@ Daniel

Though I don't agree with you entirely you make a sensible point, though I think it's far too soon to call the austerity vs stimulus debate.

In the long term the underlying cause of low growth is the lack of productivity in western economies allied to their bloated public sectors crowding out the private sector. I'm curious to know do you really believe this is going to be resolved in the long run through another round of fiscal stimulus. What is the lefts view on creating a strategy to achieve lasting growth, as a laissez faire economist I'm curious to see what a rational left winger has to say on this subject.

The free market argument is basically that Keynesian remedies do not produce "sustainable growth". All that happens is a growth of unproductive sectors of the economy, a fiscal expansion simply increases the size of government, increases debt and produces nothing more (although GDP figures might look better we have not actually increased real wealth). We could end unemployment tomorrow if we declared war on France and conscripted 5million soldiers, but we would not be better off because we would not produce things that people actually want.

So the other half of the Keynesian idea is that governments can invest productively. But at the same time you (in my view correctly) recognise that people like Cameron and Osbourne are not competent, in which case they are unlikely to be very good at investing your money wisely.

The current economic situation seems pretty dire, but this is a consequence of too many years of far too loose credit, the crony-capitalism and corporatism of the banking sector and in unwillingness to allow failing companies to fail, in particular Northern Rock, HBOS, RBS so that solvent institutions would take over. We are in a pretty dire position. But to borrow more is just to keep on digging whilst we're knee deep in dirt in our hole.

Awake!
Never fear my column this week talks about Ms Lagarde's speech at Jackson Hole, Wyoming where she called for a short run fiscal stimulus. Her speech was a major embarrassment for Osborne and Cameron who supported her candidacy for MD at the IMF. Falling confidence matters as it tends to be a leading predictor of falling GDP growth, hence raising worries of a double dip.

I suspect this was not an outcome Osborne had expected or planned for.

Danny Blanchflower

@danny

Please analyse and report what she says objectively, no rose tinting.
- start cutting future expenditure (no stimulus which loads future unfunded debt repayments, as she explains)
- ensure debt can be financed (protect the AAA)
- the UK is no where near her austerity measures (the prize is to avoid them)

We might be able to concur.

A technical question - what happends after the effect of the short term stimulus has worn off? Do we wait and see then blame the tories?

Capitalism needs growth or it dies. Simple. Those who choose austerity over growth will come to despair. Legarde seems to advocate Darling's policy of slow deficit reduction over ten or so years whilst maintaining growth.

@Clare

Sorry for the late reply. One thing I know about economists (both left and right) is that they are not objective, but 'experts' merely expressing their prejudices (the same applies to politicians and others).

Where's the evidence for this 'crowding out' preventing growth? We just assume it to be fact. The size of today's 'bloated' public sector, as you call it, is nothing compared to its size in the fifties and sixties when we had much higher rates of growth than we do now. Indeed, the 'mixed economy' was seen as an integral part of Britain's economic recovery after the war. We are led to believe that the collapse of the consensus in the seventies was due to energy prices, loose monetary policy, and greedy Unions. Moreover, was Thatcher's privatisations in the 1980s that successful? Only those that made money out of them say yes.

I'm not a policy maker nor am I rational, but I like the idea of temporary tax cuts for the working and middle classes to stimulate demand with our nationalised banks forced to lend more to SMEs, and a 'tax holiday' for firms with relatively small turnovers and those in new technologies. The onus will be on private businesses to grab opportunities, but within a socialist system of the state playing more of a role in banking. These are but a few; however they all cost money, but I see them as an investment not as more public debt.

I wouldn't be surprised that the first country to stick its two fingers to the ratings agencies and deficit doom merchants will be the first country to recover. Today's austerity could be the equivalent of the 1930's gold standard - the first to abandon it wins.

Don't shoot the messenger ...
About time th 100 wealthiest took out an ad in the FT saying the rich and Lord Ashcroft should pay more in taxes.