http://www.economist.com/node/17147618?story_id=17147618&fsrc=rss
***************
"The value of life lies not in the length of days, but in the use we make of them; a man may live long yet live very little." (Michel Eyquem de Montaigne - French Essayist)
***************
Again a solute to one of my former students who sends a most interesting article on settling the arguement amongst macroeconomists and politicians on the issue of reducing government spending as a path to long term growth.
Terms like "Cyclically Adjusted Primary Fiscal Balance" (CAPB) are, for us, real sleep inducers but the studies that determine whether it is appropriate to claim GDP growth can result from government cost reductions are important. The "Economist" article attached outlines the debate on that issue and concludes that cutting back does not do what some in government think it does.
We're guessing there is "debate" on this issue because economists can't agree on what time it is, let alone the effects of fiscal austerity. We're also guessing that one of the lessons of the Great Depression is being ignored in this modern debate: the U.S. government decided to be fiscally "austere" in 1937 and simply made things worse. What is that old saying about those who ignore the lessons of history ...?
Fortunately, Ben Bernanke (whose PhD work was done on the Great Depression) has not ignored that lesson and will be continuing to "spend" (if the current Fed discussions are acted upon). But, of course, there is much debate about QE (Quantitaive Easing: just a fancy two word classification for the Fed spending money) and how much of an effect it can have on the economy.
In any case, the IMF study on belt tightening carefully defined "intent" and "action" in defining what quantitative results to study and compare.
The IMF concluded that, on average, a rich country attempted a fiscal contraction of more than 1.5% of GDP about once a decade. It concluded that the typical such episode is clearly contractionary: a fiscal consolidation of 1% of GDP leads on average to a 0.5% decline in GDP after two years, and an increase of 0.3 percentage points in the unemployment rate. The charts supporting this conclusion showing trend lines for net exports, unemployment, GDP and domestic demand are excellent.
Interestingly, simulations carried out by the fund show that slashing spending in an environment where interest rates have no more room to fall DOUBLES the contractionary effect of such cuts compared with a situation where the central bank still has scope to cut rates.
In English, it is stupid to go for fiscal austerity programs in the middle of a severe recessionary environment. We believe it was Paul Krugman (along with Warren Buffet) who said the U.S. economic stimulus package was not large enough, and went on to say that spending "big" now will save the economy now, and that fiscal austerity can be achieved when we get back to full employment.
Then, of course, there is the history that we are doomed to repeat.
Tuesday, November 2, 2010
Subscribe to:
Post Comments (Atom)
I couldn't agree with these sentiments more.
ReplyDeleteCraig: thank you! I'm appreciative of your support and the continuing quality of your inputs.
ReplyDeleteThis chart is indeed terrific.
ReplyDeleteBy the way, I like browsing the IMF blog sometimes:
http://blog-imfdirect.imf.org/
France lost one of its best Economists to the IMF. You know that he is a "socialist"? (I love using this word by the way, it sounds so dirty here in the US)
Christine: I'm laughing again! Dr. Irani (Oxy CEO) used to call me his "resident socialist." Keep up the comments!!!
ReplyDeleteThe question of fiscal austerity avoids more serious issues.
ReplyDeleteOur government should try to make the economic and political environment as predictable as possible now. Lack of unity and collaboration is the biggest enemy. Many different parts of government and society do not understand each other. Furthermore, USA Gov can take these times to restructure government organization and upgrade technology to build synergies and productivity. However, this will lead to firing government employees. Then again, the government could improve training programs, work with companies to forecast future labor needs, and alter the mix of skills in the labor market to make the United States more competitive.
We must realize politics is not a pursuit of truth. It is impossible for anyone to know everything that is going on. Ergo, people play the influence game. That means relying on how people present information as opposed to the actual information.
Bottom line:
Can the U.S. Government achieve its goals? Does the U.S. Government have the right goals? Overall, does any government operate as well as the United States Government? No.
Also, the words "fiscal austerity" does not elaborate on anything. Specifically, what do we cut? Maybe we increase some budgets? How do we alter the tax structure? More than ever, government top executives need to communicate with each other, consumers, and businesses. History says this will not happen. I think we all have too many unclear misunderstandings of each other. This clouds policy making, interpretation, and execution.
Everyone should probably run out and get a PhD in in one of the engineering or science fields. Business majors should be especially wary. Allow this to give an explanation: http://cfo.com/article.cfm/14533064/c_14537246
I don't know. Maybe I am out of touch with reality.