Photo: Pool / AFP / Getty
Nomura’s Richard Koo is out with his latest note, and for regular readers there’s mostly nothing new.Austerity = bad. Austerity made the recession worse in Japan. The rest of the world shouldn’t model themselves after Greece, and so on.
There is one intereting nugget though, and that concerns a conversation he had with UK’s finance minister George Osborned:
The UK was the first country to embrace fiscal consolidation under a new government determined not to repeat Greece’s mistakes. However, the economic forecasts of the Cameron government and the Bank of England were far off the mark, and now the public is worried that Britain will experience a lost decade worse than Japan’s unless something is done.
UK finance minister George Osborne recently visited Japan, and I had the opportunity to ask him whether austerity was not a risky policy choice at a time when the private sector is seeking to deleverage in spite of ultra-low interest rates. He replied that a country where the fiscal deficit had been a world-leading 11% of GDP for a time and was still 9% of GDP could hardly be accused of austerity.
I had expected Mr. Osborne to try to make a case for fiscal consolidation, but he surprised me by emphasising the magnitude of the nation’s fiscal stimulus. (Naturally, he added that deficits must be reduced in the longer term.) When I suggested it might be dangerous to expect much from monetary policy during a balance sheet recession, he replied that his government had instituted a variety of fiscal measures designed to make it easier for businesses and households to obtain
This is an important point made by Osborne, and it’s relevant to the US as well. Although marginal cuts in government spending will be a drag on GDP, the fact of the matter is that both the UK and the US are still running huge deficits, and so while the stimulus programs have worn off, the overall stimulus that occurs because the government is spending more than it takes in on taxes is a huge life preserver for the economy. So, like Koo, we think it’s refreshing that someone acknowledges that, though we’d like to hear it in the US as well.