lack any recognizable model or framework of analysis.  Today I’ll examine an article in The Economist that is vastly superior in almost all respects. But which on close examination still contains a puzzling incoherence.  The basic problem is aggregate demand, and the inability of journalists to stake out a consistent position and stick with it.  Put simply, does Britain need more demand or not?  After reading this opinion piece, I still don’t know:

Britain’s economy has its own home-grown problems, to which the misery on its doorstep will add. Spending power is scarce. Wage growth is running at less than half the level of inflation. Public-sector workers, who staged a large strike over the government’s pension reforms this week (see article), face a further two years of squeezed pay. Householders will be reluctant to dip deeper into their savings while their own debts are so high. That leaves Britain’s economy dependent on foreign demand. As two-fifths of exports are shipped to the euro zone, recession there will drag down Britain’s economy as well. Jobs are already being cut in London’s financial district, one of Britain’s more reliable export industries, because fees and commissions have dried up.

The Bank of England is likely to raise its target for “quantitative easing” (bond purchases using newly created money) above the £275 billion ($431 billion) it agreed on in October. But even swift action seems unlikely to prevent the economy shrinking for at least two quarters (enough to count as a recession). The second dip of a “double-dip” ought to be shallower than the first because there are fewer excesses to work off than after a boom. But a cumulative fall in output of 1% is easy to imagine. And recovery after that will be a long, hard slog.

Given the government’s lousy inheritance in 2010 and the suicidal nature of the euro zone’s leaders, it is hard to see how Britain could ever have avoided another dip. But what of Mr Osborne’s competence? Has the government’s budget-cutting strategy only made a bad hand worse? Has it been a “colossal failure”, as the shadow chancellor, Ed Balls, attests?

No, it has not. Mr Osborne is certainly guilty of over-optimism in the past, especially claiming that an aggressive fiscal tightening would show immediate benefits by promoting growth, rather than depressing demand. But he was right to act in 2010 to make an early start in cutting the deficit. Left untackled, the budget deficit, which at 11.2% of GDP in 2009-10 was larger than those of almost all other rich countries, would soon have undermined confidence in the government’s ability to service its public debt. That faith is all the more important because of Britain’s outsize banking sector.

The deficit will fall to 8.4% of GDP this fiscal year. The credibility won by such progress means Mr Osborne’s plan has helped secure the country the trust of both the credit-rating agencies and the bond markets.

The first paragraph is classic demand-side analysis.  It seems obvious that The Economist thinks Britain has a demand-side problem.  Of course that’s another way of saying they have a monetary policy problem, too little NGDP growth.  If so, then The Economist should be discussing NGDP growth.  In fact, they discuss RGDP growth, which they expect will soon turn negative.  And the article should focus on why monetary policy failed, but instead almost the entire article addresses fiscal policy.  And they support Osborne’s deficit cutting plan, despite the demand-side problem facing Britain.

In fairness, the data in the article makes a mockery of all the claims that Britain is trying to engage in “expansionary austerity.”  Since when is a budget deficit of 8.4% of GDP three years after a recession “austerity?”  Because the deficit used to be 11.2% of GDP a few years back?  Yes, and the term “sobriety” describes a drunk who throws back 8 whiskey sours on Saturday night, because on Friday night he had 11 drinks.  So I have no complaints about the fiscal “austerity,” but I’m still trying to figure out what’s wrong with Britain?

Then it gets even more confusing.  I had assumed that The Economist opposed more fiscal stimulus, but in fact they favor it:

A little looser, please

And what of his policies now? There, we reckon he could afford to have loosened more. The plans announced this week imply that public-spending cuts will now last until 2017, in part because the OBR reckons the economy’s growth potential is far more damaged than it had thought as recently as March, so there will be less growth to close the gap through increased revenues.

So maybe Britain’s problems are not demand-side, maybe they are supply-side.  Less growth potential.  But here’s what puzzles me.  All the talk at the beginning of the article was demand-side analysis, yet The Economist nonetheless seemed to oppose fiscal stimulus.  Now they are suggesting the problem may in fact be supply-side (in which case fiscal stimulus is ineffective), and yet they do a u-turn and come out for fiscal stimulus:

And although his scheme to guarantee bank bonds to foster up to £20 billion of small-business lending is a sensible use of the state’s still-sound credit rating, its success relies on the take-up by cautious banks and nervous small businesses. A small-business bank, capitalised with £2 billion of public money, would probably work better.

