Tuesday, March 16, 2010

More deficient deficit talk

This time by Jeffery Sachs (surprisingly) and George Osborne (unsurprisingly). Although Sachs, despite his high-profile work promoting action on world poverty, also has to his name partial responsibility for the Russian transition from communism to gangster capitalism, so maybe we should not be too surprised.
So, the story is that we need to start cutting spending straight away to deal with the deficit. So far, so conventional. But they go a little further: they even argue that cutting the deficit may be better for recovery than not cutting it, on the grounds that investors may get spooked by the deficit and the high interest rates would lead to cuts in investment.
This might be true, of course, but who is to say that the benefits of reducing the deficit - which at this stage, while we are still enjoying very low long-term interest rates, is totally theoretical - will outweigh the very obvious risks that a fiscal tightening will push demand down and increase unemployment, spooking consumers. Sure, it would be better for the private sector to invest to create jobs, but jobs doing what? Export markets are just as depressed as the home market, so where is the demand?
Sachs and Osbourne just don't know the answer to this question. And in the absence of an answer, hurrying to tighten belts when deficits are still easy to finance is not a great idea. There are risks in running deficits, and risks in cutting them. Osbourne may be about to find out the hard way that there is no free lunch on this one.