Would any amount of government borrowing count as ‘enough’ for Simon Wren-Lewis?
Today he released his exposé on “Mediamacro myth 1: 2010 Britain faced a financial crisis”. His central claim is that, although he acknowledges that “the government’s budget deficit was very large” in 2010, that was not a problem because “the deficit was rising because of the recession. It always does rise in a recession and fall in a boom…It was particularly high in 2010 because this recession was particularly deep.”
Perhaps someone might naïvely imagine that that would be all the more reason to cut back, but he explains why this is not right. “Any economist would cringe at the idea that policy should try and eliminate deficits and surpluses created by the economic cycle, because that would mean destabilising the economy.” From this he concludes that the well-known idea that it is a mistake to cut back on deficits created by automatic stabiliser effects serves to “undermine the idea that the high deficit [in 2010] was an immediate problem.”
Hmm. So we should not cut back on that element of a deficit that arises automatically as a feature of the economic cycle, no matter how big it is. That’s not quite true – there could be situations in which even cyclical deficits became so large they were dangerous – but let’s ignore that complication for now. Let’s grant that cyclically-induced deficits should not be cut back during recessions. What about non-cyclically-induced deficits – structural deficits that were not the consequence of recessions and would not go away as the economic cycle turned. One could be totally convinced that cyclical deficits should never be cut in a recession and yet equally convinced that structural deficits should be cut or avoided altogether. Lots of economists have been doubtful about structural deficits. Suppose for example that there were a structural deficit that were absurdly, insanely large. Plucking a number from the air, let’s imagine the structural deficit alone were so big that it were well over twice the maximum level of deficit permitted under the Maastricht Treaty (3% of GDP) – say 8% of GDP.
I know, I know. One can almost always reduce someone’s argument to absurdity by pushing it to crazy extremes that no-one would in practice contemplate. But just suppose, for the sake of argument, that the structural deficit were at such a mad level. Would Simon Wren-Lewis think it so obviously unreasonable or ignorant or being in the grip of a ‘myth’ if someone fully convinced of the merits of automatic stabilisers might nonetheless believe cutting back on an 8% of GDP structural deficit might not be crazy?
Perhaps he would think even that was crazy. But manifestly not because of anything to do with automatic stabilisers, because a structural deficit is, by definition, not an automatic stabiliser. So his discussion here would not be relevant to that sort of case.
Now perhaps, Dear Reader, you think that’s all very well, but is it really of any relevance to the context Simon Wren-Lewis is addressing? After all, he’s not talking about some crazy hypothetical extreme case. He’s talking about the actual situation in the UK in 2010. But the thing is – as you’ve doubtless guessed by now – that the actual situation for the incoming government in 2010 was that of the 2009/10 budget deficit of 10.2% of GDP, just 2% was cyclical (and thus an ‘automatic stabiliser’) whilst 8.2% was structural (see here). There were, of course, arguments for running a very very large structural deficit in 2009/10 and indeed 2010/11 and thereafter. A structural deficit provides an additional ‘injection’ over and above the injection provided by automatic stabilisers, potentially stimulating aggregate demand in a recession. And that is precisely what the government did – running absolutely huge structural deficits of 6.5% of GDP in 2010/11, 5.1% in 2011/12, 5.2% in 2012/13, 4.1% in 2013/14 and 4.2% in 2014/15. The Coalition has engaged in far and away the largest and most sustained fiscal stimulus ever seen in the UK economy.
Now obviously Simon Wren-Lewis thinks that running far and away the largest and most sustained stimulus, via enormous structural deficits year after year, was not enough. And he’s entitled to his opinion on that. But let’s be clear: those huge and sustained structural deficits which he thinks should have been even larger are nothing whatever to do with ‘automatic stabilisers’. The ‘myth’ around here is the one he’s attempting to spread.