The Financial Times Asks for Bad Policy

Yesterday, I wrote a post about what a failure Britain's effort to expand its economy through contractionary deficit reduction was.  Shockingly, cutting demand by limiting government spending, and cutting demand again by hiking taxes, isn't exactly a formula for gettin out of a mess that's caused by... lack of demand.  Realizing that contraction wasn't expansionary, Conservative London Mayor Boris Johnson and Ed Balls, Labour's Shadow Chancellor, proposed a cut in the Value Added Tax (VAT) to stimulate demand and get their economy off its knees. 

In an opinion piece published last night in the Financial Times, Chris Giles writes a criticism of the policy, claiming that Britain's caught the voodoo economic bug conservatives in the US have.  Giles is completely off base.  First, there's a big difference between American Republicans, who have a fetish for tax cuts, and will reach for any justification for why cutting taxes is necessary, never mind that those reasons don't follow any reality or coherent logic (I can't tell you how many times I've heard, "We can't afford to raise taxes in this economy!  But we have to cut spending... in this economy. Nonsense."), and Tories in the UK, who have a coherent (if very misguided) belief in the need for fiscal rectitude, even in a severely depressed economy.  Giles is wrong because the justification for the tax cut is NOT the Reagan-era supply-side claim (thoroughly debunked by the data over and over) that tax cuts increase revenue.  Rather, it's based on the very reasonable claim that policies that stimulate demand in the short run can alleviate short-run demand problems, and allow for fiscal adjustment in normal times.  Giles, on the other hand, is invoking the confidence fairy.  Britain HAS to show the world that it's serious about deficit reduction NOW, he claims, and that will spur credibility.  Never mind that his serious deficit reduction has, predictably, stalled the recovery ("It was the Royal Wedding! I swear! And the Olympics!" he says), all while the UK continues to borrow at extremely low rates. 

Now, do I think a cut in the VAT is the most efficient way to stimulate demand? Honestly, probably not.  Giles IS right that a significant chunk of that will be saved, which helps the saver at the expense of everyone else.  But it IS a form of stimulus that the depressed UK economy could definitely use.  Obviously, I'm no proponent of the tax cut fetish in the US.  But Giles is using it as a boogeyman to promote the nonsensical confidence fairy idea (the idea that consolidating the budget will somehow magically improve confidence enough to spur recovery, never mind that there's still a demand shortfall), a policy that isn't quite equally bad, but is close. 

It's ridiculous how bad ideas have somehow taken hold on both sides of the Atlantic.  Different species of bad policies, to be sure, but still bad policies.  It's depressing, really, how we go through crises exacerbated by bad policies, write a bunch of books about those bad policies, and then, the next time a similar crisis hits, dig them up, reuse them, and expect different results.