Monday, September 20, 2010

Austerity versus stimulus Financial post forum

July 27, 2010 The hot summer weather continues in Montréal. The economic news is mixed. Most people, at least those who are employed, are probably focused on the summer holidays and their family vacation plans.The unemployed have no such opportunity. But there are some interesting recent developments. American growth remains disappointing and the data slightly below expectations. It is clear from my recent expedition to buy a new fridge that manufacturers continue to undersupply inventories preferring to delay deliveries rather than employ more people and produce more product despite rising demand. 


On the public finance front the Financial Times has run an excellent series of articles on austerity versus stimulus with contributions from Larry Summers,Brad DeLong, Jean Claude Trichet the head of the European Central Bank, Martin Wolf of the FT,Martin Feldstein,,Jeffrey Sachs, David Miliband,Andy Xie,Montek Singh, Robert Skidelsky, Michael Kennedy among others with comments from a large number of readers including myself , most of which are worth reading and thinking about.I urge you to have a look at the series. Simply go to their site and search for it under the heading ''austerity versus stimulus". It comes as no surprise to me but even after the debacle of the 2008 collapse and the clear role which deficit spending played in preventing a total disaster, the Treasury fiscal conservative view remains strongly held by a number of economists and central bankers. It remains in my view a dysfunctional and damaging approach to fiscal policy but it is tenaciously defended by some.  


On the central banking front the Bank of Canada has raised the bank rate another 25 basis points. So long as this does not indicate a return to a policy of jacking rates up substantially over the next year the damage that it will do to the recovery is probably minimal. But Canadian growth and employment gains while superior to those in the U.S. still remains questionable for the next 2 quarters.There is no threat of inflation and still plenty of underutilization of capacity. The Bank should avoid becoming trigger happy on rates. Mark Carney should take a walk on the golf course and relax at the lake and forget about raising rates for some time.

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