Duncan Weldon notes that the tectonic plates seem to be shifting on the economy - Nick Clegg is apparently talking about the cuts as a political choice, rather than something forced on us by the impersonal powers of the bond market.
At the same time, interestingly, the Daily Telegraph’s role as a surprising source of opposition has spread to the economy. Only two newspapers covered the Hutton report’s buried disclosure that there is no public sector pensions crisis. One was the Guardian - no surprises there - but the other was Jeremy Warner’s Telegraph business section.
Warner is also of the view that the government has no policy for growth. So there’s an emerging divide between the cross-party cuts consensus, which now holds that their policy is an explicit political choice and that the more it hurts, the better, and a wider opposition. After all, the cross-party cuts consensus consists of the Tory and Liberal leaderships and the Blairites - it’s not surprising that the opposition should also be quite diverse.
The basic question here is, as the Worthwhile Canadian Initiative points out, where the demand is going to come from. Osborne and friends are conflicted on this - it’s too simple to say that it’s a dispute between supply-siders and Keynesians, as in the 1980s.
To some extent this is true - the so-called “growth strategy” seems to be all about enterprise zones and beating up civil servants - but part of the justification for cuts has been an argument about aggregate demand. It is argued that the real problem is one of confidence - presumably confidence in the government’s finances - and that a display of toughosity will restore the confidence required for those ol’animal spirits to recover.
There are other arguments, for example that the cuts are necessary to keep interest rates down, but then again interest rates are not high or rising, and the policy rate is on the zero bound. So this has to be an argument about investment and animal spirits, in so far as it is required to make sense at all.
A further argument is that Ricardian equivalence holds, and that therefore cutting the government deficit induces the private sector to spend. As the majority of investment is private, and the private sector is held to be more efficient axiomatically, this is thought to be expansionary in the short term and pro-growth in the long term. But this is really a redescription of the story about confidence.
Indeed, the very idea of “expansionary fiscal contraction” has a Keynesian gloss - it’s meant to be expansionary, it doesn’t deny the whole issue of the demand side - whether you accept it or not. Its opponents reject it on Keynesian grounds and point out that all the cases produced in its favour involve substantial alternative sources of demand, such as exporting into the 1990s boom.
So, we have two very different views on the economy, both with broadly Keynesian underpinnings but with very different outcomes. The key distinction, perhaps, is the role of investment - the Treasury view is that there is insufficient investment due to confidence, and punishing the public sector will restore that confidence. The enormous cash balances the financial sector and large firms in general have built up will be released back into circulation.
The opposition view is that this crisis is just one example of a structural failing in the British economy - it just doesn’t do investment, even in the best of times, as Weldon points out here. Given liquidity, as they have been by monetary policy, the City and big business more broadly know exactly what to do with it, which is basically to lend it out against property. No amount of cuts will shift that, nor will low-level tinkering with enterprise zones. The government should either give them the government bonds they want, soak up the liquidity, and reinvest it itself, or else break up the banks.
But really, how good is the underlying economy? Are there special barriers to investment and growth?