Thursday, December 25, 2014

A great one by Prof. Robert Skidelsky

A great article by Prof. Skidelsky can be found on the Project Syndicate site.

His last paragraph is the one to keep in mind in an IB P1 macro essay question on fiscal policy, deficit spending, austerity and their effects:

We can all agree that what happens to the budget affects the economy. But I would argue, as Keynes did, that “the boom, not the slump, is the time for austerity at the Treasury.” To try to cut spending in a slump, as Osborne is doing, is to prolong the slump. And, as he is learning, to his displeasure, that means postponing the day when the books will be balanced.

The whole article is very useful to read. Check out the way he explains the 'signalling effects' of announcing spending cuts:

A credible policy of fiscal consolidation, they might say, will have the same exhilarating effect on confidence as fiscal consolidation itself.
Economists call this the “signaling effect.” If you announce that you intend to balance the books over five years and pencil in a lot of spending cuts, consumers, relieved of their fears of future tax increases, will start spending more freely. This will cause national income to rise, and, with luck, the budget deficit will start shrinking, more or less according to plan, without requiring any, or much, retrenchment.
The article can be found here: Britain’s Closet Keynesian. Hiw page is here.

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