Government Policy

Consensus is growing that interest rates have been kept too low for too long and that inflation, which stands at 4.5 per cent, is accelerating dangerously, just as inequality deepens, growth flatlines and incomes decline. Worse still, as we enter the age of austerity, is that near-zero interest rates are artificially supporting an already unstable housing market.
Spencer Dale, chief economist at the Bank of England and a member of the Monetary Policy Committee (MPC), has spoken of the immediate need to raise the Bank's base rate and then to keep nudging it upwards. "I don't take lightly the impact this could have on some families," he said in an interview with the Financial Times on 21 May. "But I think the cost to our economy as a whole – were inflation to persist for longer and our credibility [to] start to be eroded – would be even worse."
The coalition government's "emergency" deficit reduction programme is based on one fundamental principle: when fiscal policy is so tight, monetary policy needs to remain as loose as possible. It's often said that, because of the rapidity and harshness of the cuts in public spending as well as the absence of growth in the UK economy, the government needs greater flexibility. It needs to be less rigid and more pragmatic. It needs a plan B, dare I use the cliché.
In one sense, it already has a plan B (abnormally low interest rates and the option of more quantitative easing). What it might soon need, especially if the MPC votes to raise interest rates, is a plan C (which would mean slower cuts and the kind of humiliating policy reversal that the Chancellor, George Osborne, would never sanction).
A few weeks ago, over lunch at the New Statesman, Cable and I discussed some of those economists who robustly oppose his position on deficit reduction. In a considered and impressive essay in the NS in January, he had argued, against the professor of political economy Robert Skidelsky and our economics editor, David Blanchflower, that Keynes would have supported the coalition government's macroeconomic policies.
Yet the banks are not lending, especially to small and medium-sized businesses, and the government, though it is spending, is not spending enough to power growth.
As James K Galbraith, son of the more famous J K, has written: "Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors – public deficits or private loans – has to be in action."
“The point I stressed when I was having lunch with you," Cable says now, "is that it's not just a Keynesian lack of demand, it's not just a Budget deficit problem. You have a model of economic growth that has broken down, comprehensively broken down. We had personal debt, which was unbelievably high, and this means you have an overhang debt on houses.

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