So Mr Osborne has not got things completely right. But this government’s instincts have been saner than its big-spending predecessor’s. Mr Osborne was correct in his determination to tackle the deficit quickly. The notion that he has caused the coming recession is nonsense. More flexibility is now needed. But, sadly, all the options for Britain are pretty dark.

I don’t know about Britain, but I’m certainly in the dark.  I have no idea whether Britain’s problems are demand or supply-side.  I suppose they are both, and I’d guess that’s also the view at The Economist.  But in that case the policy discussion should focus on two areas:

1.  A better monetary policy regime, to keep NGDP growth on target.

2.  Supply-side reforms such as reversing Labour’s huge increase in marginal tax rates on those who work in the City.  And reversing Labour policies that increased the share of government spending as a percent of GDP, even during stable periods like 2000-2007.  Supply-side reforms would improve the P/Y split, for any given increase in NGDP.

Yet the article has little to say on monetary policy and nothing to say about supply-side reforms.

I suppose this post sounds highly negative.  It’s not meant to be.  They are right that Britain needed to reduce its budget deficit.  They are right that “The notion that he has caused the coming recession is nonsense.”  They are right that growth potential has been damaged.  But they’ll never be able to convince smart Keynesians like Krugman/DeLong/Yglesias with such a muddled model.  They need to focus like a laser on what really determines AD and AS.  And temporary fiscal stimulus has little to do with either.

PS.  I always get commenters insisting that big government is not the problem in Britain; that Sweden has an even bigger government, and is doing fairly well.  The mistake is to focus exclusively on levels, as there are many differences between any two countries.  Over the last 10 or 15 years Sweden has been vigorously reducing the size of government as Britain has expanded their state.  And if I’m not mistaken Swedish per capita GDP caught up to and passed the UK a few years back.

PPS.  Something to cheer up my British readers, as the press is bashing Britain for not blindly signing on to the failed Eurozone policies being promoted on the continent.  Britain was bashed even more viciously in 1931, when they opted out of the failed international gold standard regime.   History has vindicated that “obstructionism” and it will vindicate this obstructionism as well.



27 Responses to “The half-hearted Keynesians at The Economist”

  1. Gravatar of Nevorp Nevorp
    13. December 2011 at 07:31

    Cameron was right to use his veto, however, that hasn’t stopped the Europhile’s running around like headless chickens squawking “how we’re going to be left behind”. As Boris Johnson puts it, Europe is in danger of saving the cancer rather than the patient.

    On the issue of the Economist, as a layperson I’ve always had the impression they see the current crisis as just another business cycle episode rather than effectively the ending of a debt super cycle.

  2. Gravatar of W. Peden W. Peden
    13. December 2011 at 07:40

    I hope we get the second half of the 1931 reversal and we get the National Government’s successful solution of the Great Depression: loosen up monetarily and tighten up fiscally. That is the only way you can have “expansionary austerity”.

  3. Gravatar of Britmouse Britmouse
    13. December 2011 at 08:04

    Good post.

    Never underestimate the ability of the Bank of England technocrats to screw everything up, though. They are being timid again, 2 year CPI forecasts have been below 2% and falling for November and December and they did not change the size/speed of QE.

  4. Gravatar of ssumner ssumner
    13. December 2011 at 08:19

    Nevorp, I like that Boris Johnson line.

    W. Peden, I agree.

    Britmouse, Yes, I’m afraid they are not going to support NGDP growth, which is disappointing after all the rumors that some of them privately supported NGDP targeting.

  5. Gravatar of DB DB
    13. December 2011 at 08:48

    Your PS is an important point – the %GDP test is a poor way of understanding the imprint of a public sector on the wider economy. Both health and education are overwhelmingly government-managed as well as financed – even if now with a range of private providers working on contract, but still with public managers calling the shots. And if you look at the declining public-sector productivity as those (and other) sectors were expanded in the 2000s, it’s easy to see why we had such a big productivity slowdown.

    Re the Euro – I just hope, having made the brave call, Cameron has the guts to see it through and not backtrack.

  6. Gravatar of Gabe Gabe
    13. December 2011 at 08:58

    “Eurozone policies being promoted on the continent”

    being promoted by whom?

