Even Nobel prize-winners get it wrong

Yesterday, the eminent Nobel laureate in economics Professor Sir James 
Mirrlees and the ex MPC member and noted labour economist Professor David Blanchflower CBE, joined together with Professors Andrew Hughes Hallet and Drew Scott to publish a letter in the Scotsman.

The letter argued for the UK government to undertake a fiscal stimulus focused on increased capital investment to boost the flagging UK and Scottish economies.

I totally agree with them. As I have noted in numerous posts on this site it is demand deficiency, made worse by the Coalition government's fiscal consolidation that accounts for the present weakness of the British economy.

However, the letter seeks to justify the authors' stance with the following

The Scottish Government has consistently argued for what First Minister Alex Salmond calls a UK Government "Plan Mac-B" based on the Scottish experience during the last recession from 2008. That downturn was shorter and shallower in Scotland than the UK as a whole.

Mr Salmond argues that his devolved administration's decision to bring forward capital investment spending on infrastructure construction contributed significantly to this relative performance. We agree.

The key facts cited in this statement are open to dispute.

First, there is some truth in the view that the "downturn was shorter and shallower in Scotland than the UK as a whole". But readers can make their own judgement by looking at the following chart.

The revised data to the first quarter 2012 show that the fall in GVA/GDP in the recession was greater in the UK, -6.3%, than in Scotland, -5.8%, but not by much. And the revised data show that the duration of recession was, at five quarters, the same in both Scotland and the UK.

Secondly, there is little evidence to support the contention that the SNP government decision to bring forward spending on infrastructure construction had any impact on the scale and duration of Scotland's recession.

The obvious point is that the construction industry contracted by slightly more in Scotland than in the UK as this chart shows

Yes, the bounce back was slightly stronger in Scotland but it soon petered out and now the sector languishes in much the same position as it was at the trough of the recession. Unlike UK construction, which while still in a dire position is about 12 percent below its pre-recession peak.

Both Scottish manufacturing and services lost less output to the trough of the recession than the UK, and that is the reason for the shallower recession here not the performance of construction.

Manufacturing probably did better because of the performance of the whisky industry. And services probably did better because of that age-old reason: a bigger public sector in Scotland.

So government did have a role to play in the shallower Scottish recession. But not because of Mr Salmond's policies.

I have the greatest respect for Professors Mirrlees and Blanchflower but they shouldn't be seduced by the siren voices of two Scottish economists of known nationalist sympathies.

Comments

[Edward Harkins]

Brian states:
"there is little evidence to support the contention that the SNP government decision to bring forward spending on infrastructure construction had any impact on the scale and duration of Scotland's recession."

We could arguably add that there is no evidence anywhere from modern economic history that increased capital investment is an efffective (and it's certainly not an efficent) way out of recession. The current near-mantra being chanted in mnay quarters across the UK and elsewhere is little more than the self-interest of specific interest and sector lobby groups - many of the players in which are the same ones that are seeking a successor to PFI that has helped them pillage the public purse.

The UK, including Scotland, does need significantly higher rates of (long-term focused) investment in capital infrastructure for many good and sound rreasons. But quick expenditure on 'shovel ready' infrastructure projects is no sensible or sustainable route of current recession.