Opinion: Danish economy shows now is not the time for Plan B

Critics of the coalition’s economic policy come from many and diverse perspectives, from those such as John Redwood who advocate the traditional Tory neo-classical approach of cutting taxes and spending until growth is achieved to those who advocate forgetting the deficit and spending until growth occurs.

The traditional Tory arguments were largely demolished by the great Liberal economist JM Keynes in the 1930s, and their reheated version disproved by JK Galbraith in the 1980s.

The arguments of those who wish to see stimulus spending are more cogent but the latest data concerning the Danish economy should provide them with food for thought.

In November 2011, Denmark’s newly elected Prime Minister Helle Thorning-Schmidt pledged to spend £2.2 billion a year more than the outgoing administration. The money was to be spent on stimulus packages to deliver growth for the economy. The package bears quite a similarity to those advocating plan B, and generally to the proposals of the UK labour party.

The outcome can be seen in the latest GDP figures for the country. In the second quarter of 2012 the Danish economy contracted by 0.5%, exactly the same figure as the contraction in the UK economy in the same period. The consequences for the Danish economy is that it now has a greater debt burden than was necessary for absolutely no benefit, and will have less flexibility in the future.

Stimulus packages are designed to inject short term capital and long term confidence into an economy but as I have previously argued, the confidence part of that equation will not be delivered automatically. Wider economic conditions must facilitate it.

Merely spreading the cuts over a longer period of time delivers uncertainty rather than confidence, negating the impact of a stimulus, as people stop spending money they actually have in anticipation of future cuts. This has the same impact as the actual cuts but without the deficit being reduced.

This is a point I have previously made here in relation to Labour’s economic plans. The coalition has already responded to the changes circumstances brought about by the Eurozone crisis by bringing forward infrastructure spending. Those advocating Plan B should also adjust their sights as they examine the state of Denmark and realise that all is not well.

* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election

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  • The problem with Redwood is that he has spouted so much garbage that it is hard to listen when he says something useful.
    Like a stopped clock, he is right once in a while.

    Sorry to hear that Denmark might have made something of an econimic balls-up.
    I hope they didn’t already have an onerous debt burden before their Govt. spending spree.
    I like Denmark: a bit of a cliche, I know, but the pastries are really very good there.

  • Not all stimulus spending is equally beneficial. This government is particularly bad at picking projects that have a multiplier effect, and particularly consistent in shoring up the financial resources of the megawealthy at the expense of everyone else.

  • toryboysnevergrowup 5th Sep '12 - 9:53am

    The Greek, Spanish, Irish, Italian, French and many other economies which ahve engaged on defict cutting programmes before growth was embedded do of course demonstrate the opposite. You cannot look at single factors like this in isolation – the Danish economy is very dependent on what is going on in its neighbours.

  • Is there really any ‘multiplier’ which is >1 for any ‘stimulus’ spending?
    If so, where is it? We can then keep investing in this money machine and pay off the debt with the tax receipts.
    As we have seen, once the ‘stimulus’ of public money is taken away, there is inevitable decline – see recent construction industry figures. If only there was a place where govt spendinng would produce genuine momentum that would continue once the spending stopped.

  • You seem convinced that yet more borrowing and spending is not the answer. That seems reasonable and the Denmark case supports the argument.. That leaves carrying on as we are, borrowing a mere £600bn extra over this parliament, or trying the approach of Redwood et al. There seems very little evidence that the current policy is having any effect.. The Coalition will have borrowed and spent more in 5 years than Brown borrowed in 13, but there are no signs of growth returning. You need a better argument against the Redwood alternative than that a couple of famous economists thought it wouldn’t work. There are no doubt some famous economists who think it will work. What does that prove?

