Wednesday, October 20, 2010

Austerity measures are a mistake for the UK

. . . according to yet another Nobel Prize winner in Economics. Yesterday, we learned from The Independent here that Britain's new Nobel laureate, Christopher Pissarides, had this to say about George Osborne's gamble:

"[. . .] I am rather puzzled as to why big companies think the private sector will create jobs if the cuts are immediate rather than spread over two or three years, to give the private sector time to plan ahead. The situation is not so grave; there is no big risk premium of government debt as in Greece or Spain. I see a lot of confidence in the ability of the British Government to control the deficit. That confidence will remain if there is a well-arranged plan over the next few years rather than the next few months. [. . .]"

This time we have these words from Joseph Stiglitz, in The Guardian:

"[. . .] Britain is embarking on a highly risky experiment. More likely than not, it will add one more data point to the well- established result that austerity in the midst of a downturn lowers GDP and increases unemployment, and excessive austerity can have long-lasting effects.

If Britain were wealthier, or if the prospects of success were greater, it might be a risk worth taking. But it is a gamble with almost no potential upside. Austerity is a gamble which Britain can ill afford. [. . .]"

The evidence seems increasingly clear. While the Government continues to claim it has no choice but to impose deep cuts immediately, the overwhelming weight of economic opinion is that this is a deep mistake and may even be likely to further damage the economy.

Why then would the Government want to slow or even damage the recovery? Two possible reasons come to mind. One reason is ideological. Many Conservative Party members desire a much smaller state with fewer public sector workers. Major cuts imposed swiftly helps achieve this goal. A second reason is optimism. The hope is that elections will not be called for four years. By that time, it is hoped further that the economy would have had enough time to recover even if things were much worse than they would have been otherwise because of the austerity measures to be introduced shortly. Therefore, the ideological desire for a smaller public sector is something the Government may believe it can get away with, or so this is my best guess. The future will tell how this will all pan out.

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