Friday, January 28, 2011
Austerity is "dangerous hogwash"
Which is pretty strong stuff coming from David Blanchflower in his opinion piece on Bloomberg. He being an English Professor of Economics he speaks of the example of his country as the best example of the failure of austerity as an economic policy.
Sorry, fiscal austerity doesn’t work. For evidence, look no further than the U.K.And consider all the current European practitioners of austerity. A look at their numbers shows a disturbing return to recession as a result. This should be a serious lesson for the US and if there was a Republican president it might be so. Sadly austerity with a resulting recession is exactly what the Republican/Teabaggers want to do to this country to damage President Obama.
This can’t be good news for the U.S. political right, whose mantra has been: cut spending, put a lid on deficits, and growth will improve.
All sorts of good things, it is claimed, will spring from a turn to austerity that stops all this stimulus nonsense and prevents the Federal Reserve from doing more quantitative easing. Reductions in spending, according to a theory known as Ricardian equivalence, will do no harm because lower borrowing will automatically lead to higher private spending. Plus, of course, there is the notion of crowding out, meaning that reining in the public sector leaves room for the private industry to step in and all will be well.
This is dangerous hogwash.
There is little historical precedent in the real world, though lots of fantasizing in the made-up world of economic theorists, to suggest that fiscal austerity works. The best example of austerity’s failure is the double-dip that occurred in the late 1930s in the U.S., when spending was reduced too soon in a nascent recovery. In contrast, the U.K. didn’t have a double-dip because it was engaging in classic Keynesian spending as it began re- arming.
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