Friday, February 19, 2010

60 wise economists

I've returned to the UK to find economists are battling things out in the newspapers! Somehow BBC's international site, which I must have been getting in Japan, didn't include anything about the 20 economists in last weekend's Sunday Times. These economists said the government needs to get on with reducing the size of the deficit and hence national debt, before things get out of control.

This analysis, by very prominent economists indeed (Ken Rogoff, Tom Sargent are superstars of the economics world), counters what Rob lectured you on this week on the multiplier and accelerator. Nonetheless, their points are valid: There does need to be some plan in place to reduce the deficit so that those people lending Britian money to finance the deficit can know there is a realistic chance of getting that money back.

It shows fundamentally that economics is not a bland discipline where everybody agrees on everythin. It also shows the economy is an incredibly complex beast, which defies attempts to understand it with simple models.

However, today saw Act 2 of the debate. 60 economists have written two separate leters to the FT: See here, and here. Again we have heavyweights - Nobel prizewinner Joe Stiglitz, as well as many other likely future winners (including my old PhD supervisor, Sir David F. Hendry).

These 60 economists agree with the kind of analysis Rob gave you last week: Multipliers and accelerators are out there and matter. Cut spending now and there is a great risk of pushing the economy right back into recession. Recession means no growth, higher spending on benefits, lower tax receipts, which will only worsen the deficit.

I'm with Rob, and I'm with the 60 economists. But I do have one concession to the 20. While deficit cutting can't start now, a detailed plan for its eventual repayment should be set out now, to convince the UK's creditors that there is a credible plan and intent to repay the debt eventually.

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