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Macro Policy: A Lost Decade for the West?

Monday, November 19, 2012
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I greatly enjoyed the talk given at the Tutor2u Global economy conference earlier today by Mike Kitson from the University of Cambridge Judge Business School. He spoke on the topic of "2010-2020 - a lost decade for the world economy"



Most macro policy debates in advanced countries revolve around rejuvenating and rebuilding economic growth. The concept of growth itself is fairly simple - it involves finding and using more inputs and then using ideas to configure them in better ways. Most mainstream macroeconomic models assume that we will always return to normal growth - but there are no banks in the BoE model - they dont capture the fragility and deep rooted problems of the financial system. 

The Bank's projections for growth have been inaccurate and optimistic!

The UK economy has many structural problems - one of which is private sector debt - it will take a long time to deal with it.


The weak growth problem is worsened by a policy vacuum - there is no coherent growth strategy - the UK Treasury view now is similar to the 1920s - a belief in fiscal orthadoxy where cutting the deficit will create the conditions for lower state borrowing. Intelligent economics knows that the causality runs from faster growth helping to reduce the fiscal deficit and boost incomes to help lower private debt ratios

There are some reasons for cheer including the rise of other economies, we should regard the BRICS as competitors and customers


Ideas are key growth drivers - but these require finance for nurturing and achieving scale - we must remember that technology & innovation is expensive. 

Some governments have increased their science budgets - only one G7 country has cut state science budgets - the UK! Technologies produce positive social returns, the state should help fund them - for example in the United States, the algorithm that led to Google's success was funded by a public sector National Science Foundation grant. Growth comes from diffusion of new ideas - illustrated by the Solow Paradox - computers are everywhere save for productivity





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