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Sunday, October 26, 2008

ECONOMIST'S LETTER

The Telegraph letter on Alastair Darling's announcement to let spending rip to end the recession:

Further to your interview with Alistair Darling, we would like to dissent from the attempt to use a public works programme to spend the country's way out of recession.

It is misguided for the Government to believe that it knows how much specific sectors of the economy need to shrink and which will shrink "too rapidly" in a recession.

Thus the Government cannot know how to use an expansion in expenditure that would not risk seriously misallocating resources.

Furthermore, public expenditure has already risen very rapidly in recent years, and a further large rise would take the role of the state in many parts of the economy to such a dominant position that it would stunt the private sector's recovery once recession is past.

Occasional slowdowns are natural and necessary features of a market economy.

Insofar as they are to be managed at all, the best tools are monetary and not fiscal ones. It is inevitable that government expenditure and debt naturally rise in a recession but planned rises in government spending are misguided and discredited as a tool of economic management.

If this recession has features that demand more active fiscal policy, which is highly disputable, taxes should be cut. This would allow the market to determine which parts of the economy shrink and which flourish to replace them


Signed by a whole bunch of people that nobody on breakfast TV has ever heard of.

This is pure free market theory & actually overly generous to Darling.
As a supporter of X-Prizes I actually do believe it is possible for government, if it is sufficiently competent, to choose which parts of the economy have most potential to grow. Specifically good investment in transportation systems does tend to have a major influence on everything else in the economy - disproportionately more than average investments. Also investment in education purely for work (measured as adult male education) does so.

Beyond those however allowing the market to make the choices is wise for a competent government. In this case "monetary tools" means cutting interest rates, as John Redwood has been saying for a long time & even Vince Cable has recently started saying. Personally I would say putting it into cutting corporation tax would do even better (as in Ireland) because it is more directly targeted at the most productive parts of the economy.

Of course this critique is based on the theoretical assumption of competent government, which is why it is overly kind to Darling.

Our Chancellor has said specifically that the investment will go on new schools, hospitals & housing. The first 2 will not have any multiplier effect beyond employing builders. School roles are actually falling. Housing, if anything is worse since houses, at least at present prices, are a glut on the market & more of the same will just depress the rest of the market further.

Had he said the money should go on building nuclear power stations, improving roads, tunnels, X-Prizes, supporting the formation of new off site manufacturing of houses, & hiring retired tradesmen to run evening classes (or day classes, but the teachers unions wouldn't like it) I would think that probably a useful way to spend money even though we have to borrow it in the first place.

However the same or better effect could be obtained by just cutting the morass of government controls we have. We don't need government subsidies to build nuclear power we just need government to say it is allowed - tomorrow, not in 5 years after everybody has spent 5 years filling in paperwork. We don't need government subsidies to build houses we just need government to get off the backs of builders & let them build - a bridging loan guarantee to get mass modular construction going would be fine but if builders aren't forced to change their designs for every council & sometimes every house then mass production would get going anyway albeit a little more slowly. If we got rid of the 90% of the regulations & bureaucracy which has ensured the new Forth Bridge & Millennium Dome cost 13 times their real building cost then building, which accounts for a massive proportion of the economy, would take off without another 1p spent.

Comments:
...but if builders aren't forced to change their designs for every council & sometimes every house then mass production would get going anyway albeit a little more slowly.

Here in the US we have three building codes that are used by local governments and a fourth that is used for mobile homes. The private organizations that publish the three codes for fixed housing are merging meaning that there soon will be a national code for site built housing with only minor local variation. Mobiles will still have the national HUD code.
 
The proportion of homes which are modular or partly so seem to vary widely around the world & this can only be because of the government regulations. Yhe UK seems to be at the back end of this queue.
 
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