Defensible conclusions from observing UK fiscal policy

Here are a few which are at least what I call “defensible”:

1. The UK economy was hit with serious problems, and fiscal (and monetary) policy did not respond strongly enough to keep the nation on track.  (NB: If you are citing measures of a cyclically adjusted gap in UK fiscal policy, you probably are citing evidence in support of this proposition.)

2. There has been a shift in the composition of government spending, which has led in turn to sectoral shift problems for former UK government employees.

3. UK government spending is underinvesting in that nation’s future, most of all in education but other public goods too.

You may or may not agree with these views, but again they are defensible.  You can point to both evidence and theory in their favor, noting that the skeptics may have other reasons for dissenting (but still they should accept the first-order evidence and theory).

Here is the view which is not so defensible:

4. A negative shock to UK government spending led to a negative AD shock and that drove the recent poor performance of the UK economy.

People, that one just ain’t true.  I’m receiving a lot of comments and emails, all citing evidence which supports versions of 1-3, but interpreted incorrectly as support for #4.

There is a big difference between #1 and #4 for their concrete implications.  For instance if you believe in #4, it seems that problem would be relatively easily fixed by more AD.  If you believe in #1, you have to think long and hard about what those initial shocks were, and then ascertain how much the resulting fallout from those shocks could be fixed by AD measures.  These become murky waters very quickly.  For instance a mix of collapsing London finance, disappearing North Sea oil, and mysterious British productivity puzzles (one possible set of options in these murky waters) probably can be fixed only a bit by a more expansionary fiscal policy.

I’m on board with the government spending/sectoral shocks to government employment point, though of course it is only one part of the problem.  I would note that everyone criticizes sectoral shocks theories until they wish to use them.  I also would suggest that this point is well explained by the conservative critique of entitlement spending, namely that it swallows up too many parts of the budget and the broader economy.

People are trying to use the UK fiscal policy evidence to argue for the “simple” view when instead they should be pushing the “murky” view.  And the murky view implies the whole mess just isn’t that easy to fix, or for that matter diagnose.


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