10y breakevens are now *down* from 4.2% last week to 3.8%…?
(And 5y breakeven inflation is down even more from 4.7% to 4% …?) pic.twitter.com/csAyYP8xzI
— Basil Halperin (@BasilHalperin) September 27, 2022
To be clear, I don’t envy their current macroeconomic situation. But again, the talk of how terrible this is seems much overblown to me.
Now you might be wondering how the five-year break even rates can be so well behaved. Well, here is a dirty little secret: there is much less stimulus in the Truss plan than people are claiming.
I don’t mean to pick on Josh Barro, of whom I am a huge fan, but his pithy summary is so clear it allows me to summarize some of my disagreements on these issues. Here is one excerpt from his Substack:
It’s a huge fiscal stimulus at exactly the wrong time. Truss is proposing over £160 billion of deficit-increasing policies over the next five years. To give you a sense of scale, since the US economy is approximately eight times the size of Britain’s, the equivalent would be if we implemented an additional $1.4 trillion, five-year stimulus package.
I agree this is expenditure, but by no means is all or even most of it “stimulus.” As Josh notes, the energy price subsidies are the biggest part of this announced plan. I am against that policy, but it is trying to absorb a contractionary shock rather than being stimulus per se. The Truss plan is transferring much of that higher energy cost from the private sector to the public sector. The real cost involved is mostly the preexisting problem from the higher cost of energy, which now is on the government’s books to an increasing degree. Many people are speaking of that as “a cost of the Truss plan,” which it is in terms of nominal flows but not nearly as much in real resource terms (I would admit and indeed stress that the plan distorts relative prices, which is a big part of my objection to it).
That is probably one reason why the five-year break-even rates for the UK generally have been falling, not rising.
Then there are the tax cuts for the wealthy. But those too are (mostly) not stimulus. Dare I make a…Barrovian argument? If you cut taxes, hold spending constant, and the tax cut recipients save most of that money, that satisfies the Barrovian neutrality theorem. That also isn’t stimulus. (Obviously government spending isn’t constant, but the main boost in spending, as discussed immediately above, is not itself net stimulus but rather a funny inefficient transfer that still leaves a net contractionary force partly in place, namely higher energy prices.) You might object to the tax cut policy for distributional or other reasons, but you shouldn’t add it to “the stimulus pile.” At least not most of it. Furthermore, you can buy this argument without accepting the (Robert) Barro analysis for more general settings.
Again, people think there is much more “stimulus” in the new plan than there really is.