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Pieria Panel: A path for growth

Pieria Panel: A path for growth

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With increasing concern over limitations of monetary policy at the Zero Lower Bound, the challenges facing developed economies recovering from the Great Recession appear to be growing.

Professor Miles Kimball has argued that “with fiscal policy…you really do have a problem as you have to deal with short run stabilisation and long run debt sustainability problems all at once”.

That may be correct, but if the multiplier for infrastructure spending is as high as even the Office for Budget Responsibility’s model suggests then perhaps fiscal policy can (and should) play a short-term stabilisation role without endangering long-term debt dynamics?

A panel of Pieria experts give their thoughts on the way forward:

Simon Kirby: “A sustained economic recovery will, in part, depend on private sector investment. At the moment uncertainty about future demand is weighing heavily on their decisions to invest in the UK economy. We need to remember that even in terms of infrastructure the majority of spending is undertaken by the private sector and this will continue to be the case over the long run.

Aside from providing a policy framework that provides certainty to the private sector in their decision making over large-scale investment decisions, government can have an impact on the short-term through increasing their direct spending on infrastructure and housing projects.  

There is a growing consensus that the government should be increasing infrastructure investment but the debate now appears to be over how that should be funded. Should it be paid for with a balanced budget approach or financed through borrowing?”

Philip Booth: “I think that is being discussed. Certainly Jonathan Portes at NIESR and on the other side of the debate people like Graeme Leach at the IoD are making this case.

Graeme Leach and I would argue that really there is no significant medium-term benefit to increasing the fiscal deficit. It is true that not all changes in spending are equal and some are more growth generating than others – capital expenditure on worthwhile projects for example.

The point that he and I would stress is that these things should not be done for the purposes of managing short-term aggregate demand but for the long-term supply-side benefits to the economy. So our arguments are somewhat different to Portes’ but he does make the point about the rate of interest at which the government can borrow and the profitability of public sector capital projects.”

Azad Zangana: “The difficulty that the government has faced is that it has been trying to start long-term infrastructure projects through private sector financing. These are the types of projects that would traditionally be funded by pension funds looking for yields that they are not getting from other investments at the moment.

That process has taken quite a long time. They are struggling to create a single platform for these investments, a way to monitor how these projects are going and in the meantime some of them have failed at the first hurdle in terms of due diligence.

In our view we think the government should be using its balance sheet quite aggressively to go for very long-term projects – I’m talking 50-100 years – paid for with 50-100 year government bond issues. I do think that pension funds would pick them up allowing the government to lock in current rates for projects that will be needed now or in the future.

They may be for example energy projects, transport or housing, which is an obvious area to start. There are plenty of areas where you can see benefits.”

Of course, there are alternative approaches that focus on how monetary policy can get around the Zero Lower Bound. Kimball is currently working on a paper with Ruchir Agarwal looking at how a combination of electronic money and negative rates could spur investment, while John Aziz suggests central banks could look at unorthodox policy that bypasses the banks.

What all of the panel agree upon, however, is that five years on since the start of the crisis a “bumpy plateau” for the UK economy is not an acceptable policy compromise.


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Kirkby says “government can have an impact on the short-term through increasing their direct spending on infrastructure….”

It can take YEARS to get infrastructure projects going (planning permission and all that), by which time the recession might be over.

Infrastructure spending is about the LEAST APPROPRIATE anti cyclical form of spending I can think of.

Zangana says, “Of course, there are alternative approaches that focus on how monetary policy can get around the Zero Lower Bound. Kimball is currently working on a paper with Ruchir Agarwal looking at how a combination of electronic money and negative rates could spur investment, while John Aziz suggests central banks could look at unorthodox policy that bypasses the banks.”

My advice to Kimball, Agarwal and Aziz is not to bother. You don’t need bizarre and unorthadox ideas like “negative interest rates” or “electronic money” or “by-passing banks” to get around the zero bound. Advocates of Modern Monetary Theory (of which I am one) worked out how to do it long ago.

As MMTers have pointed out ad nausiam, and as should be blindingly obvious, a deficit increases private sector net financial assets (i.e. it increases the monetary base and/or national debt). That’s quite apart from the fiscal or household inncome increasing effects of a deficit.

When the net financial assets of a private sector entity (household or firm) expand and keep on expanding, a point must come where the household (or firm) starts to spend, even given constant or zero interest rates. What do people do when they win a lottery?

What’s so difficult about all that? I’m baffled.

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