The Bankwatch

Tracking the consumer evolution of financial services

To exit or not to exit; that is the question

There is a fascinating debate raging amongst some of the best known economists.  The debate is specific to the UK economy but when you note the number of Americans involved you can rest assured this is equally applicable to US.

The debate began with the case for belt tightening from 20 economists:

UK economy cries out for credible rescue plan | The Times

IT IS now clear that the UK economy entered the recession with a large structural budget deficit. As a result the UK’s budget deficit is now the largest in our peacetime history and among the largest in the developed world.

In these circumstances a credible medium-term fiscal consolidation plan would make a sustainable recovery more likely.

In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.

Followed by the case for restoration of growth before belt tightening from 60 economists:

Letter: First priority must be to restore robust growth | Financial Times

Sir, In their letter to The Sunday Times of February 14, Professor Tim Besley and 19 co-signatories called for an accelerated programme of fiscal consolidation. We believe they are wrong.

They seek to frighten us with the present level of the deficit but mention neither the automatic reduction that will be achieved as and when growth is resumed nor the effects of growth on investor confidence. How do the letter’s signatories imagine foreign creditors will react if implementing fierce spending cuts tips the economy back into recession? To ask – as they do – for independent appraisal of fiscal policy forecasts is sensible. But for the good of the British people – and for fiscal sustainability – the first priority must be to restore robust economic growth. The wealth of the nation lies in what its citizens can produce.

Relevance to Bankwatch:

The 3 to 1 relationship of economists for government spending vs planned reductions in government spending certainly proves that most economists are on the liberal side of continuation of government spending.

My own take is in favour of the group of 20.  When I read the group of 60 case it is centred on the world automatically becoming better when growth kicks in, and the world returns to normal.  This reeks of an ostrich head in the sand view of the world.  What on earth would make them think “automatic reduction that will be achieved as and when growth is resumed “.  There are so many flaws in that view.  For starters, the rapid aging that follows as night follow day when the baby boomer wave hits the old folks home, leaving a much smaller group  to provide tax revenue is a double whammy of lower revenue/ higher costs.

When we read the cases carefully, the 20 group are really saying that what is needed is a plan … a plan that lays out a better approach going forward over the next 5 – 10 years that is based on reality, and that will reassure currency and financial markets.  There is no historic reference that suggests anything positive from continued government spending and debt increases.  Only bad things come from that.

Written by Colin Henderson

February 20, 2010 at 23:32

Posted in economy

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