Wednesday, 14 July 2010

Are you a double-dipper?

One of the most important political debates in the country right now - as it has been for the last few months, and as it probably will be for the next couple of years - is whether spending cuts and tax rises are going to precipitate a 'double-dip' recession. Expert economists and not-so-expert newspaper columnists are lining up on either side; politicians have staked out their ground, seemingly full of certainty, even passion. Who to believe?

Having consulted with professional economist friends, there's not much that you can robustly rely on in either the theoretical or the empirical research (that is, through looking at computer models or at history). You'll hear people bandying about terms like aggregate demand and referring to dates such as 1937. But the data, wherever it comes from, is inconclusive.

And this is unsurprising as the economic success of the budget fundamentally comes down to two things. Firstly, the world economy - if that goes down it's likely we will too, regardless of our fiscal policy.

The second factor is close to home (literally, in a sense): confidence, of businesses, individuals and markets. In an important respect, your answer is as good as anyone's as you are (if you're reading this in the UK) one of those individuals whose attitude will determine whether the budget ends up promoting economic growth.

So tell me - did the budget make you feel good about the future or bad?

The more people and businesses feel confident in spending and investing because they see government debt and the future tax burden coming under control, the more the budget will have been good for economic growth.

The more people and businesses feel too worried to spend and invest because they see immediate spending cuts and tax rises resulting in fewer jobs and less demand for goods and services, the more the budget will have been bad for economic growth.

Whether you feel good or bad about the future - and whether most people and businesses agree with you - will determine what happens next. And that's something economic models or a study of history cannot estimate with any certainty. There can be a very respectable difference of opinion on this. But it's difficult for even the best economists - and certainly newspaper columnists and politicians - to claim any special insights.

11 comments:

Brit said...

Exactly, these things are self-fulfilling.

The Coalition cut-talk is primarily about trying to boost private sector confidence, by showing that the deficit is controllable and by being seen to tackle the squeezing out in many regions of private sector jobs by huge public sector employment.

Whether all of these cuts (which are largely backloaded to the end of the Parliament anyway) will materialise in such a severe form is an entirely separate question.

Neither Labour nor the Coalition can explicitly admit this of course - the former for political reasons and the latter because it would defeat the object. I'm surprised the likes of Nick Cohen haven't observed this - he's shouting 'doom!' instead.

Gaw said...

It's hilarious how many people have become confidently expert on the macroeconomics of fiscal policy. The more you know about it, the more you realise how simple but unknowable it all is (like most things).

Gaw said...

I should probably have said 'uncertain' rather than 'unknowable'. It's amenable to judgement if not modeling.

Brit said...

Heh heh... I'm much keener on 'unknowable' than you...

Gaw said...

I knew that.

malty said...

My favourite font of all financial knowledge is labelled Blanchflower, the good old BBC takes him out and dusts him down or at least makes a transatlantic smoke signal, every time their backroom minders want to rubbish the latest govt wheeze. Yon Blanchflower sounds like he knows all, eff all, which makes him an excellent financial (wheelable out at short notice) expert.
Three certainties in life, birth, death and a world economy unguided by human endeavour.

Gaw said...

Danny's certainly got a gob on him. In other words, his statements don't seem invested with much academic circumspection do they?

Francis Sedgemore said...

Double-dipping sounds like some particularly juicy sexual indulgence.

Gaw said...

Yes, Francis. And are you?

Sophie King said...

My other half, a head-hunter, has almost more work than he can handle at the moment. The business world across a number of different sectors certainly seems to be feeling quite robust about the future.

Francis Sedgemore said...

No; these days I live an exceedingly unexciting life.