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Paul Krugman Sends Us to Jonathan Portes on Macbeth and Fiscal Policy

Jonathan:

Not the Treasury view...: It's not too late to change course: Macbeth and fiscal policy: I appeared before the Treasury Committee…. Two of my fellow witnesses, Jens Larsen and Roger Bootle, said that while they thought that there was a strong case that the government's fiscal consolidation programme was too aggressive - that is that we would be better off now had the scale of fiscal tightening in the first year or two been less - that the risks of changing course now outweighed the benefits…. I described this as the "Macbeth argument", from the following quote:

I am in blood stepped in so far that should I wade no more, Returning were as tedious as go o'er. [Act III, scene iv.]

In other words, since Macbeth has already killed Duncan and Banquo, it is better to carry on (and order the deaths of Macduff and his family) than to stop. So, although misguided policy has led to unnecessary economic damage, that damage is (returning to economist speak) a sunk cost; and the pain ahead is less then the pain that we would suffer if we changed course, as a consequence of the possible negative financial market reaction….

The Treasury also appears to subscribe to a variant of this argument. When the original fiscal consolidation plan was welcomed by the rating agencies, that was a vote of confidence:

Standard & Poor's, the ratings agency, revised its outlook on Britain from negative to stable..The Chancellor said: ""That is… a vote of confidence in the Coalition Government's economic policies… Telegraph, 26 October 2010

But when the same rating agencies realised the damage the plan was doing to growth, that made it even more necessary:

Fitch revised the outlook on the UK's rating to negative from stable….

A week from the Budget this is a reminder of why it is essential Britain sticks to its plans to deal with its debts… Telegraph, 14 March 2012

Even leaving aside the obvious inconsistency here, I remain of the view that this argument is incorrect…. I don't think it's plausible to argue that markets have more confidence in governments that never adjust policy…

This is an argument I have heard a number of times recently: if we change course, they say, who will have confidence that we will carry out our policy commitments in the future? I first heard it in the Vietnam context, where it went: this is awful, and we must follow this through to the end to convince people that we will do this again.

Never seemed to make any sense to me. It seemed to me to be essentially a declaration of intellectual, political and moral bankruptcy, and a desire to hold onto office and gamble for resurrection and hope something would turn up.

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