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    In the black Labour: some issues

    Sun, 12/04/2011 - 08:33 EDT - Stumbling and Mumbling
    • Comments

    If I were one of the authors of In the black Labour, I’d be taking great comfort from recent US economic data.
    These show that the economy is holding up well, despite the prospect of a significant tightening of fiscal policy next year. This hints at an intriguing possibility - that, maybe, expected future fiscal tightening need not be contractionary now. Maybe people  are more myopic than conventional rat-max economics assumes.
    This weakens one obvious objection to ITBL’s proposals. Hopi says that “fiscal conservatism for the long term doesn't mean fiscal stupidity in a crisis” - in other words, that Labour should run loose policy in recessions, with the promise of tightening later.
    If current US experience is right, such a policy is feasible, as the expected future tightening need not depress current activity and so offset the current loosening.
    Instead, I have three other quibbles.
    One concerns the mechanism for enforcing future tightenings. Hopi suggests “an obligation, policed by the OBR, to run a current spending surplus in any year when growth is projected to be over 2%.”This runs into a problem - that growth projects are often wrong. If - as is usually(pdf) the case - a recession is unexpected, such a rule could well mean the government tightens fiscal policy at the start of a recession.
    I would prefer to see either stronger automatic stabilizers - higher marginal tax and benefit withdrawal rates - or state-contingent policy tightening, based upon realish-time indicators (eg VAT rises if retail sales growth exceeds x%).
    My second concern is about the financial balances. Governments can only run surpluses if the private sector invests more than it saves; this is an accounting identity. But what if the dearth of investment opportunities and households’ desire to pay down debt causes the private sector to run sustained financial surpluses, even if growth were around its modest trend rate? In such circumstances, government efforts to run a surplus would be counter-productive.
    My biggest concern, though, is the public choice aspect. Two things will put upward pressure upon the public finances: Baumol’s cost disease, which causes the relative cost of public services to rise over time; and the fact that Labour’s client base -  public sector unions - will demand increased spending. It’s a little optimistic to hope, as ITBL do, that these can be fully offset by “prioritisation, institutional innovation and reform.”
    Fiscal conservatism will thus require a large, and expanding, tax burden; as ITBL say: “if we want to collectively fund something, we’ve got to collectively pay for it.” But I detect little public appetite for collectively paying more.
    How can we reconcile the two? It would be forlorn to hope that taxing the rich would be sufficient here - not because of Laffer curve considerations but simply because there are so few of the rich. One possibility is to close the “tax gap.” But if this proves insufficient, the tax base might have to be broadened somehow.
    Which brings us to the problem that whilst fiscal conservatism is an attractive principle - the 1945-51 government showed that ITBL are right to say that “there is nothing right wing about fiscal conservatism“  - its implementation will be much tougher.
    This, though, is not so much a problem for ITBL alone as for any fiscal policy.

    • Original article
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