Monday, May 18, 2009

Could the Coalition have been cleverer than we thought?

Could what you and I may have thought of as irresponsible, really have been a cunning, successful attempt to starve the beast?

At Core Economics Mark Crosby writes:

Deficits and Debt: It’s the Coalition’s Fault!

I’m sure that the Coalition complaints about the size of the budget deficit and public debt profile will continue for some time yet. But as any good political theorist will tell you, if the Coalition really wanted to reduce debt levels and the size of government in particular they should have run bigger deficits when in office! In a very well known paper in the Quarterly Journal of Economics by Torsten Persson and Lars Svensson in 1989, it was argued that governments that prefer a small public sector should run large deficits when in office, so as to tie the hands of a potential successor with preferences for a large public sector.

He goes on to assume that this isn't what our Coalition government did because it ran a surplus.

But it may well have, deliberately, by running a far smaller surplus that was wise.

The fascinating paper he refers to is here:

Why a Stubborn Conservative would Run a Deficit: Policy with Time- Inconsistent Preferences, Torsten Persson and Lars E. O. Svensson, The Quarterly Journal of Economics, Vol. 104, No. 2 (May, 1989), pp. 325-345