Wednesday, 20 January 2010

Blanchflower and King disagree

Yesterday, Mervyn King, Governor of the Bank of England and Chairman of its Monetary Policy Committee said in a speech at Exeter University, "a key element in raising the national saving rate is the elimination over time of the structural deficit in the public finances," which is his way of telling the government to stop spending so much of other people's money.

Meanwhile, Prof David Blanchflower, member of the MPC from June 2006 to May 2009, has said the MPC should be disbanded because it is not fit for purpose. He went on to say that cutting spending in a recession would create another "dip".

So one wants to cut spending and other wants to maintain it. Who is right?

Well, it seems to this blog that Blanchflower is living in a fantasy land. Yes, if during the boom times the government had built up a cash pile - put money aside for a rainy day - then spending it now to mitigate the effects of the recession would be a good idea. But the government didn't build up reserves during the good times, it just spent all the money it had and more besides. So the only way to keep public sector spending up now is to sell gilts and print money to buy those bonds in a circular operation with investment banks which provides a tiny fig leaf of cover to prevent the world from noticing that the currency is being debauched.

King at least wants to take the first steps towards getting out of our present economic hole. Blanchflower wants to keep digging. Of course, cutting spending will deepen the recession but it will also shorten it. Blanchflower would take us on a shallow dive to perdition while King would take the medicine now and get it over with.


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