Lively articles on the fiscal stimulus debate
“Around the world over the last century, the typical financial crisis caused the jobless rate to rise for almost five years, according to work by the economists Carmen Reinhart and Kenneth Rogoff.”
David Leonhardt - writing in the New York Times - praises the employment effects of the Obama stimulus programme in a super piece. Judging Stimulus by Job Data Reveals Success
And over at the Financial Times, the ever-readable Martin Wolf considers the thickness of the fiscal tightrope facing the US government and other leading economies.
“The argument is, rather, that the benefits of the higher output today exceed the costs of debt service tomorrow ....high-income countries face huge fiscal challenges. And yes, the crisis-hit countries start from grossly unsustainable fiscal positions. But the US is not Greece. Moreover, a massive fiscal tightening today would be a grave error.”
And here is the link to last week’s feature in the Independent on the views of economist Joseph Stiglitz: The Money Man: Super-economist Joseph Stiglitz on how to fix the recession
All three of these articles will stretch and challenge A2 economists wanting to understand more about the big fiscal issues facing governments at the moment.
China the hungry teenager
Hamish McRae is on excellent form in this piece in the Independent - China’s latest growth surge is the result of an enormous fiscal stimulus and a massive (and unsustainable) rise in credit.
One of the short term consequences is that China’s turbo-charged growth is once again putting upward pressure on world commodity prices. Just as a hungry teenager will happily eat food long into the night, China’s incremental demand for natural resources and manufactured components is threatening another rise in cost push inflationary pressures in the world economy. This is one of the inflation risks facing developed countries and a factor behind fears of a rise in short term and long term interest rates before a recovery gains sufficient traction.
Stimulating Times
I was drawn to this very interesting graphic from the latest IMF report on the state of government (fiscal) finances in countries around the world.
read more...»China’s growth starts to climb back above the 8% target
China’s leaders have set ambitious targets for economic growth - with an aim of reaching 8% growth of real GDP in 2009, a year in which world trade has shrunk and much of the developed world has been mired in recession. An enormous stimulus programme seems to be having an effect with the latest data showing a pick up in output and annualised growth of GDP climbing above 8.5%. Exports remain weak and many Chinese manufacturers are finding that the prices they are able to get from advanced economy importers continues to fall - the terms of trade have moved against them. Lifting domestic demand has become a key macroeconomic objective for the Chinese government. China has poured £354billion into spending on infrastructure in order to boost its domestic economy as exports have suffered.
This BBC news video reports on the latest Chinese growth figures.
See also
BBC: China economic growth accelerates
The Times: The dragon roars again after new figures put China’s output on a growth hat-trick
Economics Snapshot - The UK Budget Deficit
*In 2009-10 the British government is forecast to spend £4 for every £3 that it receives
*Spending will be more than 48 per cent of GDP
*Tax revenues will be 36 per cent of GDP
*The gap is the budget deficit - forecast at 12% of GDP
*For taxes to rise by 5% of GDP the government would have to raise the basic rate of income tax by 12% (it is currently at 20%)
Source: Martin Wolf, Financial Times, June 2009
German Finance Minister urges less reliance on trade
Here is a fascinating short interview with the German Finance Minister who argues that Germany’s heavy dependence on international trade - she is the world’s largest exporter of manufactured goods - has left the country vulnerable to global economic shocks.
read more...»Revision - Automatic Stabilisers
Are there ways in which an economy can self stabilize in the event of an external shock? The answer is yes if an economic system contains automatic stabilizers. This brief revision note looks at what they are.
read more...»Q&A: What is crowding out?
Crowding out is an idea often used by fiscal conservatives to suggest that a strategy of using fiscal policy to stimulate demand during an economic recession might not be particularly effective.
read more...»Criticising the Fiscal Stimulus
Last week the Governor of the Bank of England voiced his (legitimate) concerns over the scale of the fiscal stimulus being applied to the UK economy. In today’s papers Stephen King writing in the Independent hints that quantitative easing might undermine the financial markets ability to provide an early warning system of returning inflation.
“The enthusiasm for Keynesian fiscal expansion is waning in the light of horrendously large budget deficits, whether or not they are funded via central bank purchases of government bonds. It’s all very well having more or less every government in the world borrowing more, but where are the creditors?”
And Larry Elliot in the Guardian pours scorn on the idea that the extra government spending will do much to enhance the government’s green credentials.
Roger Bootle and his team at Capital Economics are predicting that UK government borrowing could total £1 trillion over the next five years taking net government debt to 100% of GDP. He explain why in this article in the Telegraph.
“The ultimate objection to fiscal stimulus packages is that they endanger the solvency of the state, thereby giving rise to fears of default. Indeed, if such a prospect is realistic then the stimulus package may not work. We are not yet at that point in the UK – but nor are we a million miles away from it.”
Q&A: What is a Keynesian stimulus and will it work?
A Keynesian–style stimulus happens when policy-makers deliberately seek to stimulate one or more of the components of aggregate demand to boost output, jobs and incomes during an economic recession.
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