  • Peter Watson 5th Sep '12 - 10:13am

    Prateek Buch raises the key point that David Thorpe must address before we can accept his headline statement Danish economy shows now is not the time for Plan B:
    Would the Danish economy have grown more, less, or exactly the same if they had not invested in a stimulus package?
    A follow-up question would also be, “Would we expect to see results yet?”.
    WIthout any evidence to show that growth would otherwise have been better or the same, David’s conclusion is just an unhelpful and unsubstantiated hypothesis to fit his prejudice – though is a clever way to work in a Shakespearean reference 😉

  • so the danish cutting their deficit by nearly half over the last few years down to about -1.8 is classed as a “stimulus” to you, and a failed one at that? it’s obvious what it is – a failed attempt to reduce the deficit to create growth. they’ve had low and negative growth since starting down this path. their deficit is about a fifth of ours and being reduced at twice the pace. it’s pretty absurd to class our country as without stimulus, and theirs as being with stimulus, a stimulus which has supposedly failed and should not be replicated. quite funny really because you’ve proven the opposite of what you set out to do. your right – no one should copy the danish. which in reality means – don’t cut your deficits, as we have clear proof right here, quarter after quarter, that even with a mighty current account surplus like denmark’s flooding the country with 6% of foreigners gdp, if you reduce your government expenditure you will cut off growth.

  • Thomas Long 5th Sep '12 - 10:42am

    The reality is that we have too little evidence to draw any real conclusions from current events and even from historic events including the 80s and the 30s.

    What we do know though is that debt can only ever act as a short-term fix and always causes greater pain in the long-run. We also know that false growth caused by constant borrowing was not only one of the contributors to the current mess that we’re in but that it also makes it harder to push through the substantial reforms that are needed to keep us competitive as a country.

    What the current government is doing is not working though… we’re currently borrowing ~6% of GDP annually and injecting it as a stimulus to the poor whilst trying to sell it to the people as austerity. No wonder people are so confused about what’s going on. Despite us injecting 6% of GDP into the economy it is flat-lining. This shows us the underlying state of it.

  • @ Tony

    While a VAT rise was sadly necessary in order to repair the budget deficit (do you think the Tories would have allowed the rate of income tax to rise?) VAT cut would do nothing to help us. It would simply suck in imports as has been proven with the UK in the past.

  • This whole thread goes to the heart of the futility of attributing the economy’s performance to one aspect of it – government fiscal policy.

    Simply injecting demand at at time when it is being sucked out at a rapid rate by external factors is frankly pointless. Net trade subtracted 1.0% of GDP in the second quarter of 2012 alone, compared with government spending which neither added to nor subtracted from it. While we might be able to help productivity improve by investing in infrastructure (though it’s worth noting here that the World Economic Forum report out today ranks us sixth in the world on this measure), so enabling us to capitalise on global demand when it improves, currently we are the prisoner of economic circumstances beyond our control.

  • @probook – the multiplier has to be bigger than 1 – for we are still borrowing. Yes of course such projects exist, or there would be no such thing as capitalism.

  • What I meant by ‘multiplier >1’ is a govt. spend that works as an investment.
    i.e. the economic benefit of the stimulus is large enough to generate a net gain in tax revenue.
    I would suggest that 10yrs of govt. deficit ending in a huge recession is good evidence that ‘stimulus’ via govt spending is not generally an effective investment. If it were, there wouldn’t have been 10 yrs of deficit!
    Make that 11yrs now.
    A very tricky thing, trying to manage an economy.
    Best to focus really hard on it rather than be distracted by HoL reform et al.

  • All the evidence and quite a lot of stuff in the journals is concluding that actually the multiplier is no longer a factor in growth.

    The multiplier theory postulates that if money is introduced into the economy a percentage is saved and a much larger percentage is spent thus creating income for others who in trun save a little and spend a lot etc.

    What now appears to be happening is that people are using increased income to pay down debt and are not spending it. I would hazard a guess that the constant doom and gloom put about by the press, the Labour Party and some of our own supporters plus the constant cowtowing to markets and the ratings agencies has scared a lot of people into changed economic behaviour and has put a lot of businesses off new investment.