    Interesting interrogatories from The Daily Bell

    “Of course, somebody actually set up the Bank for International Settlements in the late 1930s. And since then someone has set up or helped set up about 200 central banks around the world, many of them reporting directly to the BIS.

    But who? And how did it happen? Dunno.

    Who speaks to the head of a state, asking him or her to set up a central bank? Dunno. Do you?

    Why is that Libya, Afghanistan and Iraq have central banks when they didn’t before, or not the kind they do now? Did you read about it?

  7. Gravatar of jj jj
    13. December 2011 at 09:12

    Even the first part of the article doesn’t look like a classic demand-side analysis. They see “Wage growth is running at less than half the level of inflation” as a problem, not the solution.

  8. Gravatar of nmd nmd
    13. December 2011 at 09:30

    The UK has been hit by at least three AS shocks.

    1) North sea oil production is falling; the UK is now a net importer of oil, just as oil prices have risen significantly. This was a negative AS to the UKs output. Loose monetary policy, or nominal GDP targeting cannot create more oil. Contra to Posen, in 2008, the UK did metaphorically loose an arm.

    2) Finance, two small English banks, Northern Rock and Bradford and Bingley, and two large Scottish banks HBOS and RBS, were clobbered at the beginning of the credit crunch. The regulatory impact of this is still ongoing. Again this is a negative AS shock, (or possibly previous measures of AS were actually measurement error).

    3) Demographic aging, like all European countries UK median age is increasing. Unfortunately the UKs pension reforms of the last decade have been imperfect. To reduce inequality the private incentive to save, (tax breaks for pension funds) have been reduced, so saving rates fell. This has been combined with unfunded increases in the universal basic state pension; of which the coalition’s triple lock on pensions is only the latest. Note that over the last five years government spending on public pensions has increased from 6.72% to 8.06% of GDP. Over the next year spending on the universal basic state pension is due to increase by £5-6bn.

    Like most European countries, none of the UKs implicit pension debts, (state and public sector) are included in the official measures of the national debt.

    The negative AS shocks reduced output, so government revenues fell, but pensions liabilities have continued to rise, (as they are mostly indexed by prices). In order to raise sufficient revenues to pay for these promises and reduce the deficit, the government raised taxes, particularly indirect taxes such as VAT. This increased measured inflation. Today the ONS released the latest CPI inflation statistics, CPI is currently 4.8%. However, the ONS also release figures on CPI under a constant taxes counterfactual, this has remained around 3%: most of the excess inflation has been due to tax changes.

    Officially the UK government has also chosen to restrict spending on public sector investment, on research and education, and ring fence or protect spending on the NHS and on old age welfare spending. Surely this is the opposite of what a benevolent policymaker would do? I.e. they’ve cut investment, to protect current consumption.

    Of the European countries which have fared best in this crisis, most have implemented successful pension reforms over the past decade; see Germany, Holland, Sweden. The countries which are struggling, France, Italy, Spain and Greece all relied on PAYG state funding of pensions. One recent estimate suggested that Spain had a implicit pensions debt of 85% of GDP in 2006, before the Spanish housing market collapse. With sufficient real GDP growth PAYG pension systems can be sustainable, but if there is a large enough AS shock, such a spike in oil prices, or a real estate crash then PAYG pensions must reduce entitlements, but politically this is very difficult.

    As long as the state pensions are indexed linked, I am skeptical whether even nominal GDP targeting would be sufficient to make France, Spain or Italy’s pension systems sustainable.

    I suspect this is why Germany and Merkel have been insistent on structural reforms, (particularly de-indexing of pensions) before large scale purchases of Eurozone debt and higher inflation.

    The Eurozone is suffering from a PAYG pensions crisis, caused by a AS shock and adverse demographics. Had implicit pension liabilities been included in the Maastricht treaty, would the Eurozone be in this dire situation?

    Alternatively, if Spain’s pension system was funded similarly to Holland’s or Sweden’s would they have difficultly refinancing public debts of around 60% of GDP?

    If Italy, Spain and France credibly past laws stating that state pensions liabilities were subordinated to explicit public debt, that they would default on their pensioners before their bonds, would they have difficulty raising funds?

    Oh one further fact, recently the UK government chose to take over the Royal Mail’s pension fund, which has assets of £26bn and a deficit £8.4bn. This will reduce the UK’s reported public debt, as the assets will be included, but the liabilities excluded from published measures of the national debt. Surely this is lunacy?

