Chris Pissarides and the deficit

I wonder how many businessmen are puzzled by the politicians’ desire to eliminate the ‘deficit’ and to ‘deleverage’. If the economy were a business this would not be an obvious strategy. But can you compare the economy to a business, as the Mature Economy Cookbook does?

One academic economist who seems to believe that national economic strategists can learn something from business is Sir Christopher Pissarides, the Nobel Prizewinning member of the faculty of the London School of Economics. I recommend his open letter to the Chancellor criticising the Autumn Statement of 2012, and especially his budget preview of 2013. Prof. Pissarides has expressed concern that ‘the deficit is reported as the difference between current revenue and spending, and not as the difference between the present discounted value of earnings and current investment spending, as is done by private companies’.

Many business leaders would share his concern. Apart from anything else, the abandonment of investment calculation implies that if the deficit turns into a surplus politicians can spend it on something glamorous without calculating the return.

Addendum: Even if one admits that private sector investment has recently been better at producing a return than public sector investment, it does not automatically follow that any investment that cannot be made by the private sector should not be made at all. And it is not a law of nature anyway. Public sector investment in the days of Joe Chamberlain or the Tennessee Valley Authority was extremely successful. The failure of public sector investments in Britain recently are more down to the incompetence of our over-centralised government, whose ignorance is starkly documented by Tory grandee Lord Hesletine in No Stone Unturned.

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