    So the government could well be wasting its time with so-called stimulus packages because the expected multiplier effect is not happening.

    The best we can hope for from government spending on infrastructure is that it creates jobs, because it is only when the fear of unemployment is put behind us that confidence will start to reappear. Confidence to spend a little more and look forward to the future.

  • @ Alistair

    The whole point is the difference between private investment projects where the gains are necessarily quantifiable within conventional accounting methods and relatively short term and public investment projects where a wider, whole economy, view can be taken and time horizons are often longer.

    The point ProBook makes is still very valid – stimulus methods have to have a high multiplier in order to recoup the money put into them in the form of higher tax revenues. Under current circumstances of hostile external demand conditions, any stimulus will have an even lower multiplier than hoped because demand will simply leak out of the UK economy, leaving us with a big hole in our accounts and nothing to show for it. That is why Ed Balls’s call for a cut in VAT is preposterous. All the last cut did was (a) create an artificial spike short term demand (b) cause a collapse in demand once the stimulus was withdrawn because consumers had merely shifted spending forwards. It’s an economic “sugar rush” with no long term benefits.

  • Plan A isn’t going too well. Unemployment is reducing whilst the economy is contacting, demonstrating that the workers in the public sector that have lost their jobs created more wealth than the larger head-count of new private sector employees.

  • david thorpe 5th Sep '12 - 12:54pm

    thanks to all for the comments
    @ prateek-good point but impossible to rpove either way! also I accept their is a lg time-the problem is that confidence wont come as long as the eurozone is in the state its in-thats why its too early for plan B
    @ toryboysnever grow up-the irish economy is doing relatively well-they have revised their growth forecasts upwards and are returning to the bond markets under their own steam rather than needing to be bailed out by the EU-the other countries you mentioend did not cut as soon as the Irish did-and as such are at an earler stage of the cycle.
    @ Loz they may be a member of a party that calls itself liberal but are they practicing economic liberalism..

    On the point which has been made on VAT and other rises in the cost of living-I agree entirely-inflation must be kept under control-its being disregarded by commentators in the UK-but remember that stimulus packages cause supply side inflation as well!

  • toryboysnevergrowup 5th Sep '12 - 1:06pm

    @mick ft
    “All the evidence and quite a lot of stuff in the journals is concluding that actually the multiplier is no longer a factor in growth.”

    I think you missed out “i wanted to look at ” after “evidence”


    And what happened to the Irish economy and its deficit first? I’m afraid that you just don’t get the point that you cannot make the conclusions you make on just a single piece of evidence. One of the main drivers of the Danish economy has always been the German economy – perhaps you should look there for your answer first. Did you read last weeks New Statesman where all those economists who originally supported the government’s deficit reduction programme know believe it is time for a Plan B – why do you think that your view is more credible than theirs based on one ratehr tendentios piece of evidence re Denmark??

  • toryboysnevergrowup 5th Sep '12 - 1:08pm


    PS the Irish were bailed out by the EU and also the UK Government

  • “We’re in a debt crisis and we need to pay down debt.”

    Crikey. Primary school economics. Money IS debt. How can you use it to pay itself down? Why will deflation bring growth? It’s just as silly as saying that inflation will cause growth, but that’s the problem with people that confuse balance sheets with economics – see for example that propaganda diatribe from the IEA you linked to, Tom Papworth. For example, the channel tunnel is described as a failure of government infrastructure spending because of its balance sheet, owing to the fact it didn’t attract as many passengers because the ferries reduced their prices. However, the fact that the ferries had to reduce their prices to compete created growth (doing stuff more efficiently) that the IEA simply ignores, because it doesn’t fit in with the agenda it set out to ‘prove’.

  • @Steve
    “Unemployment is reducing whilst the economy is contacting, demonstrating that the workers in the public sector that have lost their jobs created more wealth than the larger head-count of new private sector employees.”

