Friday, 26 August 2011

A sense of vindication...and fear

Jonathan Portes, Director of the National Institute for Economic and Social Research and ex-chief economist at the Cabinet Office has a masterly piece 'The coalition's confidence trick' in this week's New Statesman. I'm not providing a link because as many people as possible should buy the mag and support good journalism; I can assure you it will be money well spent. But here's a flavour...

Portes systematically rebuts the coalition's case on the timing of deficit reduction. For me, this is the key paragraph:

"...with regard to confidence and the threat of higher interest rates, and despite a very large deficit, interest rates were low and stable at the time of the 2010 election; government borrowing was as cheap as it has been for decades. There was no market panic. In the run-up to the election, senior economists in government, including me, were worried that an inconclusive result would lead to market jitters or worse. But we were wrong; even during the fraught negotiations to form the coalition, both gilt yields and the pound were remarkably stable".

The STUC has stressed this point time and time again over the past year but still the coalition sticks to the 'UK is the next Greece' scenario. Sure others have taken them on; Martin Wolf of the FT has been consistent on this and a number of international voices (Krugman, Stiglitz etc) have weighed in. But this is first piece I've seen which comprehensively links last year's big cons to Gideon's more recent claims that falling gilt yields through the summer prove markets regard the UK as a 'safe haven' due to the coalition's fiscal policy.

Portes is appropriately dismissive of this nonsense; explaining that as gilt yields fall, so do stocks and sterling - 'Low long-term interest rates reflect economic weakness and a lack of market confidence in the prospects of the Uk economy'. (He even chucks in a lovely graph of yields on UK ten-year gilts since '94 which I intend pinching with my lovely new snipping tool).

Noting that Gideon refers to his Nobel Prize winning critics as being on the 'outer fringe of the international debate', Portes concludes with the observation that 'this argument ['slower pace of consolidation combined with policies to support growth'] is neither radical nor old-fashioned Keynsianism, nor is it in anyway unorthodox. It is just standard, common-sense macroeconomics; or, just more simply, common sense'.

Yep, its Gideon who inhabits the lunatic fringe.

Stephen Boyd - STUC

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