Wednesday, December 19, 2012

UK economy: stimulus needed. Osborne or rational?

Although Economics is the study of a ferociously complex and unpredictable system, it is also capable of being at times, fairly simple.

A banker on BBC says of the UKs economic performance in 2012 that inflation cuts into peoples' income, which puts their spending down, which reduces their demand in the economy, which reduces production and trade, which throws people out of their jobs, which puts their spending down, and so on.

Quite true. Negative feedback. A downward spiral.

To overcome the downward spiral a stimulus is required.

There are two approaches to this stimulus.

Chancellor Osborne believes that the best stimulus is to stimulate private businesses by
  • crippling the competition by running down public services (under the flag of reducing the deficit), which throws people on the dole, increases Social Security payments and burdens the NHS.
  • reducing tax on the rich, who can then send their extra money to tax havens abroad
  • reducing regulation on business who can send their extra money abroad
Rational economists believe that the best stimulus is to stimulate the whole economy by
  • creating housing, which provides jobs and saves money.  
  • providing insulation  that reduces householders heating bills which provides jobs and takes people out of fuel poverty.
  • stimulating renewable energy industries, which provides jobs and helps our descendants to live in a normal climate.

This is the basic choice. Obviously there is more to it, and the work of economists is to quantify the gains and losses attached to each choice, but on a first look, qualitative basis, it looks as if the rational approach wins hands down over the Osborne approach. 

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