    Er, no. It doesn’t demonstrate anything of the sort. If there is labour hoarding going on it is in manufacturing, which seems to be boosting capacity in advance of a hoped for upturn. It remains to be seen whether the GDP figures are correct, since they are almost always revised up. To leap to the conclusion that public sector employees are more “productive” in some way is really quite unjustifiable. It could be that they are simply more expensive, since the output of the public sector can only be determined by the value of inputs, rather than with reference to any concrete market value.

  • david thorpe 5th Sep '12 - 2:20pm

    @ toryboysnevergrowup

    Im aware its one piece of evidence and not concludive by any means as I say in the article denamrk should provide “food for thought2 and no more

    the irish were bailed out-and now they are cutting-but tax revenues are up a little and growth forecats are beingr evised upwards-while in most of the world-from china to the UK they are being revised downwards.
    The irish example is a good one-because they began cutting very early and have stuck to it-whilst the other eu countries in toruble-ie spain and greece have tried to avoid cutting-or stopped going “too far too fast2 and look at the state they are in.
    Ireland has had one bailout and is unliley to need another-the greeks who delayed cutting as long as possible-are alreday on bailout number two-I interact with serious level financial professionals everyday-they regard irish soveriegn debt as a solid investment relatyive to most others-thats exactly why ireland wont need another bailout…

  • david thorpe 5th Sep '12 - 2:24pm

    we dont need to worry about pating down the debt-and its not the most productive use of our resource-we do need to worry about eradicating the deficit-which is not the same as “the debt” and is a much more inefficient drain on resources than any other single expense of government

  • Richard Dean 5th Sep '12 - 2:29pm

    Perhaps all us hard working families and all have just gone into a sulk … why should we be keen to increase output if all that happens is that corrupt polictians and bankers get rewarded hugely? Why not just wait, hang on in there, consume less, tend te garden, grow untaxed vegetables, until those ***ts have sorted out their corrupt financial system.

  • Personally, I think the economy is stuck because it’s based on consumer spending and credit with wages that don’t really leave people with enough disposible income. What we are finding out is that we are not a rich society, but an increasingly poor one with some very rich residents. Ordinary people didn’t see any trickle down effect in the financial bubble years. They simply borrowed more. Hence property prices few people can actually afford, cheap imports and a thirty year recession in the North. Of course they are paying off their debts and spending to stand still. The alternative is mot a boom. It’s court cases and repossession. The problem isn’t consumer confidence, it’s consumer skintness,

  • Dave,

    there was an interesting interview recently by Stephen Sackur on BBC hardtalk with Adam Posen. This was the exchange concerning the debate on stimulus, the multiplier and debt:

    Stephen Sackur:” It seems there is always, particularly right now, a debate within top economists’ circles about whether the current situation proves that in essence, Keynes was right and the government has to pump the economy. Somebody has to do it and it has to be the government. Or, those who say absolutely not, at a time when debt is the insurmountable problem, piling new debt is a mistake. Do you think that in essence Keynesians have won the argument?

    Adam Posen: Well the Keynesians have had all the evidence on their side and it has turned out to be right, and I have argued that in a number of speeches. They have not won the argument which is a shameful statement about our politics in the United States, Europe, and United Kingdom, because it was not all evidence based. All the things that Keynes told you: that interest rates will stay low when there is a lack of private sector demand, that governments are not going to be held under threat by bond markets when there are just as much worried about growth and they are fearful of what to do with their money. When you withdraw or add fiscal stimulus, it has a multiplier greater than one. All those things were proven to be right by Keynes and by recent experience in the United Kingdom and all those things were proven to be right when I did work on Japan in the 1990s. You know… I do not know why we still debate these things, well people have ideologies.

    Stephen Sackur: Except in Europe and around the world we have sovereign debt crises and what you are arguing is that you simply build up more debt in a desperate effort.”

