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Stephen Archer is a speaker with great charisma. By using illustrations and personal experiences and not being afraid to share his own point of view of the current situation and who is to blame for it, he engages the whole audience, at the same time helping us all to understand the credit crunch a little better.

— Warwick Business School

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Economic Austerity – A broken Model?

Let’s start with the clear and hazardous issue: the economy of the UK has shown no ability to grow under austerity policies and the policy compounds the issue by putting handcuffs on the patient so that the economy is structurally unable to grow and trade its way out of trouble. Businesses are frustrated, the electorate is bewildered or angry or both. The same is now to be seen across Europe and to some degree in the USA too.

Keynes would not be happy with what he is seeing in the western economies today. But would he be right? In my view, partly. When the economic down turn hit in 2008 the governments of the USA and UK loosened state purse strings to try to stimulate the economy or slow the decay. It’s a method well tried and a bit like taking cold remedy for an economic sniffly nose. However, the economic pressure was to become so great that cuts rather than investment became the order of the day for these economies and the European ones too.

The driving force behind austerity is to reduce sovereign deficits and in turn, eventually, sovereign debts. It has since 2008 become received wisdom that excessive deficits and incurable debts are a bad thing – who in their right mind could not agree? To some extent – me for one.  We see after several years of varying levels of austerity in the mature economies that deficits are only being scratched and debt recovery is a pipe dream. But the pursuit of austerity is not only reducing living standards (justifiably some argue) but also damaging structural competitiveness. Inward and internal investment is running at too low a rate and the ability of nations to grow their way out of recession is being shown to be seemingly impossible.

Lack of growth precedes fiscal weakness and a need for even more austerity – thus economies are damaged in the long term.

Italy is cited as a debt ‘basket case ‘ but its debt has been more than 100% of GDP for a decade but only seen as an issue when people took a look at Italy after being shocked by Greece and Spain’s plight. US scale mega debt has been growing for decades. These cases and there are many more, show that it is the attitude towards debt and the solvency behind it that is more important than their mere existence. If austerity is to make debt incurable then the attitude to debt should surely be re-assessed.

If we accept that only GDP growth and cross border trade can cure deficit and debt then why are we allowing growth to be so stifled? The OBR has stated that “tax increases and spending cuts reduce economic growth in the short term.”

Can and should governments borrow to achieve structural growth change – surely yes in the light of the alternative. Moody’s downgraded the UK because of  “sluggish economic growth in the medium term, which austerity has made worse”. (this did not stop the government trying to spin the downgrade as endorsing the UK policy!)

Bradford DeLong of Berkeley and Larry Summers, the former US Treasury secretary, have shown clearly that in a recession investment from borrowing can bring down the deficit in the longer term. Re-trenchment, which is what we see across western economies cannot create growth unless it is accompanied by dramatic means to shift GDP to the private sector- which is unrealistic. But the lack of government’s understanding of the nature of interdependence of state and private sector contributions to GDP is crippling these economies too.

The whole western economic framework is teetering on the edge of prolonged stagnation and debt fudging. It is time for a re-think and change of attitude to sovereign debt in order for these economies to be able to achieve sustainable growth.

(For the record, I do not endorse the underlying mantra of the current UK economic policy)


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