Monetary Aspects of Austerity Budgeting


I liked Nick Clegg’s speech to the Liberal Democrat party conference and think it’s a nice defense of progressive liberalism against the libertarian vision of the vanishing state on the one hand, and the clientelist vision of a state run for the benefit of service-providers. But something I think is interesting is that his defense of the UK governing coalition’s austerity budgeting totally misses the best arguments in favor of it, namely the centrality of monetary policy.

The crux of the matter is that in the UK, unlike in the US or Europe, monetary policy has in fact been extremely expansionary. Sufficiently expansionary that after falling to 1 percent in the fall of 2009, the CPI is back up to three percent. Reporting has made it clear that the view in the Bank of England and the Treasury is that absent fiscal austerity the monetary authorities will need to tighten to keep inflation from getting undesirably high. This is a judgment whose merits could be debated, but the Brits—unlike us—are in the position of facing some real tradeoffs here and the austerity option is not-unreasonable when you consider that the UK is coming off a 12-year span of Labour rule during which the size of the public sector did in fact expand considerably.

All of which is just to observe that in the UK, just like in the US, politicians seem loathe to talk about monetary policy even though they love to talk about “jobs” and “the economy.” It’s impossible, however, to talk about short-term economic performance in an accurate way without talking about monetary policy. All across the developed world countries have set up central banks, charged with with maintaining macroeconomic stability, granted them operational independence from politics, and then fallen so deeply in love with the idea of independence that the political system acts as if they don’t exist. But they do! And whatever the merits of whatever form of independence, it doesn’t make sense to just ignore them.