If the world really is short of demand, as many economists argue, then novel monetary policy measures like Quantitative Easing (QE) strike me as an inefficient way to stoke it. It’s too indirect and may actually be counterproductive. And let’s not even bother discussing the potential for asset price bubbles.
If demand stoking is the aim, better to run a fiscal deficit. The bulk of incremental additional spending should be directed to one-time, efficiency-adding infrastructure projects.
I’ve argued that the UK has a golden opportunity to ramp up infrastructure spending to help offset Brexit pains. If you’ve been stuck on the M25, in the skies over Heathrow, or on the Piccadilly line you’ll know there are a lot of efficiency gains up for grabs. There’s a difficult transition period approaching. And long term borrowing rates are as low as they’ve ever been. Now is as good a time as any for the government to borrow to invest in the nation’s efficiency. It would surely beat negative interest rates as an alternative.
A well-crafted nationwide plan would likely attract the support of the people. They’re well aware that the Brexit transition won’t be seamless. I think it’s an easy layup for the government. And they should do it regardless of how negotiations in Brussels progress.
Trump card
But it could also be an important trump card for the Brexit negotiations.
UK currently runs a fairly large annual trade deficit with the rest of Europe. No reason why that has to change. All those infrastructure projects could use a helping hand from Europe – Spanish airport builders and co-investors, German engine makers, Austrian signalling companies, Dutch computer systems, French train carriage manufacturers, Swedish engineering.
The UK should announce a well-prepared infrastructure investment drive for its own good. And clearly the government will want to direct as much of the work as possible to British companies and workers.
But there are certain products and skills that must be imported. A promise to keep importing those from Europe—even a written commitment to maintaining trade deficits with the Continent for 5 to 10 years post-Brexit—would be a useful carrot. The threat to send that business to Korea, USA, China and elsewhere is a powerful stick.
Because if there is one place surely suffering from a shortage of demand, it’s Europe. Perhaps the Brussels bureaucrats looking to make an example of the UK will still win the day. But many European companies, workers and voters won’t want to lose one of their most important export customers just to prove a point.
Makes a lot of sense for both the UK, and also for the individual EU countries Gareth.
I think you should refer this to the UK Brexit Negotiating team because it links in with what seems to be PM Therese May’s approach to the Brexit talks, which is to minimise involvement with the EU negotiating team (keep it to administrative and technical matters sort of thing, as they will be just trying to punish the UK to set an example to make sure others don’t follow, and as with most of the Brussels bureacrats are EU federalists in their leanings) and deal rather with the individual nation states (whether the EU in Brussels like it or not).
Recent news (either on the immigration troubles in Europe, or Merkels fall from grace with the German electorate including her recent apology for her ‘Europe is open’ speech) would suggest the EU is on a downward slide and the UK is in a great position to benefit without all the hindrances that Brussels imposes on economic growth and sovereign nation state actions.
This all makes perfect sense, but don’t forget that your idea would need to be agreed upon by British politicians, and then executed by British public servants. And keep in mind that both groups of people make their Australian counterparts seem utterly brilliant in comparison.
Historically, Britain’s response to troubled economic times has been to engage in populist idiocy like the nationalisation of high profile companies and/or industries, or to engage in mass distractions like wars (cf. The Falklands, Iraq, Afghanistan etc.) and sports (cf. the profligate spending that was needed to boost Team GB’s medal tally – an insanity that every journalist seems to think was money well spent).
I’ve learnt the expensive way that basing investment decisions on politicians acting in the public interest is a fool’s errand.
Expecting idiots to behave idiotically tends to achieve better returns.
It’s a right point to use the low interest rates to invest in infrastructure. And it’s also a right point to better tax companies like Apple to finance the infrastructure. But this is not only a point for UK, it’s a point for every country in Europe and even many places in the USA. The public infrastructure there is in a bad state and has to be renewed.
@ SG: The public service for infrastructure will engage in wars? Oh, that’s logic…
As Michael Caton would say: ‘tell him he’s dreaming’.
Regarding the future structure of the EU after brexit it is imperative to maintain the four freedoms of the EU single market (the free movement of goods, capital, services, and people). So something would have to give, especially the free movement of people, and it ain’t going to happen…wasn’t the idea behind brexit to keep the Europeans, especially the Eastern variety, out of Britain?
I’m not so sure about the four freedoms Martin.
Certainly the first three (goods, capital and services) would be fine. But the people one is the one causing the most angst and has become a real challenge to national identity and sovereignty.
We can ‘beat around the bush’ and listen to the bureacrats from the EU but that really strikes at the heart of the problem – control of one’s borders (especially with such a disparate national membership as the EU has) touches a raw nerve with most of the populace (even if the PC brigade from the EU like to suggest otherwise).
I would forecast that this will be the undoing of the EU, and my money is on any business in the EU countries which has major export potential with the rest of the world rather than specifically within the EU. I reckon that is what the market has become aware of lately with the UK, hence why all the drastic forecasts of the dire impact of Brexit have not (and I would guess will not) eventuated.
It’s something Australia should do as well. Have the Government borrow massive amounts of money at say 2% per annum interest over 30 years, and use it to build much needed infrastructure, such as ports, rail, bridges, and some roads. These sort of projects will improve productivity by reduce travelling and transport times for people and goods.
The reason why we won’t do it is because Australians have been brainwashed that all Government debt is bad and should be reduced immediately. Times of low growth and low demand is exactly the time when Governments should borrow and spend on building infrastructure.