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| Taking your foot off the accelerator too soon |
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| Written by Giles Wilkes |
| Tuesday, 23 June 2009 12:54 |
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When should policy makers start to withdraw the stimulus? Christine Romer in the Economist digs up an historical analogy that Paul Krugman is fond of: the way FDR precipitated a mini-Depression in 1937-8 by going for a balanced budget too soon, and also tightening monetary conditions. She warns against holding back on stimulus until we are returning to full employment. Paul Samuelson too argues for the stimulus to be sustained. Perhaps the green shoots we are seeing are only, um, shooting because of the expectation that the stimulus will last. Similar reasoning helps explain why Wolfgang Munchau is so furious about the Berlin Hairshirt. A constitutional commitment to a tight fiscal policy is crazy. What if Germany does not resume growth at a healthy pace? Munchau writes:
This is one reason for our aversion to the Conservatives' Office for Budget Responsibility. In certain circumstances - say, when the economy is growing, there is a surplus and a large debt to repay - having a Victorian Uncle tutting over the Chancellor's shoulder about debt repayment may make sense. But what about during another downturn? Fiscal policy is a matter for judgement, not dogma. You may hear more reasons for this aversion on Sunday in Westminster Hour, for which I was interviewed. One reason to slam on the fiscal brakes might be long-term interest rates getting out of control (see earlier discussion about Niall Ferguson's views here). When the economy is at capacity, public and private growth start to compete against one another. But there seems to be a reasonable consensus behind the idea that the recent rise in rates is benevolent, reflecting higher future growth. Paul Krugman, obviously, agrees. However, David Smith discusses Mervyn King's views and hints that rates might rise faster than people currently expect. One day we will have to deal with the structural fiscal deficit - we have a big paper coming out on the subject soon. Public spending cuts will surely play a part. But I am amazed at the unbalanced hostility that the FT shows towards the public sector in this info-graphic. Phrases like "unsustainable leviathan" beg the question. Few analysts point out how the loss of revenues and a collapse in nominal GDP are the immediate cause of the debt explosion. We will. The other big issue is the future of banking regulation. There is a growing consensus behind the idea of a wise systemic regulator solving problems in future. No more will regulators just look at individual companies: instead, they will analyse the whole universe of financial entities, and work out when it looks likely to blow up the world, again. Hmm. I'm glad someone is kicking back against this idea, or at least asking it questions. John Plender:
Precisely. An excellent letter today makes a similar point.
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| Last Updated ( Tuesday, 23 June 2009 18:14 ) |



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