Faster, please.

Gavin Kelly argues that it doesn’t much matter, from a practical point of view, what the Eds decide about the coming spending review. It covers 2015 and 2016, and administratively speaking changing it wouldn’t have much impact before the end of the financial year in April, 2016. After all, the Tories and the Lib Dems only managed to implement a few billion in in-year cuts.

I think this is, in a word, nuts. First of all, the comprehensive spending review timetable is not controlled by the precession of the galaxy. It was invented by Gordon Brown. It’s an administrative construct, not a law of nature. If it was absolutely necessary, it could be changed. That said, administrative constructs have a life of their own. After all, there’s a reason why the end of the financial year is in April.

Much more importantly, though, we should think back to the summer of 2010. It is of course true that a lot of the cuts weren’t implemented until much later, and indeed some still haven’t been implemented. But there is surely a reason why the recovery stopped dead in Q3 2010, just then. The Government took considerable care, over the summer and autumn of 2010, to communicate that it intended to swing to austerity, to prepare the public with rhetoric, and also to make early announcements that would be hard to roll back, as costly signals of credibility.

Hence the decisions to kill the Building Schools for the Future program and to chop the Nimrod MRA4 planes up for razor blades. They knew it would take some time to implement the plan, and they took action ahead of it in order to commit themselves irrevocably.

If you think expectations, predictions of the future, plans for investment, and forward guidance on policy matter in economics, you should take this very seriously. It is utterly conventional to say that governments should hand monetary policy to the central bank, or import credibility from a fixed exchange rate, in order to commit themselves in advance. If you’re a Keynesian, you presumably think animal spirits – largely intuitive enterpreneurial judgments of future prospects – play a key role in the determination of investment.

For some reason, “expectations” have always been used as a punch at Keynes, as an argument that stimulus always and only achieves inflation. This only works with full-blown Ratex, but still, it is surely strange that nobody seems to think that the government credibly signalling an intention to achieve deflation might cause rational economic actors to expect just that but everyone thinks the same would work for inflation. They had the power, they had the intent, and it was what half the country feared they’d do.

If you want a slightly more formal statement of this, consider either an adaptive-expectations model where people adjust their expectations to what just happened, or else a slightly more sophisticated one where people follow the trend with gradually increasing confidence, but try to identify break-points where things change. (I’m indebted to Daniel Davies for this idea.)

Another issue is the composition of the cuts. So far, they have disproportionately fallen on capital investment and specifically on construction. The front-loaded element was even more so. There are good reasons to think that investment, and even more so construction, are the leading variables in the economy. (Kondratieff, Keynes, and Kalecki thought so, and that’s just the Ks.)

Now, consider François Hollande. The PS has pursued the idea of staying the course until some future development makes it possible to do otherwise – either a shift in European politics, or eventually winning back the confidence fairy via enough “sérieux budgétaire”. Surely, the expectation this creates is that it’s not getting any better, and is likely to get worse with the chance of some sort of horrible accident, and therefore it’s best to dig a hole. Of course, being in the eurozone creates constraints the UK doesn’t have.

I’m on the record as saying that the worst possible thing that could happen at the election would be Labour getting Zapped into Hollandaise sauce. So I think that whatever is planned for the spending review, the very first days of the Eds should include an immediate demand shock, if nothing else to show willing. The example of 2010 suggests that it might not need to be very big. Similarly, the example of 2008 suggests that a relatively small discretionary stimulus might be more effective than we think. And both suggest that targeting capital investment and construction would help.

The title is, of course, taken from “Crazy Mike” Ledeen. If he could influence politics with his blog…

Leave a Reply

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

This site uses Akismet to reduce spam. Learn how your comment data is processed.