Friday, February 19, 2010

The New Battle of Britain: Economists v. Economists

A group of 20 prominent economists, including Sir John Vickers, Thomas Sargent, and Ken Rogoff, published this letter in last Sunday's Times (London) supporting the Conservative party's plan to dramatically cut public spending to cut the UK's budget deficit, which they described as "the largest in our peacetime history and among the largest in the developed world."

Today, 60 other prominent economists, including Lord Skidelsky, Brad DeLong, Joseph Stiglitz, and Robert Solow, published two separate letters (
here and here) in the Financial Times opposing the deficit-reduction policies of the Tories, and claiming that cutting public spending now could disastrously delay recovery from economic recession.They support the current Chancellor, Alastair Darling's, policy of postponing budget cuts until 2011.

These same two letters could well have been written about US policy, where Republicans are clamoring about growing budget deficits, while the Obama Administration is inclined to push off spending cuts until 2011 in order to prevent a double-dip recession.

So which group of very, very smart economists is right? Of course, no one can say. Welcome to the world of macroeconomics. If pushed from my perch on the fence, I would tend to fall within the second camp: cutting budgets would be more dangerous than increasing deficit spending at this time, when a weakened economy is just beginning to come out of recession.

The larger message is that, while economists are in widespread - indeed, nearly unanimous - agreement on some fundamental issues such as price theory and international trade, they are in diametric opposition on other issues of central importance to policy makers and voters/consumers.   

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