Macroscope | Our broken economy doesn’t need more stimulus
The OECD’s urging to ‘drop austerity’ is out of sync with reality
The recent row in the UK over the upcoming referendum on Britain’s membership in the European Union and the debate over the pressurised extraction of oil, known as fracking is similar in that everybody has a view but no one is prepared to be informed by the facts. The usual source of information, the internet, is unreliable. Most posts are highly biased and parrot fiction as fact. In both cases people hold firm views because it comes from the gut; this is more commonly known as indigestion.
There other issue in economics that drives more heat than light is whether governments should spend to get their economies out of trouble, or should they employ handbag economics, austerity, to consolidate their economic strength?
Keynesian economists who demand spending to stimulate the economy are forgetting that we are already spent
Once again the armchair economists of the Organisation of Economic Cooperation and Development have called “on rich countries to drop austerity.” This phrase was the BBC’s emotional shorthand for the story described in the Financial Times as a, “call for urgent action to combat flagging growth” for despite positive growth in the US, the UK, Australia and indeed Europe the spectre of flagging growth continues.
China alone will impact global growth as its steadily declining growth figure of 6.9 per cent (going on 3.9 per cent) will obviously affect global growth figures given how the world’s second largest economy affects the maths. The oil price fall will provide an additional but apparent fall in growth despite it being altogether positive for the global economy – though not for Brazil, Russia, Saudi Arabia and Venezuela.
The OECD is mired in a number of historical misconceptions. First of all rich countries aren’t rich – they may have lots of assets but most of them highly indebted. My father-in-law said that you never know how wealthy a man is unless you know how much he owes. The public debt ratio in Japan is currently 237 per cent of GDP; the US is 104 per cent; in Europe it is 93 per cent; China is believed to be at least in the 90’s if local public debt is included.
Some countries like Singapore have high debt levels (at 114 per cent of GDP) but also large reserves but there is no such pot of gold and no easy way of earning it in most other jurisdictions. A country may be developed but that is not the same as being rich with the luxury of being able to afford to be a little generous.