The coalition’s strategy for growth came under renewed pressure today from three leading economists. The remarks were made at an ippr event on growth.
Will Straw is editor of ‘Going for growth‘, a collection of essays from leading academics and economic thinkers.
The coalition’s strategy for growth came under renewed pressure today from three leading economists. Martin Wolf, Professor Wendy Carlin and Gerald Holtham discussed ideas from a new book on growth at the Institute for Public Policy Research.
Speaking at lunchtime today, the Financial Times’ chief economics commentator, Martin Wolf, said:
“I think it’s pretty clear that we agree that the Government doesn’t have a plan for growth and I think we all agree that the deficit reduction plan is enormously risky in terms of macro[economics] and ill supported by the risks tha they have pointed to.”
Following remarks made in a recent op ed (£), he questioned the government’s approach to cutting the headline rate of corporation tax rather than providing increased investment allowances. He went on to list the importance of macroeconomic stability which meant more than solving the “inflation problem”, “making the use of land less irrational” through better land use planning, and “raising standards of education and training through all levels of society”.
Venture capitalist, Gerald Holtham, fleshed out his contribution to the collection of essays arguing for a state-led investment vehicle for the production of marketed services such as toll roads, high speed rail, and wind farms. His argument, which has been set out previously on Left Foot Forward and in the Financial Times (£) and could provide a template for the mooted Green Investment Bank, was largely endorsed by Martin Wolf. In the Q&A, Holtham described the coalition’s current approach as “ideological” and said:
“I don’t think that cutting the corporation tax is going to solve any problems.”
Professor Wendy Carlin of University College London and the Centre for Economic Policy Research presented slides outlining the UK’s economic predicament which showed that compared to previous recessions, unemployment rates had taken a less severe hit during the current recession. Carlin also detailed how the UK’s front-loaded fiscal consolidation put it at odds with other G7 countries as the graph below shows.
Carlin suggested a three point plan for government which would make use of:
– the low interest rate environment to promote investment along the lines later set out by Holtham;
– complementing behavioural changes induced by increases in the oil price with policies to steer “large-scale structural change towards a low-carbon economy” by; and
– the boost to tradeable goods and services from depreciation by using complementary rather than conflicting policies.
Carlin and Wolf both criticised the Government’s immigration policy with Carlin arguing that the current policies were damaging higher education and “other high value added industries”.
A podcast of the event can be heard here.
26 Responses to “Martin Wolf: “The Government doesn’t have a plan for growth””
Will Podmore
Guido, and other free-market dogmatists, should read, The myth of the rational market: a history of risk, reward, and delusion on Wall Street, by Justin Fox (Harriman House Ltd, 2010.)
In this fascinating book, Justin Fox, the business and economics columnist for Time magazine, charts the rise and fall of the myth of the efficient market. Fox shows how life has exploded the idea that the market processes information rationally and allocates resources efficiently.
This is in part a history of those looking for a sure-fire way of making money from the stock market. They share the fantasy that they can know where share prices are going and the level of risk, and that they can produce a ‘scientific forecast of the market’. Of course, when markets crash, most investing ‘stars’ crash too. If the market is that efficient, surely speculators could never beat it?
But the crash of capitalism has crashed its theories too. As Alan Greenspan admitted, “the whole intellectual edifice collapsed.” Adair Turner, chairman of the Financial Services Authority, said that we had experienced ‘a fairly complete train wreck of a predominant theory of economics and finance’.
Prices do not reflect real values. As Clive Granger and Oskar Morgenstern wrote in their 1970 book, Predictability of stock market prices, “It is … a subterfuge going back at least to Adam Smith and David Ricardo to say that market price will always oscillate around the true (equilibrium) price. But since no methods are developed how to separate the oscillations from the basis, this is not an empirically testable assertion and it can be disregarded.”
Eugene Fama, who formulated the efficient market hypothesis in the 1960s, admitted in 1991, “Irrational bubbles in stock prices are indistinguishable from rational time-varying expected returns.” There was no way to know if the market was irrationally volatile or not. He now believed that prices could go wrong and stay wrong. In sum, markets’ behaviour determines the economic reality that market prices are supposed to reflect. The market is created subjectively; it does not reflect the real world.
The market is not about allocating capital efficiently but about giving speculative parasites the chance to make vast profits with our money. As Larry Summers, Clinton’s Treasury Secretary, once concluded, “We might all be better off without a stock market.”