Sunday, October 24, 2010

Dangerous times in the United Kingdom

I think the NY Times spurs one to write. Today's editorial on the insane government fiscal policy in the UK requires discussion. Britain is playing with one of the economic stabilizers that automatically bring countries out of recessions. England is planning to cut up to 20% from certain departments over a 5 years. They will lay off close to 400,000 government workers.

The plan is close to reckless in a recession. Any reduction in spending during a recession is dangerous enough, but a 20% decrease is insane. The government also believes the private sector will pick up the differences in job losses from government cuts. This radical switch in policy counts on consumer demand and increased private investment. However, job and unemployment insurance cuts scare consumers. And corporations have shown a reluctance to invest. Big companies pay can borrow at a near zero interest rate. They also are sitting on record profits, yet they do not invest in creating jobs.

What should Britain do ? Apply a little of the usual common sense. (0) Flatten government growth. (1) Gradually cut spend and the deficit at a rate that roughly matches the countries growth rate. A cut little above the rate for the conservatives. (2) Increase the efficiency of government. (3) Better match long term job openings with worker skills.

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