Supply matters - but so does demand (The Financial Times)

Noted economists Lord Skidelsky and Marcus Miller responsed in the Financial Times to Ryan Bourne and Tim Knox’s CPS Growth Bulletin “Some Perspectives On GDP Growth“. 

To view the full article, please visit The Financial Times website

“At long last, the defenders of George Osborne’s deficit-reduction strategy have come up with a reasoned case.

The thoughtful argument in support of the UK chancellor is made by Ryan Bourne and Tim Knox, economists at the centre-right Centre for Policy Studies think-tank. They say that Britain suffered a huge supply shock following the recession of 2008. This left it not only with reduced output, but also – by undermining the banking system and by causing a big increase in state spending and the national debt – with less capacity to produce output.

Since the problem is one of reduced capacity, Bourne and Knox contend, expansionary monetary and fiscal policy will not solve it. Policy should, instead, aim at raising the “medium term growth rate”. How to achieve this? By a “relentless focus on reducing the burden of government spending”, combined with measures that include cutting welfare benefits and taxes, rehabilitating the banks, scrapping planning laws and opening up public services to competition.

The logic is the familiar one that high public spending, whether financed by borrowing or taxation, crowds out more efficient private spending. So even if their recommended transfer of resources to the private sector involves a large drop in current output, these transitional costs will be worth it. Policies to avoid or mitigate this cost are wrong-headed. We would be, as Bourne and Knox say, mortgaging our future. So it is more austerity we need, not less.”

To view the full article, please visit The Financial Times website

Date Added: Wednesday 20th February 2013