Britain: a Market Monetarist Victory?

     As Martin Wolf chronicles, the real worry in Britain is that the wrong lessons will be learned. To that end, Sumner is constantly holding up Britain as a MM success story. Yet what kind of success story is this where GDP is still 15% below it's long term trend?

     http://diaryofarepublicanhater.blogspot.com/2013/12/sumner-declares-vindication-for-fiscal.html

     David Cameron may luck out in the upcoming election-voters tend to vote based on the current economy which has seen a sharp rise in employment. Yet, his plans for the economy are not what the country needs.

  ."Whatever the causes of the crisis, it has bequeathed huge headaches. But the biggest, by far, is how to reduce the permanent losses of output. Even if the economy grew at a sustained rate of close to 3 per cent a year, the present value of lost output would be close to five times annual GDP. This is why a delayed recovery is not much of a triumph."

     "This is the background against which the pre-election policy debate should be judged. As the Office for Budgetary Responsibility has noted: the government’s plans for the next parliament “will take government consumption of goods and services ... to its smallest share of national income at least since 1948”. That is both undesirable and implausible. What matters most is restoring as much of the lost output as possible, as soon as possible. Eliminating the fiscal deficit, via a sharp reduction in the ratio of public spending in GDP, from 44.7 per cent in 2012-13 to 38.2 per cent in 2018-19 is not such a policy. Indeed, it is unclear why eliminating the fiscal deficit is vital."

     "The crisis was surely the result of the global integration – and rapid growth – of the UK’s financial sector, a policy on which almost all agreed. Yet debate has converged, instead, on the ideas that the pre-crisis UK was a “bubble economy” and that fiscal deficits were the result of pre-crisis fiscal indiscipline. As a result, almost everybody now agrees on the idea that eliminating the fiscal deficit is the priority, however low the interest rates and however strong the case for more investment."

     "But the need is, instead, for an economy that recovers lost ground, without relying unduly on finance. Only politicians who have good plans for restoring demand and output deserve power. This will take innovative ideas. So far there has been almost nothing new. This is the most depressing of all."

       http://www.ft.com/cms/s/0/25f004e6-673a-11e3-a5f9-00144feabdc0.html#ixzz2ofkZDNUf

       Sumner argues that the problem in the UK economy are supply side-the famous 'structural problems. This is just the usual conservative opportunism. How has British healthcare suddenly shaved points of U.K. productivity?

      "Unlike the US or Spain, the UK did not have a construction boom. Nor did it experience a surge in private consumption. House prices rose sharply, but did not subsequently collapse, as they did in Ireland, Spain or the US. Debt exploded, but mainly to buy ever more expensive houses. Subsequent losses on mortgage lending have been very small. The financial sector did grow from 6 per cent to 9 per cent of gross domestic product between 1998 and 2008. But this is not enough to justify belief that output in 2007 was unsustainable. After the fact, forecasters assume it was. That is a result of standard cyclical adjustments. Yet neither wages nor prices showed massive overheating, unlike in the late 1980s."

     "If the economy was not hugely overheated in 2007, then the view that pre-crisis fiscal policy was self-evidently irresponsible cannot stand. At the end of 2007, UK net public debt was the second lowest in the Group of Seven rich countries, after Canada, at 38 per cent of GDP, about a third of the country’s long-term average. According to the International Monetary Fund’s April 2008 estimate, the structural fiscal deficit had been 3.1 per cent of GDP in 2007. This was high, but no catastrophe. The share of government spending in GDP in 2007, just under 40 per cent, was almost exactly the same as in 1996, the last full year of the Conservative government of John Major."

      http://www.ft.com/cms/s/0/25f004e6-673a-11e3-a5f9-00144feabdc0.html#ixzz2oflkLKEy

      Nevertheless, the worry is that the wrong lessons are going to be learned in Britain and elsewhere. Certainly a Cameron reelection would be one example of the wrong lesson learned.