>In a recession should we spend or should we pay off the debts?
>The UK budget was announed today. It aims to eliminate the 11% deficit in less than four years. Is this reasonable? Who will pay the price? Is that right/just?
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Battison's Blog 
>Debts should be paid off in the boom period.Ergo, in a recession you should have enough debt facility to spend more to stimulate the economy.the mis-management has occurred in previous years, not in the policies of today.horses, gates, bolted.
>I completely agree. But what happens when you're faced with a situation like today where previous governments weren't prudent enough during the boom and we now face growing negative market speculation as our debts mount?
>The government start taking short cuts and looking to get the money by hook or by crook from families and businesses the country over.Looking at it from the perspective of a business:The government have mismanaged their fiscal affairs and are now deeply in debt. Do you think they are going to pay their own way out of it honestly, or do you think they are going to get private enterprise to pay it for them ?My bet is that they won't be doing the honourable thing, and the rise in VAT is evidence of that. http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/how_vat_works/rates/vat_rates_en.pdfand page 27 to see how it has continuously gone up in the UK.Mismanagement occurs for the same reason you think Direct Democracy can't be trusted. Because voters are stupid. They all wanted increased welfare and voted for governments that wrote the biggest checks, then they suddenly complain that they've got a deficit on their hands.What will happen ? Rinse and repeat just like before.
>Question to Rob (and others).Do you think a situation like this won't be repeated again ?If it will be, then how long until it happens again ? 20-30 years ?And why will it happen again so quickly ?Because this is the natural cycle ?
>I don't think voters are stupid! Besides I'm one of them, so if they are then I am too!On VAT, didn't you back the increase back when we were talking about a choice between NI tax and VAT?Secondly, you say VAT in the UK has continually gone up, but it's done the same in most other countries.And no, Governments yo-yoing in and out of debt due to sheer stupidity is not a natural cycle. I'm surprised that with such beliefs you can even be a democrat, let alone a proponent of direct democracy. The reason most economic powers went into debt during the last boom was because they didn't understand enough about economics. Only 2 or 3 years ago very intelligent economists and statemen were denying that bubbles were an economic reality. We now know they are, and countries are far less likely to repeat such errors (take China's property and asset bubbles for example; the government is already acting to counter their growth). Do people forget? Of course they do. But this is truer in business than government. It may happen in governments again; in fact it most likely will. But it will not be as widespread or intense again because people learn.
>I probably did chose VAT, but if I did back an increase of one tax over another tax, it does not negate my contention that governments use private businesses to fund their errors.Neither does the UK being joined by most other countries in increasing VAT on private businesses negate this proposition. In fact it would help support it."Voters aren't stupid" ? According to this source only 1% of the population trusts politicians, yet every election, about 70% of the population vote for them.http://www.guardian.co.uk/media/greenslade/2009/mar/31/1Isn't repeating something over and over and expecting a different result one of the definitions of stupidity ?"The reason most powers went into debt….was because they didn't understand … economics. Only 2 or 3 years ago …denied bubbles were reality"You talk about it as though it was particle physics, and that there have been recent new revelations about economics brought about by technology or hubble telescopes.What we know about economics now is the same as we knew 5 years ago. Name me a game changing academic paper that has been published that has turned previous convention on its head during this time.There hasn't been.Mistakes were made not because of ignorance but because of wilfulness.And it is wilfulness and stupidity that will cause it to happen again. And it will not be less widespread than before due to our increased understanding. If your logic were true, then each recession would be less severe than the last due to our ever increasing understanding. It would be impossible to have a smaller recession unless we 'unlearned' something.
>I love that fact about only 1% of people trusting their politicians. I wonder what this says about Brits if 57% of those polled don't trust people in any of the stated professions? However I don't necessarily agree with you when you say: "Isn't repeating something over and over and expecting a different result one of the definitions of stupidity?" Hope is one of the strongest human emotions, and hoping against probabilities isn't the definition of stupidity. Besides, I don't think many people ever truly believe the next lot will be much better, just a little. A better example would be football. Year after year English people expect our team to win big. Yet year after year they're dissapointed. There's nowhere near as many people who pin their hopes in politicians as there are people who pin their hopes on footballers. Does that make them stupid? A little naive maybe, but not stupid. If so then rolling a dice and hoping to get a 6 is stupid, because you only have one chance in 6 of actually getting it.There have not been many "game changing academic papers" in the last few years. On that you're right. But it does not mean that everything existing in academia was accepted by economic actors. It's a fact that most people did not accept the existence of asset bubbles 5 years ago, and do today (take Greenspan and Bernanke for example). No debate! Does that mean that recessions will always get smaller? No of course not. There is more at stake than knowledge alone. As you suggest willingness and human errors have a huge part to play, which aren't easily accounted for in economics because of human psychology. Structural and environmental matters also play a hugely significant role. However knowledge does play a role alongside these other things. It's essentially evolution. If we never learnt from the past then we'd never grow as a species. But we do learn, and we do adapt. If you, growing up in this era, and talking about this subject now, were to become the Finance Minister or Chair of New Zealand's Central Bank at one point in the future would you repeat the same mistakes? I know you meant that it would be the generation removed who repeated the mistakes, but this recession will be entered into the history books and taught to those studying economics at university (in fact it already is because I'm learning about the current crisis in my Masters).
>I love the way you decide that there is 'no debate' left on the subject."It's a fact that most people did not accept the existence of asset bubbles 5 years ago, and do today (take Greenspan….)"So the Dotcom boom of the late 90's wasn't a bubble ? Or people just didn't know what a bubble was ?And Alan Greenspan's famous comment in 1996 about the "irrational exuberance" of the markets wasn't a warning about over-inflated stock prices, i.e. a bubble ?http://en.wikipedia.org/wiki/Irrational_exuberanceSorry to quote Wikipedia again.
>There were many bubbles before this one, and indeed some scholars and economic agents who accepted their existence. But the majority were extremely sceptical, either of their very existence, or of their impact.It's about economic philosophy and ideologies, which go right back to Adam Smith. Those who believe in the ever-present rationality of the markets, and the equally ever-present 'invisible hand', couldn't accept the logic that once a bubble appears free markets can no longer be relied upon to allocate resources efficiently. What happens is that in bubbles the prospects of quick and effortless profits are extended/held out beyond where they are for the rest of the markets. It therefore provides incentive to invest in manners that are individually rational, but immensely damaging to the economy. Of course this requires action by government, and that's fundamentally adverse to right wing, laissez-faire government, and the writings of people like Milton Friedman.John Cassidy, in his recent book "How Markets fail" said "A decade ago, bubbles were widely seen as aberrations. Some free market economists expressed skepticism about the very possibility of them occuring. Today [i.e. after the recession hit] such arguments are rarely heard; even Greenspan, after much prevarication, has accepted the existence of the housing bubble." (pg 9)People have long talked of "irrational speculation", which you referred to above. But the difference between before and after this recession is that where before it was seen as the action of certain roguish actors/agents, now it is recognised as a structural facet of our economic system that requires regulation.
>So Greenspan didn't say that there was a bubble in 1996 then ?It looks like you are only trying to convince yourself Rob.
>Not so far as I know he didn't