    With each passing day, Japan’s response demographic crisis over the last two decades looks better and better.

    For an interesting comparison of Spain and Sweden’s pensions systems see:

    Thanks for the post.

  9. Gravatar of marcus nunes marcus nunes
    13. December 2011 at 09:48

    PPS. Something to cheer up my British readers, as the press is bashing Britain for not blindly signing on to the failed Eurozone policies being promoted on the continent. Britain was bashed even more viciously in 1931, when they opted out of the failed international gold standard regime. History has vindicated that “obstructionism” and it will vindicate this obstructionism as well.
    You just have to go back 20 years. I linked before, but it´s even more relevant here:

  10. Gravatar of Shane Shane
    13. December 2011 at 09:51

    Over the years you’ve completely convinced me that as far as increasing AD goes, fiscal policy is equivalent to monetary policy. But I’m still not completely convinced that fiscal policy is totally equivalent to monetary policy because it seems to me there may be cases in which fiscal policy can work around AS problems that monetary policy cannot.

    If the supply problem is that there are a bunch of zero marginal product workers as far as the private economy is concerned, then it seems to me that fiscal policy can play a role that monetary policy cannot. The government could hire these workers to clean public buildings and parks, visit the sick and elderly at home, work as watchmen and women, etc. etc. This wouldn’t be a complete waste as they could prevent real losses to the economy by making sure people don’t get sick in public places, lowering crime rates, ensuring that the elderly understand medication instructions and don’t get sicker, etc. This would also help ensure that these workers don’t become permanently unemployable. Finally, it could also transform some other unemployable workers into employable ones, as now there would be more demand for food service work, cab rides, bartenders from these newly employed government workers.

    But the point is that without fiscal policy coming in and transforming a sizable set of “useless” workers into employable ones, this extra demand would not exist, because these workers never would have been hired by the private sector. Fiscal policy would be the cornerstone of creating a virtuous cycle that improves both AD and AS problems in a way that monetary policy alone could not, which in turn would make monetary stimulus more effective (two great tastes that taste great together, as Yglesias says). All of this, of course, could be combined with labor market reforms and tax reforms over the medium term. But fiscal policy would have to move first for this to happen in an economy like that of the UK with deeper AS problems than the US.

  11. Gravatar of Peter Peter
    13. December 2011 at 10:17

    Wouldn’t supply side improvements be even more efficient now? If the supply side improvements put downward pressure on prices, the central bank will have to ease more to keep the … on target. That should make NGDP increase faster.

  12. Gravatar of Bob Murphy Bob Murphy
    13. December 2011 at 11:03

    Scott wrote:

    In fairness, the data in the article makes a mockery of all the claims that Britain is trying to engage in “expansionary austerity.” Since when is a budget deficit of 8.4% of GDP three years after a recession “austerity?”

    I think since the same time that economists started calling a tripling of the monetary base “monetary tightening.” Call what the Brits are doing “passive austerity.”

  13. Gravatar of Tony Holmes Tony Holmes
    13. December 2011 at 12:13

    Not sure what you have in mind when you refer to Labour’s huge marginal tax increases on those working in the City. Are you referring to the 50p tax rate (which applies to all, not just those in the City) or the one-off bank bonus levy ?
    In any event, given the Government mantra of “We’re all in this together”, tax reductions for people widely regarded (rightly or wrongly) as being partly responsible for the current financial problems would be politically daring, to say the least.

  14. Gravatar of Mike Sax Mike Sax
    13. December 2011 at 12:37

    Scott I posted a comment before that has unaccountably disappeared… Interesting.

    As to what you say about Britain, ” Something to cheer up my British readers, as the press is bashing Britain for not blindly signing on to the failed Eurozone policies being promoted on the continent. Britain was bashed even more viciously in 1931, when they opted out of the failed international gold standard regime. History has vindicated that “obstructionism” and it will vindicate this obstructionism as well.”

    The analogy between the current Euro system and the old gold standard is apt still I don’t see Britain did anything to be proud of here. If anythign Cameron was very silly-this agreement wasn’t binding on Britain anyway only the 17 euro countries and Britain has just given the French what they alwasy wanted-a French and German dominated Europe with England marginalized. It was a political error with no upsdie at all.

