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Tuesday, 14 July 2009

Yanks in the UK: Inflation, deflation or just a vacation destination?

Sumer is Icumen in, so the American tourists are heading this way. First up is Mr Tim Geithner, US Treasury secretary, who suggests that, like the Kingdom of God, a recovery is at hand and we don’t need any more fiscal stimulus for the moment. Speaking in London at the start of a European tour (“If today is Tuesday, this must be Belgium”) before heading off to one our two of the friendlier and richer Gulf states, he massacred the English language with: “There is a very good chance for seeing the US economy and the world economy get back to the point when it is growing again over the next few quarters.”

One of his fellow countrymen has taken up a more permanent residence in London. Adam Posen, a US academic, is the latest member of the MPC, and being a newcomer and a foreigner unfamiliar with our ways, he was more direct and confident with MPs at the Treasury committee than is usual for members of the MPC.

In Mr Rosen’s view the UK was behind the US in the economic recovery, but is also better placed to sort out its banks before the fiscal stimulus of the past year runs out of steam.

So rather than being on the verge of maybe turning the corner and seeing the light at the end of the tunnel like the US, we have away to go. Unlike Mr Geithner, Mr Rosen isn’t averse to printing some more money to get the economy going, but since nobody is sure yet how much impact the £125 billion injected so far has had on the economy (isn’t that great, who else could spend that much and not know what had happened to it), he wants to wait a bit.

Unfortunately, if we do see that light it may turn out to be an express train heading in our direction. Mr Rosen says that there is a possible nightmare scenario where that the government fails to fix the banks before creditors refused to finance huge government deficits. This would leave the UK in the same position as Japan in the 1990s.

Mr Posen says he will be undertaking three specific pieces of research to help him think about the UK economy. First, he would evaluate the potential growth rate of the economy, starting from what he described as a puzzle as to why British productivity growth had been so disappointing. Second, he wanted to delve deeper into the lessons from 1990s Japan to ensure countries do not make the same mistakes. Third, Mr Posen said he would begin research on how authorities can develop an exit strategy to loose monetary policy, excessive budget deficits, and support for the financial sector, given the important of ensuring the sequence of these moves does not undermine economic performance.

Well let me save you some time M osen. I can give you answers to points one and three: excessive government regulation, low incentives through the tax system for capital investment giving effective tax rates considerably higher than the headline rate, excessive changes in the tax and corporate legislation and a general unhelpfulness towards business, particularly capital and energy intensive industrial businesses have all contributed to the lack of productivity, and a bloated public sector if you include them in your figures.

The solution is a new, slimmed down government. Don’t look at what Japan got wrong. Look at what Singapore got right.

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