Austerity vs stimulus

This Friday parliamentarians will hold the annual economic debate against the backdrop of a sustained global recession and two competing views about how to get out of it. The debate will be particularly robust and acerbic given the election cycle we are in but we should be mindful not to confuse hyperbole with careful, fact-based analysis.  

Let us call the first view the austerity measures approach. This argument is based on the view that governments should always balance budgets; borrowing should be kept to the bare minimum; and that when recession hits it is time for more cost saving measures. This is the general approach embraced by conservatives and is best exemplified in the US by Republicans. Some Republicans have even proposed a constitutional amendment to require a balanced budget. The OBA is closest to this position and there is no doubt much of their commentary will be shaped by this disposition.

One of the consequences stemming from this approach is higher unemployment (in the short term, for sure) and less government support for those people most severely affected by the economic crisis.  A look over at Greece will allow one to readily see the particularly devastating consequences of EU imposed austerity measures.  

The second view we will call growth through stimulus. Essentially this argument is rooted in the belief that we can get out of the recession by injecting money into the economy through a variety of government initiatives and that, while increasing debt, it will help businesses grow. The Obama administration adopted the Cash for Clunkers programme with this in mind and the Bank of England pumped £325 billion into the British economy to stimulate business growth.  This PLP is closest to this approach, having set in place a number of tax concessions to help local businesses.

An important aspect of this recession-busting strategy is that a high premium is placed on job retention: further job losses simply place a greater burden on the state since it will lead to an inevitable increase in benefit claims. Responsible governments cannot allow the weak and the vulnerable to go without food and shelter.

Both views have merit, should not simply be dismissed  and require careful reflection. It may well be that an ideal approach combines elements of each.

How Bermuda got into a recession in the first place will also be hotly debated. There can be no doubt the global recession has been the primary determinant of our current economic circumstances but you will certainly hear on Friday that this government is largely responsible. It takes an incredible leap in logic to view the damage to countries in every corner of the world caused by the financial meltdown and then posit a theory of Bermuda exceptionality. The redevelopment of Sonesta Beach and Coral Beach/Horizons were stopped dead in their tracks with the dramatic collapse of investment giant Lehman Brothers, the company providing the financing. Bermuda lost hundreds of millions of dollars and 100s of jobs and this had nothing to do with domestic policies. This is one clear and obvious consequence of the global recession.

Bermuda has been severely impacted by the global recession and government is attempting to stimulate the economy, protect jobs and provide business incentives. A government which puts people as it first priority will not seek to run the country as one would do a business; governments do not operate on a for-profit basis. There is certainly more that government can do to stimulate growth and make the country a more attractive place to invest; we need to focus on getting the appropriate structures and policies in place to achieve this goal. Getting this right can help position us to recover quickly as the recession winnows away.