{"id":31463,"date":"2022-10-04T05:58:35","date_gmt":"2022-10-04T05:58:35","guid":{"rendered":"https:\/\/themint.kinsta.cloud\/?p=31463"},"modified":"2022-10-04T06:05:35","modified_gmt":"2022-10-04T06:05:35","slug":"growth-a-tale-of-make-believe","status":"publish","type":"post","link":"https:\/\/www.themintmagazine.com\/growth-a-tale-of-make-believe\/","title":{"rendered":"Growth\u2026 a tale of make believe"},"content":{"rendered":"

Where is the fairy dust when you need it? \u00a0Frances Coppola<\/strong> goes looking.<\/p>\n

Ah, the lovely economic growth fairy. It flutters around the world, resting briefly here, lingering longer there, sometimes disappearing entirely. It flies on an unpredictable path and comes to rest in unexpected places.<\/p>\n

Politicians prize it above all things. They tempt it with goodies, and invoke it with incantations: they perform rituals and make sacrifices, hoping to attract it to their shores. Journalists excitedly flock to where it has been sighted and bring back news of what, they think, attracted it to that place. And economists wax lyrical about the importance of attracting it and issue dire warnings about the consequences of frightening it away.<\/p>\n

They believe that if only we can get the growth fairy to return, all our problems will be solved.<\/p><\/blockquote>\n

The financial crisis of 2008 did frighten it away. It briefly returned when governments and central banks cooperated to stimulate their economies. But the costs were great, economists were foolish, and politicians, frightened. As the West turned from stimulus to austerity, the growth fairy disappeared.\u00a0<\/p>\n

Politicians and economists have been searching for it ever since. They believe that if only we can get the growth fairy to return, all our problems will be solved. But although the elusive creature has briefly appeared now and then, no-one has yet managed to persuade it to stay.<\/p>\n

For the first few years after the financial crisis, the rituals and sacrifices advised by economists and performed by politicians mostly involved government finances. They decided that cutting the size of the government budget would invoke the growth fairy: \u201cExpansionary fiscal consolidation,\u201d they called it. And as debt\/GDP rose, they warned that once debt hit 90% of GDP the growth fairy would fly away, never to be seen again.<\/p>\n

So government debt and deficits came to dominate economic policy. The damage caused by the 2008 financial crisis was still evident: banks wouldn\u2019t lend, businesses wouldn\u2019t invest, there weren\u2019t enough decent full-time jobs, wages wouldn\u2019t grow, interest rates were nailed to the floor and central banks were keeping their economies on permanent life support with bucketloads of quantitative easing. But politicians and the media remained laser-focused on deficit reduction. If they fixed the government finances, they said, growth would return, and with it, investment, jobs and wage rises. And so we dutifully swallowed the spending cuts and tax rises prescribed for us, unpleasant though they were.\u00a0<\/p>\n

\n

Expansionary fiscal austerity\u00a0 proved to be a myth.<\/p>\n<\/blockquote>\n

But \u201cfixing the government finances\u201d proved harder than they expected. The government\u2019s austerity measures depressed GDP growth, which slowed\u00a0 the rate at which the deficit reduced. And although debt\/GDP didn\u2019t hit 90%, it remained stubbornly high. Expansionary fiscal austerity\u00a0 proved to be a myth. Far from expanding in response to the government\u2019s cost-cutting, the economy became stuck in a high-debt, low-growth rut.<\/p>\n

Then a new political movement emerged. Their big idea for invoking the growth fairy was nationalism. \u201cAmerica first\u201d they cried in the US, angry that the growth fairy had apparently taken up residence in a large and populous country on the other side of the world.\u00a0<\/p>\n

In the UK, the same movement told us that the growth fairy would return if we left the EU. Once we were no longer bound by the EU\u2019s bureaucratic shackles, they said, we could once again become the buccaneering country of old, leading the world towards a free-trade nirvana. And once we were no longer paying into the EU\u2019s coffers, we would be able to rebuild the public services shattered by years of austerity. \u201cLet\u2019s give \u00a3350m per week to our NHS,\u201d said one slogan.<\/p>\n

