Last week Left Foot Forward showed how UK business investment was in a state of collapse. The US is suffering the same problem and Nobel prize winner Professor Paul Krugman has written about the necessary policy response on his ‘Conscience of a Liberal’ blog.
“Under the kind of conditions we’re now facing, the main determinant of business investment is the state of the economy, as evidenced by the plunge in investment shown in the figure. This, in turn, means that anything that improves the state of the economy, including fiscal stimulus, leads to more investment, and hence raises the economy’s future potential.
“That is, under current conditions deficit spending doesn’t lead to crowding out — it leads to crowding in. In fact, you could argue that the worst thing we can do for future generations is NOT to run sufficiently large deficits right now.”
The argument undermines the key tenet of a speech made by George Osborne on September 15th when he argued:
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“in an open economy [reducing the deficit] does not undermine recovery by reducing aggregate demand.”