My thoughts on the bank lending measures announced by the Chancellor and Governor yesterday are well reflected here. But I wanted to focus on one particular part of the Chancellor's Mansion House speech that has got less attention. The Chancellor argued:
"Credit is not the only area where we can use the global confidence in our balance sheet to boost private sector growth. We are already taking action to support new house-building and infrastructure investment through government guarantees. In the next month we will set out how we can do much more."
As a matter of simple logic, this statement implies that the government believes:
a) more investment, particularly in house-building and infrastructure, would be good for "private sector growth" - demand, output and employment in the private sector;
b) given current policies, the private sector will not deliver this desired extra investment on its own;
c) nor will monetary policy, conventional or unconventional;
d) moreover, if the government intervenes to facilitate such extra investment the impact will not be offset by monetary policy (that is, the Bank of England will not tighten monetary policy in response because of concerns about inflation)
e) if the government, via government guarantees, assumes some or all the risks associated with such investments (in particular that the direct cash returns on the investment will not be sufficient to repay the borrowing) these additional fiscal liabilities will have no adverse impact - either on gilt yields in the short-run or perceived fiscal sustainability in the long run.
This chain of logic is, of course, precisely the one I and others (in particular Martin Wolf) have been outlining for some time. No doubt the Treasury will find a way of ensuring that whatever guarantees are offered have no direct, short-term impact on the measured fiscal aggregates. But from an economic point of view that is irrelevant. The economic difference between the government borrowing from the private sector to finance investment spending, and the government guaranteeing the borrrowing of another entity - with the government guarantee meaning that the lender has no more or less risk of non-repayment than if the money was lent direct to government - is marginal.
So the government has now conceded the intellectual and economic argument. Let us hope that they proceed to deliver the meaningful policy change that we have been calling for, however it is labelled.