    Adam Posen: It is not a desperate effort, it is a necessary effort because we are in desperate situations. What matters with public debt as with private debt is what you spend it on. So as this note said of noted economists, Lord Desai, Tim Besley of the LSE (London School of Economics). Nine have come out and said we always said you should not cut public sector investment, because it’s what you spend it on and at what price. As interest rates are as low as they are in the United Kingdom it does not make any sense to sit on the money.

    I don’t think anyone would argue that Keynesians don’t advocate capping or cutting current spending while simulataneouly maintaining or increasing public sector investment. The problem lies in attempting to do one without the other and stifling demand and new investment before the economy has had sufficient time to stabilise.

  • Maybe govt. investment in a telecommunications bandwidth upgrade for the UK would be a financially positive investment. i.e. something that will pay back in the foreseeable future.
    Can’t think of any others right now.

  • david thorpe 5th Sep '12 - 3:34pm

    @ steve

    publci sectors workers are employed top craete wealth-by and large they are employed to distribute it and to produce social goods rather than economic goods
    unemployment remaining static while thousands of public sector workers had their employtment terminated shows that the public scetor are steeping up to craete jobs-which is exactly what the government thought would happen-growth is slow because the jobs are in sectors with a heavy lag time0so any impact on growth wont be felt for a while

  • david thorpe 5th Sep '12 - 3:59pm

    @ probook…

    thats an example of somehting that would pay off in future

    the classical exmaples of it are road building if you then toll the roads-or if you use the capital to improve infrastructure like railways to crate huge numbers of short term jobs and hipe that the spening of those newly employed will boost retail spendfing..

    this government is doing some of that soon…

  • Bill le Breton 5th Sep '12 - 4:39pm

    You may be interested in a monetary explanation of the Danish position by Lars Christensen. http://marketmonetarist.com/2012/08/02/the-luck-of-the-scandies/

    The Krone – fixed to the Euro – came under heavy selling in 2008 during the flight to the dollar. The Central Bank therefore had to buy Euros. ‘As a result Denmark saw a sharp contraction in the money supply – a contraction that continued in 2009 and 2010’ – defending the pegged rate. Domestic demand crashed. (MV=AD). The monetary contraction compounded the global financial crisis.

    To quote Lars again, “the Danish monetary regime led to tightening of monetary conditions in reaction to the external shock.”

    From this weak position, Demark now has to cope with the flight from the Euro to currencies such as the Krone and the problems of an appreciating currency.

    As I have said before, you cannot explain situations purely in fiscal terms. What is happening to the money supply and the velocity of circulation, and the actions of the Central Bank.

    It is impossible to judge the effectiveness of a fiscal stimulus, for instance in the UK, without reviewing the actions of the Central Bank. There is every reason to believe there is no multiplier effect when the Central Bank tightens monetary policy to offset the fiscal stimulus to defend its inflation target, as the Bank has been doing.

    Stimulus requires co-ordination between the fiscal and monetary authorities – which the Quad chooses not to have.

  • Tim Nichols 5th Sep '12 - 6:17pm

    @ David Thorpe

    The Danish ‘Kick-start’ fiscal stimulus programme announced in Nov 2011 is to run over 2012 and 2013.

    It is worth a total of 18.7 billion DKK, which is £2 billion.

    This is 1% of Danish GDP.

    10.7 billion DKK of it is due during 2012; and the rest in 2013.

    That means that by Q2 th9s year only around a quarter of the fiscal stimulus package will have been spent – worth only around 0.25% of GDP.

    It can also take time from the point at which is is counted as spent by government to the point at which it actually hits pay packets with the jobs it is meant to create, and is then spent in the economy (for example, a copmany may be contracted by government, but it could then take a couple of months to recruit). And it also then takes further time for the full mulitplier impacts of a fiscal stimulus to take effect.

    A 1%GDP stimulus is very small in terms of the level of stimulus as a proportion of GDP that Keynes recommends – and that modern Keynesians such as Krugman recommend.

    So this does nothing to prove that a plan B based on fiscal stimulus wont work.

