Confidence and Stimulus

Recently, Mr Blanchard, chief economist of the IMF, recently said authorities should not rule out another fiscal boost, despite debt worries. “If fiscal stimulus helps avoid structural unemployment, it may actually pay for itself,” (1)

The economics behind this is that higher growth reduces government borrowing because it leads to higher tax revenues and lower spending. If fiscal stimulus increases growth, it will particularly help reduce the debt to GDP  ratio.

The statement of Mr Blanchard is in sharp contrast to Jean-Claude Trichet of the ECB who recently stated.

“The idea that austerity measures could trigger stagnation is incorrect,… confidence-inspiring policies will foster and not hamper economic recovery.” – J.C. Trichet (double dip recession)

I have to say, since J.C. Trichet made that statement, I have not seen any evidence that spending cuts, (with prospects of lower wages, job losses and lost government demand) have not increased spending. If anything, confidence has fallen in recent years.

A big question is how much can the government borrow?

By on September 14th, 2010

2 thoughts on “Confidence and Stimulus

  1. We strongly suspect that neither party really knows what they’re doing, nor does any group of experts know what to do.
    This is an area of uncharted waters, and everyone has theories, including the President. He’s placing his untested theories into action, and people are uncomfortable. Even if the executed policies are the “right” ones, that is something which we will not know for several years down the road, even if then.
    This economic problem is simply too large, complex, and interconnected with the economies of other nations, over which the US has no control. To fix most things in the universe, you have to get them to sit still at least for a short period of time. This is a dynamic situation.
    If we as a society actually knew what worked, and could establish a direct cause and effect relationship with any certainty, we would have done it by now. Don’t you think?
    If the solutions were that clear cut, wouldn’t you think that the governments of some other large world economics would have placed those solutions into action already? Any self-respecting, honest person would not claim WITH CERTAINTY that what they did at point X led directly to condition Y. Who really knows that? Let’s get real folks.
    Quite frankly, we don’t think that any leader or legislative body ever KNOWS that what they do will have a specific, desired effect. Like any business person, they simply just give it their best shot and hope and pray that things will turn out OK. At least business people have more control over their smaller entities.

  2. Can I ask a question that has been bugging me for some time?

    What are these spending cuts that you (and everyone else) refers to?

    I recently had a look in the Budget Forecast as found here.

    The statistics go back to 1970 and they show that government spending has decreased only once in that time period (1988-89), and has more than trebled. In addition, expenditure is forecast to increase from around 600 Billion to 710 Billion over the next 7 years or so. Even with inflation, that seems like a significant increase?

    So what figures are people looking at when they talk about cuts?

    Thanks very much

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