Co-ordinated state action is necessary to address climate change without harming the economy or inflicting the costs on the poorest.
As the United Kingdom approaches the Brexit cliff edge, the task of preparing the economy has fallen to a secret group within the civil service. Their mission – creatively dubbed “Project After” – is to model and plan for a variety of scenarios, from the significant disruption associated with no deal to the more moderate outcome of a negotiated departure.
When preparing for the economic consequences of Brexit, policymakers need to consider two time horizons. Over the long term, growth is determined by the economy’s potential output – that is, the amount we would produce if all our resources were used most effectively. Any changes to the supply or productivity of the economy’s factors of production (land, labour and capital) impact potential growth rates.
In the long run, however, we are all dead. Over the short term, levels of demand – determined primarily by individual consumption and business investment – influence how much of that potential output is used, and therefore how much the economy actually grows. Increases and decreases in demand are a natural part of the business cycle, driven by what John Maynard Keynes called “animal spirits”. But extreme events – financial crises, natural disasters and wars – can affect demand as well.
Of all the possible Brexits, no deal is most likely to impact growth today. Immediately after the UK leaves, logistical problems could prevent vital goods from reaching shop shelves.
