Saturday, 10 July 2010

Coalition are "ideological amateurs"

In the New Statesman, Keynesian economist David Blanchflower makes an impassioned and convincing defence of Labour’s spending and attacks the “ideological amateurs” of the Coalition. Blanchflower argues that Labour borrowing – at very low rates – stimulated the economy and kept unemployment down. The logical conclusion is that cutting government spending now threatens economic growth and risks a double-dip recession.

The evidence employed by Blanchflower is mixed. Quantitative data shows that our fragile economy is not yet ready to have state investment withdrawn at levels proposed by the government. For example, business investment in the first quarter of 2010 is estimated to be 6% higher than the previous quarter – but it is still 11% lower than the same period in 2009. Likewise, investment in private-sector manufacturing is down 29% on the corresponding quarter in 2009.

Blanchflower’s empirical approach is very persuasive, but where it suffers is the over-emphasis on qualitative data gathered through the consumer confidence index. This suggests that, between 19 April and 23 May, consumer confidence fell by 10 points and expectation regarding future economic conditions fell by 12 points. This sample, however, covers the period before and after a general election – a time of flux, instability and uncertainty – and would certainly have adversely affected consumer confidence. Furthermore, protracted coalition talks – with speculators unsure who would form the government – would only have compounded the situation.

Regardless of selective methodology, however, Blanchflower’s argument is very compelling. Austerity measures cannot create 2.5 million jobs – especially with the government putting all their faith in the private sector. Incessant talk of cuts and financial crisis creates a flawed confidence and makes private sector growth even less likely. There is a certain tragic irony that Vince Cable’s Department for Business Innovation and Skills is the first government department to face 25% cuts. The BIS, after all, is tasked with stimulating the private sector to create jobs.

Who’s going to stimulate the private sector when the BIS has been decimated and confidence has crashed? Who knows – but only state investment can remain immune to confidence crises.

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