    Firstly, many Plan B advocates – myself included – would say you need 5% to 10%; and secondly, only around a quarter of the Danish one had been implemented at the point at which you are judging it – a mere 0.25% GDP.

    It is also unclear how much the Danish Q2 contraction would have been without it. Perhaps it would have been -0.8% instead of -0.5%. You never know about the dog that didn’t bark.

    For those who are interested, details of the Danish ‘kick-start’ stimulus are here:

    Frankly this kind of intervention shows the poverty of decent economic analysis and debate that we have. Scant detail was given about the stimulus in the article and it leave the impression the author did not know crucial details like the timetabling and just assumed that if it was announced it Nov 2011 is was all spent in the immediate weeks afterwards.

    LDV editors – could we have a higher standard of checking, and referencing requirements, in future for articles like this? It’s pretty bad for claims to be made that a programme has failed when in fact it’s barely out of the starting blocks.

  • I note that some people are citing the creation of private sector jobs in the wake of public sector cuts as proof that the government’s economic plan is working. But this is actually not as clear cut as it sounds, because a lot of private sector jobs are simply out sourced public sector jobs. For instance a ton of cash as been flung at private employment advisers. It doesn’t create wealth, from all the evidence it doesn’t even work as well as looking through your local a list of local job vacancies. On paper it looks like private sector growth, The key measure of a government.s economic success really needs to look at manufacturing, consumer spending and other kinds of wealth creating growth . What for instance happens to the economic outlook if you remove companies that have just benefited from funding being shifted from the public to private sector?
    I still think infrastructure spending would benefit the country in the long run. We’ve got aging power station, poor broadband and probably a good few other things that aren’t going to renew or repair themselves, so you might as well do them now instead of later.

  • @ Tim Nichols

    “Firstly, many Plan B advocates – myself included – would say you need 5% to 10%”

    How do you think the markets would react to the UK announcing that it was planning to grow its deficit to 13-18% of GDP, which is the implication of what you are saying?

    And how do Plan B advocates judge when it is time to withdraw this stimulus? What exactly is their decision rule. How fast and how long does the economy have to grow to meet the criteria?

  • Purely in the interests of detail and facts, of course….

  • Bill le Breton 5th Sep '12 - 7:24pm

    Tim, very interesting. And is the central bank going to provide an accommodating monetary policy?

  • @ Bill le Breton

    How precisely has the B of E been “tightening” monetary policy. It is not sufficient to say that there has been a slow growth in NGDP to demonstrate this. The money supply has been limited by companies and households’ restricted desire to take on credit and by the malfunction of our lending institutions, not by B of E policy.

  • Bill le Breton 5th Sep '12 - 7:54pm

    It is passive tightening, RC. If the demand for money is growing – either (as you point to) through balance of payments or through changes to velocity (opposite of hot potato) and the Bank doesn’t create enough money to compensate, policy is tightening. [this is also what is happening in the Euro Zone]

    What we see is low NGDP growth.

    You then ask when do you stop (for me monetary) or for plan B-ers fiscal stimulus? When NGDP gets back to trend.

    Have you seen that Woodford is now backing NGDP level targeting: http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/03/michael-woodford-may-have-written-the-years-most-important-academic-paper-heres-why/

  • Bill le Breton 5th Sep '12 - 7:56pm

    NGDP level targeting makes it a rule based process – it removes discretion. It means we can sack the MPC.

  • So you are saying the B of E should be engaging in even more QE in order to boost the money supply?

    I don’t think the B of E’s position could remotely be described as being one of “tightening”.

    Anyway, I would say again that NGDP targeting really is not that meaningful unless you can control the inflation element. It is external supply side factors and overly high inflation that has brought down GDP, not lack of demand accommodation. If you look at retail sales, for example, they are still rising year on year as are our imports.

    What is causing the economy to stall is the existing debt of households and a massive slump in our external trade position. Monetary policy is not going to help either of these problems.

