Daily Archives: July 26, 2011

The latest figures show that Britain’s economy has barely grown in the past nine months. The official statistics may underestimate the true growth rate – and there may be supply side factors that fiscal and monetary policy cannot address. But assuming the economy stays subdued, there will be a strong case for a boost to demand through macroeconomic policy.

There is no doubt that George Osborne’s policy of fiscal tightening has slowed the economy. But the intention was that its effects be cushioned by expansionary monetary policy and a lower exchange rate, and that still remains the best route to easier demand policy.

Inflation is still too high for the Bank of England to ease policy immediately, but underlying inflation rates are now falling sharply. We now know that it would have been a serious mistake for the Bank’s monetary policy committee to increase interest rates earlier in the year. The case for another round of quantitative easing is growing. 

Since the Japanese earthquake and global financial tsunami, governments have been pressed to guarantee their populations against virtually all the risks exposed by those extremely low probability events.

Such guarantees require building up buffers of idle resources that are used only if, and when, the crisis emerges. If policymakers choose to buffer their populations against every conceivable risk, their standards of living would almost certainly decline.

In recent years, US regulatory policy has become highly skewed towards maximising short-term bail-out assistance at a cost to long-term prosperity. This bias leads to an excess of buffers at the expense of our standards of living. Public policy needs to address such concerns in a far more visible manner than we have tried to date.