One of the causes of inflation is too much money chasing too few goods. Why is the rate of inflation increasing now despite a slow-down in spending?
JVR The high inflation rate is being caused by a commodity boom. The rapid growth of China and India is driving up the costs of raw materials. Added to this, poor harvests and political turmoil in the Middle East have meant high food and oil prices. Domestic demand in the UK has little influence on these global events.
What policies could be effective in reducing employment. Does an obsession with capping immigration mean that some jobs will go unfilled?
JVR The net immigration cap of under 100,000 is a terrible idea. Since EU and outwards migration cannot be controlled and there was already little unskilled immigration the government is effectively reducing skilled immigration. This is leading to the UK putting off talented people coming and staying here. It is stifling the ability of our world- class universities to attract talent of faculty and of students. It is hard to think of a better strategy for stunting growth.
When do you think Britain will hit the bottom of this recession. How much worse will things get?
JVR I do not know for sure. Much will depend on how the euro crisis plays out and whether the richer countries will bite the bullet to protect the weaker ones and establish a larger bail- out fund. Around the world there is a need to stimulate demand in the short-run and have a credible deficit reduction plan in the medium run. Politicians in the US and Europe seem unable to deliver this necessary outcome.
What economic or fiscal policies would you pursue to encourage growth if you were Chancellor?
JVR The Coalition’s July 2010 Emergency Budget has ushered in the largest fiscal consolidation since the War – seven per cent of GDP by 2015/16 instead
of Labour’s five per cent contraction by 2016/17. In my view, this ‘Plan A’ was a mistake as it has depressed the economy at a time when the recovery was still fragile.
I would slow the consolidation in spending by increasing public investment projects, such as reinstating the cancelled school buildings programme. In the long-run a more industrial growth strategy is needed – what I call a ‘Plan V’ (
blogs.lse.ac.uk/politicsandpolicy/2011/08/02/ slow-growth-not-new-normal).
How can the global economy continue to grow when the resources that support growth are finite?
JVR We have grown for much of the last 500 years so I don’t see resource constraints as strongly binding. Many of the things that countries need to do to support growth are about removing restrictions which require political will rather than money. The major structural impediments in the countries like Greece, Italy, Portugal and Spain are barriers to entry in many professions, high firing costs that protect ‘insiders’, excessive red tape and other product and labour market regulations that stifle growth. In the shorter term, the richer countries need to be careful that they do not prematurely start drastic austerity programs before growth is more secure. Co-ordinated austerity in the US, eurozone and UK will stifle global growth – not everyone can export their way out of recession.
Finally, why do economists always seem to disagree?
JVR Honest people have different views. Economics is not physics – this is what makes it interesting! n
i
John Van Reenen is Professor of Economics and Director of the ESRC Centre for Economic Performance (CEP) at the London School of Economics
Email
j.vanreenen@
lse.ac.uk Telephone 020 7955 6976 Web
cep.lse.ac.uk
AUTUMN 2011 SOCIETY NOW 27
The US sub-prime crisis sparked off a cascade of problems affecting the global economic system
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