Saturday, March 6, 2010

Careful about sloppy thinking

Monday's lecture is on fiscal policy.  There's much to say about fiscal policy at the moment, given the UK government has run up a 12.6% of GDP fiscal deficit.  One thing though to say is this: Don't confuse deficits with debts.

If you or I run up a huge deficit at one point in time, whether or not the person we borrow from should be alarmed isn't based just on the current deficit, but also on our track record.  That determines how much we should be trusted.

So this article panics because the current UK deficit is higher than Greece's!  But Greece has been running reckless deficits for years and hence is in a terrible situation where nobody wants to buy its debt any more.  The UK, as we'll note on Monday, has been much healthier over the years, and hence the fact our deficit (as a proportion of our national income) is higher is not something to get overly scared about.

It's certainly something to be aware of though...

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