It’s the Denominator?: UK/EU Economics

In keeping with our European-economy watching over the last several posts, we read one that's more UK-centric; but the following from it still shows the universality of the various issues.

Now, we could be arguing for months about multipliers. Most probably inconclusively, as their size depends on a multitude of factors. But it is undeniable that any action on the numerator of the deficit (or debt) ratio implies adverse effects on the denominator, that is GDP; and that these effects are likely to be larger in times of crisis, when private expenditure is particularly weak. Italy, Spain, Portugal, and especially Greece, are there to prove it. On the contrary, in periods of crisis, acting on the denominator is certainly more successful, because more likely to reverse the deflationary spiral, and to trigger a virtuous circle of increasing income and tax revenues. At least for crisis stricken economies, the key to fiscal sustainability is the denominator of the ratio. Even the IMF famously backtracked on the size of multipliers, and expressed doubts if not on current austerity per se, certainly on its size and pace.

In 1937 Keynes famously said that “The boom, not the slump, is the right time for austerity at the Treasury.” People in Brussels, and Chancellor Osborne, should really go back to the classics.

via It’s the Denominator, Stupid! | Sparse Thoughts of a Gloomy European Economist.

What do you think? Did Keynes have it right: "The boom, not the slump, is the right time for austerity at the Treasury"? Should we really ask the government to get completely out of attempting stabilization and stimulus? Should we really ride out recessions/depressions so that only "organic" rebuilding (without the government picking winners) should happen? Could we wait?

Is our slow recovery better than the extreme depths we would hit possibly followed by more rapid growth than would otherwise occur?

Are there, however, better choices than Keynesian monetarism on one hand and Austrian School economics (austerity) on the other?

Does the debate go back only to two competing theories: 1) deregulation of the financial sector caused the problem or 2) governmental intervention in the form of artificially low interest rates cause the problem.

Was it a combination of the two?

We live in interesting times.


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