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.
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.
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