Opinion: The Conflicts of Economic Policy

Nick Clegg’s conference speech committed Lib Dems to manage debt out of the economy and implement a fair tax regime. But the objectives of economic policy often conflict with each other.

Let’s take it that there are three objectives for current economic policy:

1. to reduce deficit and the debt it accumulates
2. to inject demand into the economy
3. to have a fair tax system

In the following table, I’ve had a try at evaluating recent and proposed economic policies against these objectives.

Whether a policy reduces deficit and debt, and whether it stimulates demand is a fairly objective question. Whether it is fair is subjective. In my suggested policy rating, the two tax changes already implemented win on two of the three criteria – they don’t reduce deficit/debt, but do stimulate demand, and are fair. I claim this because taking more than half of the marginal income someone earns, apart from being likely to dissuade them from earning it in the first place, does not feel fair to me. Others might disagree.

But when we move to consider policies proposed or imminent under the coalition government, then the picture changes markedly. Cutting government spending will not necessarily cut the deficit, because more redundancy and unemployment in the economy will increase the welfare bill. And if the welfare spend itself is cut, then huge demand deflation will result, and the effect on the poor will be extremely unfair. Changes to the pension regime, to increase contributions and delay payments may be more certain to reduce the deficit, but will certainly also reduce demand in the economy, and can hardly be argued as fair to those who have worked for so many years in the expectation of a better pension. Increased taxes on the rich, whether property owners or pensioners, will also depress demand, and in my view are not fair, since most people’s homes are not ‘unearned wealth’ but the result of a lifetime allocation of earned income to purchase their home. That income has already been taxed, for many at 40%, and will again be taxed under inheritance tax.

So Lib Dem economic policy doesn’t look as effective for deficit reduction or for demand stimulation or for fairness as is claimed.

But which of these conflicting objectives is most important? My contention is that the main issue facing the economy currently is not deficit and debt, but lack of demand. It is this lack of demand occasioned by real wages being depressed below rising levels of productivity that has caused the crisis. We need to feed disposable income into consumers’ hands to get them spending again, and to allow them to spend sufficiently to purchase the GDP output the economy is capable of. Otherwise we face continued recession, unemployment and growing communities in poverty. Is that a fair or desirable outcome? On this leading objective of stimulating demand, cuts in government spending, increased pension contributions, delayed pension payouts, mansion tax and rich pensioner benefit reductions all fail.

What of the deficit and the debt mountain? Steve Webb warned us at conference that the markets will bust us if we don’t reduce deficit and debt. But can we actually achieve this? We haven’t so far. And should bond markets dictate economic possibility and social policy? Failure to stimulate demand is what will certainly devastate our economy. I have argued elsewhere that modern technology is pushing productivity so much above real wages that debt is inevitable in the theoretical model, and so it seems to be in real economic practice across all developed world economies. This is not just a matter of governments making mistakes. It is a real unavoidable phenomenon.

So I offer one more policy, the only one which can break the deadlock:

* Geoff Crocker is a professional economist writing on technology at www.philosophyoftechnology.com and contributor to Basic Income Earth Network, www.basicincome.org