Increasing economic growth is a big issue in most, if not all, countries around the world right now. For the case of the U.K. recovery from severe recessions was achieved in the 1930s and the 1980s in the presence of fiscal consolidation. In this article at VoxEU.org Nicholas Crafts asks if there are any lessons from these experiences for today’s situation.
Crafts writes (references deleted)
The policy lessons from these episodes can be summarised as follows.
- First, although it is not possible to cut nominal interest rates when, as now, they are at the lower bound, it is possible to deliver monetary stimulus by reducing real interest rates if, as in the 1930s, the authorities are willing and able to commit to higher inflation. However, the inflation-targeting regime in place since the 1990s would have to be revised.
- Second, although there are reasons to think the fiscal multiplier may be relatively large when interest rates are at the lower bound, history says that this claim needs to be treated with caution especially when public debt-to-GDP ratios are large.
- Third, a key component of a policy to stimulate recovery during an episode of fiscal consolidation is an ability to ‘crowd in’ private sector spending – private housing investment aided recovery in the 1930s and consumer spending did so in the 1980s.
- Fourth, if politicians wish to devise more interventionist industrial policies then it is essential that they are designed with a view to minimising the adverse impacts on competition.
If radical changes to monetary policy are ruled out and fiscal consolidation continues, the implication is that reforms to supply-side policies have to play a significant part in any attempt to stimulate growth. The ‘good news’ is that there are plenty of evidence-based reforms that can strengthen the UK’s growth performance by improving horizontal industrial policies which have left much to be desired in the last 30 years. These include repairing a serious infrastructure shortfall , institutional reforms to deliver higher quality schooling and improve cognitive skills , reforming taxation to reduce corporate taxes and expand the VAT base , and addressing the massive distortions created by the land-use planning system which undermine the potential productivity gains from successful agglomerations . The ‘bad news’ is that these policy choices are very much exposed to government failure, are subject to implementation lags, and have their effects in the medium- and long-term.
If there is one area that could deliver short-term stimulus and long-term efficiency gains, as in the 1930s, it is surely private house building. The evidence suggests that draconian planning restrictions mean that the stock of houses is three million below and real prices are 35% above the long-run free market equilibrium. The welfare gains from some relaxation of these planning rules are huge and the employment implications of steadily addressing the housing shortfall could be considerable – building 200,000 extra houses per year might employ 800,000. This would require addressing issues of housing finance and incentivising local communities to want development because they can benefit from it and builders to believe that delaying construction would not be profitable. In principle, this could be achieved very quickly but, sadly, it is not politically acceptable so the Chancellor of the Exchequer may find himself in the role of Mr Micawber for a while longer.
The last comment is interesting. Is this a case of a good economic policy not being popular and thus not enacted?
One also wonders what effect “draconian planning restrictions” are having on the stock of houses here in Christchurch, and around the rest of the country.