It\’s not all bad news for Britain. There is good reason – not least the end of the VAT holiday – to expect growth to resume in the final three months of 2009
The end of the VAT holiday isn\’t going to raise growth: given that it was cut in order to raise growth that just ain\’t likely at all.
The imminent end of it might bring forward some spending, that\’s true. But then we\’re getting close to the idea which is currently an anathema: that consumers react rationally to future tax changes. And if they do that then deficit spending now doesn\’t boost the economy, for people will save the money in response to those future higher taxes that they know are coming.
Can\’t have it both ways now.
However, this is much more interesting:
And although Britain\’s recession has been the longest in the G7, other nations have seen steeper declines in output.
Indeed. Which leads us to a very interesting question indeed.
Take the US. Which was worse, the 1920/21 recession or the 1929/41 one?
Or if you prefer, Germany 2008/9 and UK 2008/9?
Is it the depth of the recession or the length which is the problem? Might we actually prefer to have a deeper recession but one which is shorter? Certainly, that US experience is that deep but short is better than long.
And there are indeed respectable economists out there (the Austrians) who would argue that we\’ve been making exactly the wrong decisions: we\’ve locked ourselves into a long recession rather than taking the pain quickly. Their basic idea (and of course you all know more macro-economics than I do so this is very much back of a postcard) is that a recession is an acknowledgement of the fact that we\’ve fucked up. We\’ve been doing the wrong things (building too many houses, or investing too much in them, or in finance, or cars, whatever) and that now we\’ve realised this we all need to take a deep breath and work out what we really want to be doing. The recession itself is this period of recalculation. Once we\’ve worked out what we want to do then off we go again.
However, in this view, the propping up of the current structure by various Keynesian methods leads to an extension of this period of recalculation: might well make the recession shallower but inevitably makes it longer.
Which brings us back to, what would we prefer? Deep and short or shallower and longer?
There\’s a very interesting and juicy thought behind all of this. We\’ve seen pretty much a global recession. We\’ve also seen a number of different policy responses. Everyone\’s done a bit of everything (fiscal and monetary) but the proportions have all been different. Give it a few years and we might well find out that current Keynesian orthodoxy isn\’t quite all it\’s cracked up to be. Those who did more of the fiscal stuff might take longer to come out of recession while having had shallower ones. There\’s something about Harberger triangles and Okun gaps (or is it the other way around?) which can be used to tot up which is the best in the long term.
Here\’s hoping that someone actually does that work, eh?