The outcome of the Group of 20 summit in Toronto on June 26-27, 2010 was clear: shrink the budget gaps by half or more by 2013. The presidents and prime ministers of these advanced countries agreed. This is a complete u-turn to their Keynesian arrangements last two years where they pledged to spend and spend, our old blog noted at the time.
We wrote this piece a year ago. In most cases, we posited a different path which to our knowledge will push the world to the right path of prosperity. When the group agreed to cut waste and managed debts, they came home and did neither. So much talk and no action.
What are the implications of this agreement? After all, many economists have been asking for more spending. They reason that more spending will trick us out of economic recession. New York Times columnist and Princeton professor Paul Krugman has this notion that cutting spending could be a bad thing.
But for Nkpuhe (and now Tekedia), we think the group of 10 has done the right thing. We are very enthusiastic that cutting deficits and reducing debts will bring sanity to markets. It will calm the bond market with the effect of lower interests that can actually help investors to access capital.
They did not shrink any debt unfortunately; the reason we are still in a hole globally.
When there are financial restraints that eliminate bailouts, markets are allowed to function the way they are supposed to be. We think financial austerity could be a path to new level of investment. It removes the uncertainty of government interventions that have weakened many firms and repositioned others.
Nothing like that has happened. Greece and other nations in the PIIGS are yet waiting for more help.
Take for example, the sovereign debt crises in PIIGS nations have harmed many of their firms. So when governments commit to reduce debts, it can actually help corporate entities in the long run. Forget the notion that the world can get out of recession through spending/stimulus where we depend on the citizens to spend us out of the troubles.
That might have worked in the past, but the reality is that the level of productivity engineered by technology and the outsourcing of jobs make it difficult to hire more people. Focusing on what worked in the industrial economy and transitioning that idea to the knowledge economy is not right.
Unemployment may stay high for a long time in the US because we have since destroyed the system that enables job creation as we blogged. So that idea of spending and taxing must be dealt with. We need austerity to get our economies back to shape. That is what individuals do and it will be good for nations also. Stimulus with no job in America is not going to help. We tend to forget that one PhD in high tech US firms create about ten jobs in Asia. If government helps to hire them, they have multiplier effects across Asia. So that plan of focusing on spending when jobs are not here will not work easily.
When governments show commitments to live within their means, the confidence in the market could be up as people understand that no help will be needed in future. If you fail you fail and we will witness a balance. Nkpuhe maintains that to cut the deficits, the best plan will be to cut spending and reduce bailouts. Using massive tax with spending is a wrong idea.
We commend the group and hope they will carry on. We have already seen what is happening in UK and in few years, UK will be back to good economic health. We think the new chancellor of exchequer is doing the right job. Keynesian economics is not right now because many economic variables cannot easily be controlled as technologies have revamped the economic system making it difficult for micro-economic policies to work as planned.