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Friday, October 17, 2008

How to make a recession

Posted By on Fri, Oct 17, 2008 at 9:21 AM

Sensibly, we're all tightening all belts---only people who really need one would rush out to buy a car or a refrigerator or other big-ticket item right now, given the economic uncertainty.

But governments are following course:

Nova Scotia's response to dealing with the potential effects of a downturn in the world economy will not include running a deficit, Premier Rodney MacDonald declared Thursday.

"We will not have a deficit in Nova Scotia," MacDonald bluntly told reporters following the weekly cabinet meeting.

The premier said that while the extent of the fallout from world markets likely won't be apparent for months, the province will take steps to ensure it doesn't add to its $12.1-billion debt.

"What will happen to the stock market in the next six to eight months is anyone's guess. As a province, we're going to ensure that we remain within our financial envelope and that may mean tightening our belt … before the end of the fiscal year."

He added that if the economic situation required the government to make spending cuts to balance the books then steps would be taken.

No doubt hundreds of other governments are making similar decisions, creating a sort of anti-Keynesian wave that will plunge the world economy into even deeper recession.

Only when the economic situation gets so terribly bad that, in order to get reelected, governments will have to go into debt and spend heavily on relief programs will the overall situation improve.

This is economics 101---for both the health of the economy and the benefit of the citizenry, governments should expand services and spending during hard times, not reduce them. We've known this for 80 years, and yet we still get it wrong, every time.

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