Solutions to Economic Crisis

Given recent economic problems, what are the possible solutions?

For the UK and US, I really feel the economy could be helped, if there was strong and decisive leadership. The fundamental thing is the government need to stop emphasising the need for austerity and hard times. They are currently trying their best to talk us into a recession. It is not just  a fiscal crisis, the real problem is prospect of a second recession.

Fundamental problems

  1. Lack of Economic growth
  2. High Unemployment
  3. Long term structural deficits
  4. Lack of Confidence in finance and consumer sector.

Solutions

1. Number One priority to Target Economic growth and reduce unemployment. At the very least, economic growth needs to be close to long run trend rate 2.5%; it actually needs to be higher to catch up with lost spare capacity. Strong growth will help boost tax revenues and reduce unemployment. It is only in this climate you can successfully reduce deficit.

There is supply side unemployment, especially in Europe, which has seen prolonged structural unemployment in past two decades. But, the fundamental cause is lack of aggregate demand. (see: The Unemployment Problem)

The UK and US should make a point of not cutting spending in this current economic climate. Governments should be bold and say the best way to reduce Debt / GDP ratios – is to increase GDP and this is what we are going to do.

Governments have to stop focusing on the negative and the necessity for austerity and hard times. If they want to turn around consumer and business confidence, they should convince the country their aim is to boost growth and reduce unemployment. – This is the thing that will really encourage stock markets and bond markets.

Long Term Deficit

Many countries are making the mistake of trying to solve long term structural deficits, by sacrificing short term growth. In the name of long term structural change, governments are deflating the economy at a time when they should be doing the opposite.

The UK and US, should be setting out plans to reduce the long term deficit, but this should not be involving short term cuts in spending on important capital investment. These long term policies should involve:

  1. Raising retirement age in response to ageing population.
  2. Evaluating automatic health care spending in US.
  3. Seeking to move people off long term benefit (e.g. helping those on disability allowance find less taxing jobs)
  4. Planned Tax rises which are appropriate for incentives, efficiency and equality. e.g. US should be planning to raise tax on petrol, and tax on those high income earners who have befitted from recent tax cuts.

These kind of policies are sustainable and actually make a big difference to long term budget situation. If you sell off assets or stop current capital investment projects, it is a very limited benefit to the long term budget. But, if you make changes to retirement age or entitlement spending this isn’t just a one off benefit, but a permanent improvement to the governments fiscal position.

Bond yields in the UK and US are near record lows. If the government came up with plans to improve long term budget situation over next 20 years, markets would be willing to lend for short term economic recovery.

See: Four different solutions to financial crisis

4 thoughts on “Solutions to Economic Crisis

  1. Very nice well written site – much nicer than mine!

    http://www.commonsensebritain.co.uk

    I agree on ‘growth’ but we don’t understand how to achieve sustainable growth. This can only come from either continuing to increase the UK’s population or by continuing to improve efficiency. The first is clearly impossible as we would bust at the seams. This means the only choice we have is INVESTMENT – And in the RIGHT areas. Our politicians (and most economists?) do not understand this. I believe that I have some of the answers – please see my website.

    JP

  2. Investment is a good idea however, going back to basics, investment alone will not stimulate the economy , firstly you need real demand for products and services. That comes from me and you the consumers providing there is the disposable income available, with wage restraints and uncertainty in the economy this will take time. Funny money or quantitative easing is always a last ditch attempt at stimulating the economy,this coalition has injected approx 325 billion pounds through the banks to provide some stimulation, we can clearly see it has not worked. Cut out the middle man “the banks” and target the consumer with Qe straight in to our bank accounts, 100,000 pounds each using our ni numbers through HMRC .consumer spends generating real growth increased tax revenue for the government employers employ more people from extra demand on their products and services, this boosts confidence increases our gdp in rel terms and only through a growing economy can we then start to tackle the deficit.

  3. I think whet you’ve captured here is the need to focus on positive messages – ie. not make a big noise about austerity and tax raises but instead forcus on ‘increasing GDP’. If the press could take this stance and stop trying to capitalise on doom and glood headlines to sell newspapers it would have less chance of becoming a self fulfilling prophecy. I also believe that the welfare/entitlement culture we are now so used to needs to change. Not overnight but bit by bit people need to be weaned off it and become responsible for their own financial health and future. If you look at developing nations like China and India and the work ethic and sheer hunger for expansion and growth – that culture needs to be fostered here somehow – and especially in southern Europe… At the end of the day politicians need to stop spending money on votes, at least until they can actually afford to…..

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