Idealogical Economic Policy-making - Road to Disaster

Wed, 06/30/2010 - 07:49 EDT

There is one common theme between the Bush administration, Hugo Chavez and the new UK Government. They all seem to have constructed the implementation and not the goals of their economic policies on political dogmas.

Just as Mr. Chavez nationalized the major oil and other big Venezualan industries driving productivity and profits to the ground; President Bush, ill-advised by the treasury and the FED poured loan expansion and did no market oversight and regulation for 7 happy years; so is now David Cameron and his chanellor George Osborne are implementing an austerity policy, which is largely unwed to the economic realities in Britain.

The main arguments in favour of the austerity policy are that - it will solve Britains debt problem and that the markets expect it. In reality it will not solve the debt problem it will make it somewhat milder this year. Yet Britain even under the austerity plan would still be running deficits in 2011. As for the markets, what they really expect is the non-increase or decrease in corporate tax that the shrunk budget would give.

Yet, this situation would serve a good mid-term purpose for the markets, that can in the near future continue to trade to a satisfactory level and provide dividents; However there is no evidence or logical school of thought that shows how the austerity would in any way boost, or even not stifle economic activity and recovery. It would seem that the obviously unpopular with the general public stance of Gordon Brown in the UK election debate, that the excess spending has to stay on at least one more year, was an honest assessment, rather than a promise.

The main problem for the economy is not in the severity of the austerity measures and their social impact - one way or another Britain will have to face those, if it's to re-tune its economy to the new levels of international trade and modes of the financial market. The problem is that the current policy is based solely on Milltonian dogmas, that have worked whenever individual countries face trouble, but are recipe for disaster in a systemic crisis.

The most basic and common mistake that governments make in economic policy is to set tools and agenda for the policy itself. A far more logical albeit not as popular option is to set realistic aims - leaving the short/mid-term choice of policies to the professional economists/financial authorities.

Much to this point is yesterday's Prof. Joseph Stiglizt analysis for the CNN - http://edition.cnn.com/video/?/video/business/2010/06/29/stiglitz.spending.cnn

Comments

In reality, it will not solve

Goochland Va mls (not verified) | September 6, 2010 - 1 day 23 hours

In reality, it will not solve the problem of debt, it would be a little softer this year. But Great Britain, even below the level of deficits will be even tighter in 2011. As regards the markets, what they expect is no increase or decrease of corporate tax that reduced the budget would allow.

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