Friday, October 17, 2008

Why Economists Won't Vote McMcain

Mr. McCain was asked in one of the debates how he would deal with the economic crisis, he answered: “Well, the first thing we have to do is get spending under control.”

In a deep and protracted recession, the last thing you want to do is cut government spending. Reducing government spending will reduce aggregate demand and slow the economy even more. By the way this is exactly what the British government did in 1930. When faced with an economic slump orthodox economic response was to balance the budget. So the government actually cut unemployment benefits and public spending. Needless to say, it made the recession much worse causing further falls in GDP. (see: causes of Great Depression)

With evidence of a serious recession: (and evidence is compelling)
  • Retail sales falling
  • Unemployment rising
  • Manufacturing output falling
  • Confidence very low
  • Investment levels falling
  • House prices falling
  • (To say nothing of all the financial woes)
Fiscal Policy

One of the best ways to stimulate the economy is through public spending on targeted investment projects.

Fiscal policy has many limitations, but, it is more effective than a cut in interest rates. Lower interest rates will have little effect when confidence is so low.

National Debt.

It is true that expansionary fiscal policy will increase government borrowing - already high (National Debt). But, this spending and borrowing is temporary. When the economy recovers, the government should reduce the deficit. The problem is that the government increased spending and borrowing in the boom years. They shouldn't have done this. But, just because they did the wrong thing, doesn't mean we should refuse to increase spending when we actually need it.

Yes, UK National debt will increase, but, if we stay in a protracted recession it will increase anyway.

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