  15. Gravatar of ssumner ssumner
    13. December 2011 at 12:51

    DB, I agree.

    Gabe, The BIS was not set up in the late 1930s–and it’s a powerless institution.

    jj, good point.

    nmd, Lots of good points there. I completely agree about the pension problems. I believe Britain has both supply and demand side problems, and fiscal stimulus would address neither.

    Not sure about Japan, don’t they have huge debt problems?

    Marcus, Yes, 1992 was another good example.

    Shane, I don’t see any evidence that there are ZMG workers. I see lots of very low productivity jobs currently paying $8 hour. With more demand, more such workers would be hired.

    I doubt governments would hire those workers anyway–unions would object.

    Peter, Yes, I’ve made that argument too. This would be a great time for the US to abolish minimum wages. I believe Germany doesn’t have them (or didn’t until recently.)

    Bob, I’ve addressed that before. Fiscal stimulus is costly, it required effort. Monetary stimulus is free. For monetary policy the only question is whether you’ve set the steering wheel in the right position. If not, then turn the d*** wheel.

    I’m disappointed you didn’t like my sobriety metaphor–I thought you’d want to use that against Krugman. Instead you go after me!

    Tony, I meant the 50% rate, the top rate under Labour for more than a decade. If the public wants to screw the rich, then I guess the government will have to go along. But remember what the UK was like in 1979?

    BTW, It’s not the bankers fault they got bailed out, it’s the government’s fault. They bailed out banks and let NGDP fall sharply, when they should have done the exact opposite. Now they compound one mistake with another, just like the US did in the 1930s. Our depression lasted 12 years.

  16. Gravatar of ssumner ssumner
    13. December 2011 at 12:55

    Mike Sax, Sorry about the comment, I don’t know how that happened (I almost never delete comments.) Perhaps you could try again.

    I don’t agree about Britain. With their support the evil gang on the continent could have used EU institutions to advance their cause, as all 27 countries would have been on board for a treaty change. Now they can’t. At least that’s what I’ve read elsewhere, from experts than know much more than I do. The Europeans are irate, because they know it does make a difference.

  17. Gravatar of Steve Steve
    13. December 2011 at 13:25

    Re: Britain

    My impression from reading *private sector* British economists is that they’ve been a couple steps ahead of private sector US economists for the last few years. They’ve been talking about solving the debt/GDP crisis by raising the denominator for two years, and a few were talking about needing more monetary stimulus all the way back in 2008. I’m not sure *why* the Brits are ahead of the curve, but I imagine that’s why the BOE has political cover for QE and Cameron has political cover for dumping on the EU.

    Also, I recently read that Venezuela left the gold standard in 1930. Was that seen as an example of “Latin torpor” and therefore not to be taken seriously? Or was there an earlier recognition of the problem among economists who weren’t morally righteous about golden money?

  18. Gravatar of Andrew Andrew
    13. December 2011 at 14:58

    “And if I’m not mistaken Swedish per capita GDP caught up to and passed the UK a few years back.”

    On the point on Sweden vs UK GDP, you are much mistaken.

    Swedish GDP per capita has been higher than UK GDP since before the 1960s, i.e. for at least the past five decades. And they achieved that with a higher public sector.

    That doesn’t prove that the UK will do better with a bigger public sector. But your conjecture that it will do *worse* is contradicted by that (small) data point.

  19. Gravatar of W. Peden W. Peden
    13. December 2011 at 17:06

    Scott Sumner,

    The 50% tax rate is quite a new phenomenon. I think it goes back to 2009-2010 in the run-up to the general election when it was aimed to be used as “dividing line” against the Tories. It didn’t work as a means of keeping Brown in Number 10, but that doesn’t make it any better.

    The UK could do a lot of good work by reducing the regulatory burden on small businesses, simplifying small business taxation and introducing the “card system” of welfare suggested by the Project Armaggeddon report.

  20. Gravatar of Andrew Andrew
    14. December 2011 at 00:11

    Just to add: the 50p tax rate was only brought in in 2009. The top rate of tax before that was 40p, and had been since the late 1980s.

    With respect (I do like this blog), you really need to improve your knowledge of the UK, and the EU, you’re going to make sweeping (political) generalisations.

  21. Gravatar of Passing By Passing By
    14. December 2011 at 01:46

    Professor Sumner –

    You’re right, the Economist article is a mess. Reading it, I immediately suspected politics.

