Managing the economy - Time for a new solution

The recession that was caused in no small part by the financial crisis shows no sign of nearing an end. If there is a glimmer of light in the UK coming from the end of the tunnel, it might prove to be a very long tunnel.

The latest news from around the world does not create much optimism that we will come out of the recession any time soon.

Unemployment across the single currency Eurozone has reached record highs

Chinese growth appears to be slowing

Managing individual economies has become increasingly complex over the last few decades as international trade and international banking have caused the economic problems of individual nations to reverberate around the world. Historically the international impact would usually be no more than ripples. Foreign exchange rates would then fluctuate and help to provide a local solution by making exports cheaper.

In the world of today the international nature of markets and banks has made the problems more widespread and in turn more severe. With the current fragile state of national economies and international banks the ripples have become waves that threaten to have a knock on impact like a house of cards.

The economists of today have a standard set of tricks up their sleeves. In simple terms, they look at statistical indicators such as employment levels and inflation rates or price indices to gauge how the economy is doing. Based on a belief that the availability of money acts like a tap to stimulate or dampen economic activity, the strategy usually employed is to play with interest rates to encourage or discourage borrowing. With interest rates already having hit rock bottom then money supply must be influenced directly by the Central Bank to stimulate the economy hence quantitative easing.

The coalition came into power with a supposedly unavoidable austerity package. The opposition suggested that they would have handled the situation but it is hard to be certain what they would have done if in power when faced with the reality of the impact of their decisions. If as some believe policy is made by the Civil Service and then wrapped to match the colour of the politicians would their strategy have been that different.

It is important to realise the important since of confidence in the behaviour of markets, particularly financial markets. With every more complex markets, the players in the market place look for ways to make decisions using information provided by specialist information gatherers. Credit ratings re given to all major business to provide an indication of the risk associated with lending money. These credit ratings are also applied to countries. Most countries look to increase their borrowing through the international market place. If the credit rating is poorer then the risk is considered to be higher and so the interest rate, the cost of borrowing money, is higher.

Before the monetarist approach to managing the economy, there was a strong belief that the government should spend money to create jobs that in turn would increase overall disposable income and stimulate the economy.  There are at least a couple of weaknesses in this strategy. Firstly, the jobs need to be sustainable employment to have a long term impact. This is much harder to achieve than digging holes and filing them in again. Secondly the increase in spending would create a need to borrow more money. After several years of a flourishing economy, the country should have low borrowing and be in the position to raise funds for growth. However this is not the case.

An alternative way to raise funds is to increase the money flowing into the Teasury through taxation and similar sources. Historically the UK has been a good place to trade though not cheap in tax terms.
This has encouraged tax avoidance which is legal planning within the law to reduce exposure to taxation. This should not be confused with tax evasion which is illegal.

Is it not now time to move away from the Civil Servants and look to find a new understanding of  the international play of markets in the 21st Century and the implementation of new approaches to stimulate the economy? This needs to be a worldwide approach with a combined commitment to  work.