Friday, January 27, 2012

Starving the Beast; Killing the Economic Recovery

The  UK's Conservative/Liberal Coalition took office with an assumed mandate to solve the country's long-term debt problems by slashing budgets. The "City" pushed for it; but many economists, including for example Lord Skidelsky (see, e.g., here), warned on traditional Keynesian grounds that it was a dangerous thing to do in a recession.

How's it working out? Well, in the last quarter of 2011 the UK economy shrank by 0.2% (see, e.g., here), precipitating concerns of a possible double-dip recession. Indeed, Brad DeLong observes that the UK's   economy is actually doing less well now than it did during the Great Depression (see here), and provides the following graph as evidence:

Does this prove the Keynesians right about the relatively importance of short-term stimulus over austerity? Of course not. But it does raise some tough questions for the deficit hawks, and not only in the UK, who have argued that budget cutting, by itself, would improve investor confidence enough to boost the economic recovery.

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