Friday, October 22, 2010

You Can Have Your Spending Cuts and Eat Them Too

Following the recent election in the U.K., the governing coalition has set about trying to address the U.K.'s structural deficit. In association with that, they've proposed massive cuts in government spending and massive reductions in the government payroll. Cynics suggest that the government is grabbing onto the current economic crisis as an excuse to continue the policies of the Thatcher Administration and to undermine public programs that the Conservative Party has long hoped to scale back or privatize. But you don't have to be cynical to recognize that a structural deficit is not a good thing - even when granting that a government's budget deficits are not the same thing as a household's spending more money than it earns, year after year, a government should strive for a budget that can be balanced.

The fact that the government is able to create a relatively short-term, albeit painful, path out of its "structural" deficits suggests that the problem is not as "structural" as they would have the public believe. Fundamentally, the issue is whether it would be better public policy on the whole to raise taxes or to cut spending, and to recognize that the two aren't mutually exclusive. By claiming a structural problem and a necessity of action, the ruling coalition avoids having to engage in debate over public policy.

But there's another question, specifically whether the timing is right for budget austerity. Paul Krugman argues that it's not:
There have been widespread claims that deficit-cutting actually reduces unemployment because it reassures consumers and businesses; but multiple studies of historical record, including one by the International Monetary Fund, have shown that this claim has no basis in reality.

No widespread fad ever passes, however, without leaving some fashion victims in its wake. In this case, the victims are the people of Britain, who have the misfortune to be ruled by a government that took office at the height of the austerity fad and won’t admit that it was wrong.
If the cynics are correct, the government won't admit that it was wrong because they're exploiting the crisis as a reason to implement unpopular policies, perhaps while silently accepting that the cuts could make things worse. But at the same time, as Krugman acknowledges, "there’s no question that Britain will eventually need to balance its books with spending cuts and tax increases."

So here's the thing: It is possible to debate public policy and engage in long-term planning, even when the economy is weak. It is possible to start to implement a restructuring or budget cutting process in certain areas of the economy, even when the economy is weak. And it's possible to do all of that while continuing a deficit and engaging in stimulus spending out of recognition that it could help the nation emerge from its economic difficulties. If you do all three, the public will understand your budget cuts and priorities, you should eliminate some inefficiencies and make it easier to balance the budget when the crisis passes, but you can still use government spending to help stimulate the economy.

As Krugman notes, the actual economic picture in the U.K. along with the government's rhetoric lends considerable support to the views of the cynics. If that interpretation is correct, I doubt that the government will embrace a program of spending that suggests that the U.K. can continue to afford significant short-term deficits, even if that's what's best for the country, because then they would have to engage in a public policy debate about the budget items they're cutting, explain their priorities, and explain why cuts can't be smaller or can't be deferred. But a responsible government can simultaneously tackle a structural deficit and make cuts in a variety of public spending programs while running larger-than-usual deficits and engaging in stimulus spending.

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