Capacity Constraints: Skills, Machines, Finance

'Sir, The public discussion about cutting the budget deficit is virtually confined to cutting government expenditure or raising taxes. But it doesn’t have to be like this. The national accounts, with a little manipulation, tell us that the deficit is always exactly equal to private disposable income less private expenditure less the balance of payments.

This is to say that any reduction in the government deficit can in principle be brought about either by an increase in private expenditure relative to disposable income or an increase in exports relative to imports. The expansionary route will reduce the deficit leaving output higher than it would be if the disinflationary path were followed.

My main purpose in writing this down is to enlarge the sphere for discourse and I do not pretend that the expansionary route would be easy to put into effect. Exports could be raised relative to imports especially if the pound were further devalued; the increase in exports was certainly substantial in the early 1970s and 1990s. It is possible that private investment would surge in a more expansionary atmosphere.
Wynne Godley,
King's College, Cambridge. ' [letter to the Financial Times 20 April.]

Wrong, wrong, wrong.  

Boosting consumption has been tried with credit expansion to the credit unworthy and the bubble has burst.  

Export promotion and import substitution should have occurred by now as a result of sterling devaluation by over a third in the last two years, unfortunately capacity constraints invalidate the argument.  Skills, plant, finance, demand.

Fiscal austerity is the only way out in these circumstances, where the problem is not just effective demand but the structural de-skilling of the labour force.   

We are in the long run, and the skilled workers are all dead.