Where Opinions are Facts

The ongoing discussion as to whether spending or austerity is the correct approach to solving the economic malaise is filled with many loud statements blindly claiming success or blaming the "others" for failure.

I have always had a problem with theoretical aspect of economics in which an idea if prefaced with the need to assume a certain situation exists a priori.

My favourite is the example requesting you to imagine you are on a deserted island and a can of vegetables washes up to shore. Now imagine you have a can opener....

So you get the new Treasury Minister Mr Osborne grandstanding in the run-up to the G-20 stating categorically that the cuts he is making in the budget will ensure the economic recovery. Really? For whom?

Leaked figures in the Guardian today say that according to Osborne's own papers, these cuts could result in public sector job losses of 100-120,000 each year for the next 5 years. It goes on to say that the private sector could experience the same sort of job losses.

I am not suggesting categorically that these job losses will occur-I am suggesting that in such an austerity budget there will be increased unemployment, an this at a time when unemployment is already over 8%.

I don't think there should be handouts for nothing. Some of these jobs are undeniably not very efficient. But isn't some form of employment better than no employment?

So I read in today's WSJ that the reason Obama's stimulus package isn't working is because "uncertainty about future taxes and regulations is enemy No.1 of economic growth". The author Mr Meltzer goes on to explain that the request for further stimulus measures is "convincing evidence that they too recognize that the earlier measures failed".

Mr Meltzer chooses to focus on Reagan's reduction of marginal and corporate tax rates as the engine of growth out of the stagnation of the early 80's, just as he praises Ms Thatcher's decision to reduce government spending during a severe recession in 1980.

Well, Reagan's real problem was inflation, and Paul Volcker crushed that opening discussing the fact that it would result in higher unemployment initially, but in the end would benefit everyone. That was the battle he was fighting.

Ms Thatcher might have introduced spending cuts, but she also benefited mightily from a 45% decline in the average value of the pound from 1980 to 1985 which brought in foreign investment and set the stage for joining, and exiting the ERM.

Neither of theses examples actually are that useful with regards to today's problems.
This is why the Great Depression is often referred to in discussing our Great Recession.

But even this comparison is difficult. Does one look at the results of the New Deal at its creation, or get into the sticky period of the 1938-40 period and get drawn in to the discussion that WWII "saved" the US economy?!?

Mr Bernake's greatest fear, and I would say feat was to avoid the shift from Great Repression into a Great Depression. There were immediate problems to be dealt with which required short-term responses.

And yet it is these short term responses which annoy Mr Meltzer. He wants long term solutions. I guess he would like us to worry about the barn while the house is on fire.