According to punk Keynsians a large public deficit stimulates an economy, whilst public spending restraint or cuts pushes it back into recession.
In the UK Mr Ed Balls has warned that there could be an economic hurricane hitting as a result of the Coalition government’s “cuts” in public spending. In the US Ben Bernanke has pursued low interest rates and quantitative easing as the President has run very large budget deficits. Despite this, the word is that the growth reported for the second quarter of 2010 is about to be revised down substantially.
Ben and Ed have some explaining to do. Why did Germany grow the fastest of the major western economies in the second quarter, when they were running a relatively low budget deficit and announced spending cuts? Why did the Uk record reasonable growth in the second quarter when Labour had already legislated to halve the budget deficit,imposed a range of tax increases and spending cuts to capital spending and the Opposition made clear its intention to press on more rapidly with deficit reduction? Why didn’t the combination of QE and a large deficit with no immediate plan to cut it boost the US economy to the top of the pile?
We can discount Ed’s words. As a back runner in the Labour leadership contest he has to adopt more aggressive language to get some attention. The media should not take him quite so seriously, as there is little economic foundation to his UK hurricane forecast.
We need to study Ben’s words very seriously tonight. If the US does revise down its figures and if the US authorities are now very worried about a slow pace of recovery, we should expect more extraordinary monetary action. Mr Bernanke cannot cut interest rates, so he will end up printing more dollars.
Meanwhile the failed experiment with a very large budget deficit may gradually draw to a close after the mid term elections, when both Republicans and Democrats might think they need to slow the growth in the massive debt build up which current policy is encouraging. Debt can be to economic growth as alcohol is to happiness. Drink too much and you may get depressed. Borrow more and you may have a headache.