Drastic public spending cuts were the wrong deficit-reduction strategy for the weakened British economy a year ago. And they are the wrong strategy for the faltering American economy today. Britain’s unhappy experience is further evidence that radical reductions in federal spending will do little but stifle economic recovery.I couldn't agree more. The only thing missing from this article is a discussion on the high level of indebtedness of the household sector in the UK. For such an analysis, see this first-rate piece of research by economists Richard Barwell and Oliver Burrows of the Bank of England (2011:17).
A few years of robust growth would go far toward making swollen federal deficits more manageable. But slashing government spending in an already stalled economy weakens anemic demand, leading to lost output and lost tax revenues. As revenues fall, deficit reduction requires longer, deeper spending cuts. Cut too far, too fast, and the result is not a balanced budget but a lost decade of no growth. That could now happen in Britain. And if the Republicans have their way, it could also happen here.
Austerity is a political ideology masquerading as an economic policy. It rests on a myth, impervious to facts, that portrays all government spending as wasteful and harmful, and unnecessary to the recovery. The real world is a lot more complicated. America has no need to repeat Mr. Cameron’s failed experiment.
Barwell, R. and O. Burrows, "Growing Fragilities? Balance sheets in the Great Moderation", Bank of England, Financial Stability Working Paper, No. 10, April 2011.
C'est un montage superbe. I had read the article and found it appropriate, but your addition enriched its substance. A+
ReplyDeleteIndeed, the BoE paper is a fantastic analysis. Every central bank should make it a priority to examine their economies in a similar fashion. Canada, especially, would be an interesting case study.
ReplyDeleteYour add-on to the nyt editorial is a real gem. I'm sure someone is disappointed for having missed that grizzly. Stay the course, circuit.
ReplyDeletei'll be astounded, the nyt ed. looked like it was co-authored by Circuit¨(nod!!) and swells (nod!)with the exception that the reference is the us rather than canada. got a snicker out of that.
ReplyDeleteI swear, it's not me! I guess the word is getting around...No, but seriously, it's quite remarkable how these ideas are circulating. Not that long ago (a few years), I'd get blank stares from nearly everyone if I criticized 'sound finance'. Today, we see the WSJ and CNBC networks taking seriously this viewpoint. Even MMT is being discussed - sometimes, even on equal footing with the mainstream. Who would have guessed? Now, if only political advisers would turn their mind to understanding the implications of their faulty policy prescriptions. That's the next frontier.
ReplyDeleteI concur entirely with the comments. Your add-on, unsurprisingly coming from FRB, was not only highly relevant but addressed a key policy issue that BoE had overtly tried to sensitive the existing GoB: the need to revitalize household spending, not stiffen it. The idea that keynesian strategies are solely direct government Expenditures is a misreading of the topoi. I also nod jh for having pre-empted the well-deserved nods!!! to Circuit and swells on cautioning Canada against following the UK austerity formula in a rash fashion.
ReplyDeleteNothing better than a well-placed and solid Lighthouse to light the course and stay the storm. FRB performs the function well.
Thanks MI. Appreciate you highlighting the importance of getting the household sector back on track. The only way this sector can contribute without taking on too much more credit is if a larger share of total income comes from government spending. The business sector in the UK is now sitting on a massive corporate surplus. But it's unlikely that this sector can contribute when demand is low and when government incentives to invest are non-existent. The UK has had in the past a much higher public debt to GDP ratio. The current level is not, as some would have it, overly burdensome. With British rates this low, policymakers should simply be upgrading and improving the public capital stock. Seems to me like the most effective course of action under current circumstances.
ReplyDeleteBarwell and Burrows was a good placement. h/t.
ReplyDeleteMy third hit on your site. I think your comments on the UK so far are hair-splitting accurate.
IT may not endure without some reasonable help. As an old friend would say: There's too much rubbish being thought out.
ReplyDelete@GC IT I assume refers to the Austerity program in the UK. I agree entirely.
ReplyDeleteOr are we talking about the EU? I would actually agree that it won't survive. That is, not in the same form as it is now.
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