Lured by the promise of sunlit uplands outside the EU, we voted to leave. And then we spent the next four years arguing with ourselves about how to go about it. Catfighting among politicians on the right and the left, an increasingly toxic relationship with the EU, and growing antagonism towards \u201cforeigners\u201d made the UK unattractive to investors and skilled workers, who understandably decided to go somewhere more congenial. Business investment fell, and with it, growth.<\/p>\n

Lured by the promise of sunlit uplands outside the EU, we voted to leave\u2026\u00a0 By the time the UK left the EU in January 2020, the sunlit uplands had become a slagheap.<\/p><\/blockquote>\n

By the time the UK left the EU in January 2020, the sunlit uplands had become a slagheap and the growth fairy was nowhere to be seen. But the damage done by austerity was becoming painfully apparent. Public services were crumbling: hospitals were full, GP surgeries were full, schools were full, prisons were full, roads were full, trains were full\u2026. Boris Johnson promised an end to austerity and a large programme of public investment. Sadly, he never delivered it. He was overwhelmed by the Covid pandemic, the Ukraine war, and ultimately by his own dishonesty and corruption.<\/p>\n

The Covid pandemic was the second example since the financial crisis of internationally coordinated economic policy in peacetime. Countries around the world shut down large parts of their economies to try to prevent the spread of the virus, and threw enormous amounts of money into their economies to keep households and businesses alive. Debt and deficits headed for the moon. And as the pandemic passed, the growth fairy came fluttering back. Economic growth in 2021 was the highest in half a century.\u00a0<\/p>\n

Now, inflation is heading for the moon. The years of deficit angst are behind us. Inflation is the new bogeyman.<\/p><\/blockquote>\n

But the post-Covid growth miracle was short-lived. By the end of the year the growth fairy had taken wing, replaced by fast-rising inflation as a supply side damaged by the pandemic struggled to keep up with rising aggregate demand. And then came the Ukraine war. Wars are inflationary.<\/p>\n

Now, inflation is heading for the moon. The years of deficit angst are behind us. Inflation is the new bogeyman.<\/p>\n

But politicians haven\u2019t given up trying to invoke the growth fairy. Indeed it is worshipped more than ever. The new UK government has set a growth target of 2.5% a year. And to achieve it, they are going to pump up the deficit. The Chancellor\u2019s exorbitant energy price support scheme, unfunded tax cuts and supply side \u201creforms\u201d will raise it to about 8% of GDP. And he has already signalled more to come. Just as the Coalition believed that \u201cfixing the government finances\u201d would invoke the growth fairy, so the new government believes that tax cuts and supply-side reforms will invoke it.<\/p>\n

But It does not seem to me that high taxes and supply-side rigidities are the cause of poor growth since the financial crisis. Rather, it is failure of investment, both private and public, and rising barriers to trade. When the growth fairy fled from the austerity of the West, it took up residence in China, which was embarking on a massive programme of public investment and opening itself up to international trade. It seems to me that this, rather than the tired old mantra of tax cuts and \u201creforms\u201d, should be our model for growth.<\/p>\n

We should restore public investment to the level that it was in the early 1980s, before Margaret Thatcher sold off public assets and didn\u2019t replace them. We need to invest in infrastructure – transport, renewable energy, broadband. And also in people – skills, health, social care, housing.<\/p>\n

Finally, we must try to bring to an end the nationalism that is making the world a more dangerous place. Growth and prosperity come from cooperation and trade, not protectionism and wars.<\/p>\n","protected":false},"excerpt":{"rendered":"

Where is the fairy dust when you need it? \u00a0Frances Coppola goes looking. Ah, the lovely economic growth fairy. It flutters around the world, resting briefly here, lingering longer there, … <\/p>\n","protected":false},"author":1,"featured_media":31464,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","footnotes":""},"categories":[3,58,45],"tags":[123,489,376,2264,281],"class_list":["post-31463","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-columns","category-government","category-uk-ireland","tag-frances-coppola","tag-growth-dependency","tag-political-economy","tag-sept-2022","tag-the-coppola-column"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/posts\/31463","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/comments?post=31463"}],"version-history":[{"count":0,"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/posts\/31463\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/media\/31464"}],"wp:attachment":[{"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/media?parent=31463"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/categories?post=31463"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/tags?post=31463"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}