The year has started well for financial markets. Equities are generally up. European sovereigns have borrowed with an ease that has surprised many observers. Economic data, particularly in the US, have beaten expectations. So as President Barack Obama prepares to give his State of the Union address, and as policymakers and corporate chiefs come together in Davos, there is less alarm among the global community, though not yet a sense of relief. Indeed, anxiety about the future remains a major driver of economic performance.
At Davos and beyond there will be many who argue that we must prioritise increasing business confidence and who say that government stimulus is at best useless and at worst counterproductive. Others will argue that priority must be given to stimulus and that issues of business confidence are red herrings.
Government has no higher responsibility than insuring economies have an adequate level of demand. Without growing demand, there is no prospect of sustained growth, let alone a significant fall in joblessness. And without either of these there is no chance of reducing debt-to-income ratios.
The best chance for economic recovery involves governments working directly to increase demand and to augment business confidence. At Davos and beyond, this should be the focus of economic debates. Continue reading »