    The magazine supports the Cameron/Osborne austerity drive [‘Has the government’s budget-cutting strategy only made a bad hand worse? Has it been a “colossal failure”, as the shadow chancellor, Ed Balls, attests? No, it has not.’]. One suspects that the editor told some hapless writer to come up with an argument in support. And he/she did.

    Not an assignment I’d want.

  22. Gravatar of MMJ MMJ
    14. December 2011 at 02:23


    Also worth noting that in the last cycle the UK had a significant expansion in its labour force courtesy of immigration. That driver of growth is no longer there.

  23. Gravatar of Britmouse Britmouse
    14. December 2011 at 02:49

    Andrew is right about Sweden vs UK per-capita-GDP, but it is indeed remarkable how aggressively Sweden has cut government spending as a % of GDP.

    If the BOE do suppress NGDP growth then the UK will get the “Nordic model” by default; we’ll be stuck with government spending at around 50% of GDP, high marginal tax rates, etc. Given how hard it is to get measured productivity gains out of the UK public sector (union intransigence, low public demand for reform), it is hard to see how this could result in strong real per-capita GDP growth.

    Strange how monetary policy dictates political as well as economic fortunes, yet monetary policy makers can so well insulate themselves from public accountability.

  24. Gravatar of Britmouse Britmouse
    14. December 2011 at 06:14

    Linda Yueh skewers Spencer Dale pretty nicely here.

    a) The BOE think flat output growth is likely over the next few quarters, and that a recession is possible.

    b) The BOE think monetary policy only works with a “lag”.

    c) The BOE looks at the forecast of inflation, not the current inflation rate, when deciding policy.

    d) Bam, 7m30 onwards: Why does current high inflation constrain further easing now?

    Dale’s response: . (Paraphrasing) We don’t have a clue what is going to happen to inflation. The supply shocks have obscured our view. We’re shooting in the dark here. We know inflation is high now though! High inflation is bad, so we’re not sure what to do.

    This is Spencer Dale… Bank of England Chief Economist! Over to Private Fraser.

  25. Gravatar of ssumner ssumner
    14. December 2011 at 19:46

    Steve, The UK was ahead of us way back in the 1930s, so it’s nothing new. And they had bad supply side problems as well–again nothing new.

    Andrew, Is that in PPP terms? I seem to recall the UK was higher a few years ago, when it was richer than Germany and France. Obviously in nominal terms Sweden’s always been way ahead.

    BTW, I knew the top rate was raised in 2009. That was a typo on my part. I meant to write “above the 40% top rate for a decade under Labour.” I’m typing too fast. I actually do follow the UK fairly closely. I can recall when the top rate was 83% on labor income and 98% on capital income.

    Blair/Brown kept it at 40% for 10 years precisely to reassure the City, just like their move in May 1997 to make the BOE independent.

    MMJ, A hugely underreported story in the UK, US, Ireland, Spain, etc.

    Britmouse. That may be right, but I also look at relative performance, at least for developed countries. (Obviously developing countries have a catchup factor.) Sweden did poorly when it’s government grew, and has done better since it’s shrunk. The UK made a big mistake to move in the other direction. Sweden’s government is obviously much more efficient than the UK government (I’ve lived in the UK!!), so that allows for a higher level of per capita GDP.

    Regarding your second post. Is there anyone in the UK arguing that we can’t have more fiscal stimulus now (or slow the move toward austerity) because inflation is above target? What does Balls say about that?

  26. Gravatar of Britmouse Britmouse
    15. December 2011 at 02:39

    There are some hard money/”liquidationist” right-wingers who think we need lower fiscal spending *and* tighter money because inflation is high, even in the UK. But not very many.

    Balls says high UK inflation is mostly caused by tax changes (VAT and fuel duty) and uses it to attack Osborne, but then he almost always describes the impact as a demand or “confidence” shock, which will lower growth and hence make deficit reduction more difficult, which makes no sense.

    (In fact VAT revenue has gone up very strongly, capturing an extra 1% of NGDP this year; of course it is reasonable to say deficit reduction hurts real growth if you hold nominal growth invariant.)

  27. Gravatar of ssumner ssumner
    16. December 2011 at 12:03

    Britmouse, It would certainly be odd for a lefty to make a Laffer Curve argument for the VAT tax!

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