  • Bill le Breton 5th Sep '12 - 8:48pm

    I think the Bank needs to say with conviction that it will conduct as much QE as is required until NGDP growth resumes its press crisis 5% trend rate. It should do this with great fanfare. In fact I would like to see (for dramatic effect) Osborne and Alexander instruct the MPC to do this (or better still to take back responsibility for setting monetary policy until the 5% trend rate had been achieved for five years) and for Cameron and Clegg to tell the Briitish Public that this is what they are going to do (and why): The 2012 Plan.

    If firms could be convinced that money GDP will be 5% greater in 12 months time they would gear up to meet that demand. Those sitting on cash would dust down their expansion projects. Others would take new business plans to their commercial banks.

    Those commercial banks would have a very different view of the viability of their client’s submissions if they were convinced that effective aggregate demand would be 5% higher in 12 months. But to leave less to chance, Osborne and Alexander will have also instructed the Governor to charge a fee any commercial bank holding excess reserves at the Bank of England.

    We might all be surprised how little actual extra QE was necessary.

    At the same time the 2012 Plan would include a fiscal stimulus via tax incentives for employment. Those incentives would apply to any employee taken on in the next three months and would last for 24 months. Well or something along these lines.

  • “If firms could be convinced that money GDP will be 5% greater in 12 months time they would gear up to meet that demand. Those sitting on cash would dust down their expansion projects. Others would take new business plans to their commercial banks.”

    So no mention then of how much of this nominal gdp growth will be dissipated in inflation? Or of the Eurocrisis? If we have the Eurocrisis hanging over us and all this extra demand leaking out in net imports, which is what is happening at the moment, how can this really help?

  • Bill le Breton 6th Sep '12 - 7:48am

    RC, thank you for indulging me by continuing to probe. I am not an owl, but here is a morning reply.

    It is worth having a look at the August Inflation report with its forecasts (which are based on £375b of QE) http://www.bankofengland.co.uk/publications/Documents/inflationreport/12augirprob.xls

    These fan charts http://www.bankofengland.co.uk/publications/Pages/inflationreport/irfanch.aspx show that the Bank’s policy since May has been to continue to the bear down on inflation at the cost of lower ranges for real GDP by allowing monetary policy to tighten.

    There is therefore head room for more inflation, even under the existing 2% target (targeting the forecast).

    I agree that the deflator is worryingly high – which must indicate that supply side reforms and infrastructure programmes are essential, but these could be better negotiated with the British public in a package which includes a co-ordinated campaign of monetary and fiscal stimulus.

    It may be counterintuitive but (as Friedman pointed out) ultra low rates and low NGDP indicate that money has been too tight. Nominal rates are no guide. If negative rates are required for growth, unconventional instruments are necessary and QE directed by the politically accountable Quad (rather than a discredited team at the Bank) could be more imaginative and help deliver the supply side package of tax reductions and infrastructure projects.

    Could we live with 2013 of 2% real growth (as per the US) and inflation of 3% or even 4%? With 2014 of 2% and inflation 3% and 2015 of 3% growth and 2% inflation?

    Can we live as a reasonably cohesive country with NGDP growth continuing at 3% below trend? All that wasted human potential?

  • From a political point of view, I agree insofar as now is not a time to show disagreement on the economy.

    The biggest boost government can give right now is a sense of confidence in the direction we are going. Which means making a public show of agreement, however limited.

    But it also means insisting that the majority party in the coalition is taking more positive measures which we are happy with.

    And it means reminding the Opposition of their responsibility, present and potentially future, as well as past.

    Conservatives and Labour seem to think the Euro-crisis is something happening to other people, we should be standing up for a new consensus in Europe – it is the divisions between us that caused the crisis. LibDems are the only British party to be credible partners at the decision-making table with our continental neighbours.

    Whether it’s Plan A, B or Zee, the reshuffle should have created a more significant role for a LibDem minister to accomplish this job.

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