The Great Debate UK

Budget 2010: How to thaw the economy


Anthony_Evans- Anthony J. Evans is assistant professor at ESCP Europe Business School. He will participate in a Reuters Budget live blog at noon GMT on Wednesday, March 24, 2010. Please tune in and join the discussion.-

We’re used to hearing how credit markets “froze” in the summer of 2008, and how the subsequent policy responses have been aimed at economic recovery. Indeed politicians often use terms such as “stimulate” or “kick start” to give the impression that intervention is a necessary prelude to growth.

An alternative view is that fiscal spending has sought to freeze economic activity, by preserving jobs and preventing the structural adjustments that have to take place.

What the economy needs is a widespread recalculation, where unprofitable businesses relinquish their scarce resources, and investors get back to investing. Evidence from the Great Depression in the 1930s shows that vast and arbitrary policy changes backfired, because they destabilised the investment climate.