Monday, 5 June 2017

We need stimulus when inflation is at the 2% target??

Simon Wren-Lewis (Oxford economics prof) says “We desperately need…more current spending to boost demand..” Whaat? Inflation is already at or above the 2% target, isn't? If SW-L has now abandoned the 2% target, I suggest he should explain why.

Next, in his second para, SW-L argues that fiscal stimulus is a reliable way of getting interest rates “off their lower bound”. Well I agree that fiscal stimulus is a reliable way of raising demand, which in turn will raise interest rates and which cuts unemployment and solves the basic problem (assuming, contrary to my above paragraph, there is scope for raising demand). But why the ADDITIONAL objective of artificially interfering with interest rates? So that, come the next recession, the Bank of England can cut rates? But SW-L just admitted that fiscal policy deals with unemployment. So why the need for artificial interest rate adjustments?

The optimum, or GDP maximising rate of interest is presumably the free market rate. Why interfere with it? Moreover, according the Bank of England, interest rate adjustments do not work particularly quickly: in fact according to the BoE they take a full year to work.

Also there is no need to wait for politicians to squabble over exactly what form fiscal stimulus should take (tax cuts versus more public spending, or increased spending on health versus more spending on education). An element of variability can perfectly well be built into public spending and tax. For example during the crises, the UK cut and then raised VAT: all without the say so of politicians. That element of variability could easily be enhanced. Though obviously in the long run, the proportion of GDP going to public spending is a political matter, and should be determined by politicians and the electorate, as should the proportion of public spending going to health, education, law enforcement, etc.

And finally, the reason I follow SW-L’s blog is that I find his articles interesting, provocative, high quality, etc. But I think he slipped up with the above mentioned article.



The title of SW-L’s article is “Could austerity’s impact be persistent.”

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