Recession busting: Austerity or Stimulus?

I recently read a piece in the New York Times Magazine titled "God Save the British Economy" which profiled Adam Posen, an American economist who until recently was a member of the Bank of England's Monetary Policy Committee.

The article details Mr. Posen's training and career, but spends a significant amount of time discussing the differing opinions on how to bring major economies out of the recession. Mr. Posen, during his tenure at the B of E, grew increasingly frustrated with the approach of piling austerity on austerity following the financial crisis, especially when it seemed the pain was not in fact benefiting the economy, given that the British unemployment rate has stubbornly hovered at approximetely 7.9% for the last 3 1/2 years. He argues that the experience of the US, which chose stimulus over austerity, has produced a better outcome: an unemployment rate that dropped from 10.0 to 7.7% in the same time frame, albeit at a frustratingly slow pace.

One of the interesting points in the article is the discussion of why Mr. Posen believes the B of E was so unwilling to diverge from its austerity program: he makes the connection to the ruling government's ideology taking precedence over what he views to be prudent economic policy.

While I certainly recognize the challenges of the political ideology interfering with good policy decisions, what struck me as particularly interesting in the article was the lack of discussion of the political and economic consequences of implementing Mr. Posen's policy choice.

As a thought experiment, let us suppose that tomorrow the B of E has a change of heart and immediately ceases all budget cutting, instead printing and circulating more money into the economy in a similar manner to what has happened in the United States. Let us further suppose that this course of action indeed has the effects that Mr. Posen predicts: a decrease in the unemployment rate and a gradual return to the economy functioning at full capacity.

Let us now look a few years down the road to an economically more healthy Britain; an unemployment rate closer to its pre-recession level of 5.2%, and a steadily growing GDP. From an economic perspective, assuming the economy is now on reasonably solid footing, now would be the time to start withdrawing some of the excess supply of money in the system in part through a gradual raising of interest rates, paying off the government debt incurred during the recession, and generally moving back to a state of balance between government revenues and expenditures. My question is, would the B of E at this time suddenly have the political will to make these prudent economic decisions, even if they are unpopular? Is it truly politically easier to reduce the excessive size of government during good economic times to pay for the stimulus in bad times?

Conventionally it has been seen as a virtue to have central banks separated from the political process. It is intended to allow them to look further afield than the next election cycle and make prudent decisions for the long term, rather than what is politically expedient at a particular moment. While I heartily agree with this sentiment and reasoning, it seems to me the lack of consideration of the political repercussions, in addition to the economic, can sometimes bias policy makers towards a particular course of action that might have unwanted repercussions.

I do not pretend to understand the intricacies of Keynesian interventionism, nor am I arguing that Mr. Posen's prescription is the wrong choice economically speaking. However, I do wonder, in Britain, the United States, and other major economies, are the choices of political expediency over prudent policy going to be any less likely to occur in the future than they seem to at present?

Who should pay for post-secondary education?

A few days ago I got caught up in a heated debate with a colleague over one of the more pressing issues facing young Canadians: Who should pay for post-secondary education? My colleague felt that because an educated society is in the interest of all Canadians, post-secondary education should be entirely free for qualified students. I argued that the private gain of those with more education (higher salary, more opportunity) dictates that students should contribute some portion of their education expense.

At present, our system is funded by a mix of government funding and students who pay tuition. This mix, and the total amount of funding per student, varies considerably by province. The recent protests in Quebec over tuition increases served to highlight to much of Canada how different these current numbers are. At the low end, the average Quebec tuition in the 2011-2012 year was $2,519. At the high end, the average tuition in Ontario was $6,640.

To put these numbers in context, the student portion of the total education expense in Canada ranges from roughly 12% in Newfoundland to roughly 31% Nova Scotia (Quebec comes in second to Newfoundland on the low end, Ontario second to Nova Scotia on the high end). These numbers are taken from Statistics Canada and are from the 2008/2009 year so the exact percentages may have changed somewhat, but the underlying trends likely remain roughly the same.

So where does the benefit lie between public good and private gain? The OECD estimates that the "net public return" on investment in university is $52,000 USD for men and $27,000 USD for women, whereas the private gain averages $186,000 USD for men and $134,000 USD for women as an average across OECD countries.

Given these numbers, a few things seem clear: Financially speaking, students gain a great deal more benefit from their education than society and pay a small fraction of the total cost. However, from a qualitative standpoint, having higher earning, educated and engaged citizens certainly benefits society on more than a financial level.

While I think that tuition increases are necessary in some instances to keep up with the increased cost of providing quality education, I think that government policy in this area should focus on long-term competitiveness and social well being. While I disagree with the protesters in Quebec on what constitutes affordable education, I do think this conversation needs to be had in the public discourse to ensure that the Canada of tomorrow is the place we want it to be.