The Wrong Economic Question

Just read an article arguing weather UK got out of the recession due to its austerity or did the numbers become positive after it ‘halted’ its austerity. The debate regarding austerity vs spending/easing to stimulate growth after a recession is heated, and there are a lot of big personalities (and their equally massive egos) attached to it. I however thing that in all of this debate, the actual question remains desperately hidden away, the question of reform.

The engine of growth in the short run can very well be Easing, however in the long run strong fundamentals are a necessity. By fundamentals I mean having industrial competitiveness, productivity, high quality jobs, low defecit etc. It is very strange, at least to the popular reader, that economists seem to debate austerity and easing but not how each is actually suited for a slightly different purpose, as the time frame of their impact/effectiveness is different.

Japan’s austerity and reluctance of easing previously has been said to reign in deflation. However we know that Abenomics was basically a three pronged approach, combining fiscal expansion, monetary easing, and structural reform. Even though there was little clarity on time frame it was obvious that the reform part would be the hardiest, slowest and the last to start having impact. It would have been like a company taking on debt, to get some breathing space and get its house in order.

China has done something similar, but far more complex ‘and beautiful’. It is simultaneously proving easing, yet re-balancing its economy towards consumption, yet strengthening its currency, by targeting specific industries, cities or in other words ‘areas’. In a highly pragmatic approach, it seems to know that at the end of the day they want to ‘reform’ to create a stronger and sustainable fundamental basis for economic strength yet not go into a recession. What China is doing takes a lot of political guts as well as an extraordinary capability to calculate, govern and manage. If China can pull this off, it would truly be an example (although not a perfect one) of how large economies can go through transition.

I am not however saying that either of the approaches is best. It might also be necessary at times to let austerity take its full toll, mixed with reform, which itself can help. In fact that is what most countries has at least wanted to do.The idea is that countries should know what they want. A structurally sound economy comes through reform, sometimes austerity, but the reluctance to go stall growth requires easing. There can surely be a beautiful mix of the two, however not strengthening the economy well enough (whatever that might entail, reform, austerity etc) is simply an irresponsible way to kicking down the can for