Vince Cable's plan B: a "matter of judgement"
Should the British government try to boost growth with higher public investment - even if it means higher borrowing?
Quite a lot of economists in the City, in economic think tanks, and in institutions such as the IMF have been pondering that question for some time.
Most of those economists, like Vince Cable, tend to think it's a matter of judgement whether it would do more good for the economy than harm.
I would say most would also agree with Mr Cable that the arguments in favour of investing and borrowing more have grown significantly over the past 18 months.
But, none of these economic ponderers are the business secretary - in a government which even today insisted that the coalition needed to hold the line on borrowing.
That makes his comments significant, as Mr Cable himself knows very well.
Even if his careful and well-argued essay for this week's New Statesman ultimately declines to come down firmly on the side of higher borrowing.'Damage'
The politics of his remarks is something for others to consider - including, clearly, the business secretary himself. What about the economics?
Readers of this blog will be familiar with the arguments for higher public investment, which are essentially the other side of the most common criticism of the coalition's strategy from economists, that it cut public investment too dramatically in the first two years.
As Mr Cable says in his article: "Without doubt this is the least efficient form of fiscal tightening.
"It can inflict more damage on output than cuts in current spending or tax increases because the multipliers are much higher." (Remember, if the multiplier is high, that means a given amount of tightening has a larger effect on growth than other equivalent cuts, or tax rises.)
The strongest argument in favour of higher public investment, right now - voiced by the IMF and others - is that it could have a greater effect on growth than anything else the government might do on the spending side, and might even pay for itself.
The strongest arguments against have tended to be: a) that this investment can't actually be made to happen quickly enough to make a significant difference to growth in the next year or so; and b) that the higher borrowing might derail the government's deficit plans, and dent its market credibility.Dispute
What's interesting about Mr Cable's essay is that he vigorously disputes both of these arguments against higher investment.
If raising public investment increases the government's assets, it's even possible that it could lower net debt - ie cut the numerator - as well as increasing GDP”
Treasury officials have long argued that there aren't enough "shovel-ready" investment projects out there. After all, the government is struggling to push through even the investment increase it has already committed to.
This is Mr Cable's response to HMT: "Pessimists say that the central government is incapable of mobilising capital investment quickly. But that is absurd: only five years ago the government was managing to build infrastructure, schools and hospitals at a level £20bn higher than last year.
"Businesses are forward-thinking and react to a future pipe-line of activity, regardless of how 'shovel ready' it may be: we have seen that in energy investment, where the major firms need certainty over decades."
Second, on the impact of higher borrowing on the deficit strategy, and confidence, he has this to say: "Such a strategy does not undermine the central objective of reducing the structural deficit, and may assist it by reviving growth.
"It may complicate the secondary objective of reducing government debt relative to GDP because it entails more state borrowing; but in a weak economy, more public investment increases the numerator and the denominator."Lower debt?
These are arguments which many economists would accept. It is also worth noting that the government has already broken that secondary rule of cutting government debt relative to GDP in 2015. In that sense, the damage is already done.
Also (though Mr Cable does not make this very nerdy point), it's worth remembering that the government measure - net debt - is what you get when you subtract the government's assets from its gross liabilities (debt).
If raising public investment increases the government's assets, it's even possible that it could lower net debt - ie cut the numerator - as well as increasing GDP. (I said it was nerdy).
The bigger point that Mr Cable is making here is that Mr Osborne has defined his strategy in terms of the current, structural deficit: that is, borrowing that is not due simply to the weak state of the economy and that is NOT used for public investment.
So, it would not be affected by higher public investment.
But, even if it is not included in the target measure, higher borrowing is higher borrowing, which will somehow have to be paid for.
Mr Osborne's advisers would say any increase in investment that is large enough to have a material effect on the recovery would set off alarm bells in the markets, even if the formal deficit plan had not been undermined.
A good number of City economists would agree.
That, as Mr Cable says, is indeed a matter of judgement. But in the course of 3,800 words he doesn't leave a lot of doubt as to what his private judgement would be.