The “Magic Money Tree”
Ed Balls has confused me. He says, in an interview in the Telegraph:
Something must be done now … you need some fiscal action … I care more about having something, some action other than nothing, to [prompt] a temporary injection of spending power whether it was VAT, a reintroduction of the 10p rate or a basic rate tax cut – any of those could work.
It is clever, because whatever George Osborne does in the Budget next week, Balls can say he said it first, or he can castigate the Chancellor for doing nothing.
But the peculiar thing is that Balls might also be right. I don’t know. And it is the radical state of my not knowing that has confused me. Because Paul Krugman is a Nobel prize-winning economist who is very clever and he says governments need to borrow more to put more spending power into western economies.
Eli Dourado has wrestled with the same problem:
It seems natural to conclude … that if Krugman and I disagree, the fault lies with me. After all, he is much smarter than I am, so shouldn’t I converge much more to his view than he does to mine?
Not necessarily. One problem is that if I change my belief to match Krugman’s, I would still disagree with a lot of really smart people, including many people as smart as or possibly even smarter than Krugman.
So that is fine, then. I can simply choose the view that feels right to me and there’ll be some Krugman-class economist to back me up.
Last week, David Cameron expressed a view that feels right to me when he said:
There’s no magic money tree to fund this ever more wishful borrowing and spending. Labour’s plan is completely incredible. And we won’t be following it. We’ll be sticking with ours. And at the same time as dealing with our debts.
Yeah but no but yeah. There’s no magic money tree but there is Quantitative Easing, which is creating money. Although I don’t understand why it adds to the money supply, but it is not money that the Government actually spends on anything useful such as teachers and doctors.
But then, last week, Sushil Wadhwani, who is also very clever and a proper economist, delivered the Annual Peston Lecture at Queen Mary, University of London, said, I paraphrase, “Never mind QE or tax cuts or higher capital spending, just give people free money.” His illustrative plan is to give all UK citizens a voucher for £300 that they would have to spend in three months.
Now that really is a magic money tree. Or a magic helicopter drop, as other respectable economists call it. But other very clever economists, such as Gavyn Davies, disagree. They say it didn’t work in Japan; but then other economists say yeah but no but it might work here because we are rubbish at saving.
Then other very clever economists such as Jonathan Portes say that the Government can borrow as much money as it likes because interest rates are so low. Which is another magic money tree. And that we should build as much infrastructure as we can find a use for.
But as I am against building airports, or HS2, or roads, or houses, I don’t know.
And nobody can explain why unemployment keeps on falling.Tagged in: economics
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