Jan 29, 2011 1:34 AM GMT
http://www.bloomberg.com/news/2011-01-28/conservative-austerity-idea-is-failing-commentary-by-david-blanchflower.htmlThere 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.
Claims are often made that there are examples where fiscal austerity has worked. But it turns out that this is generally due to the monetary stimulus that accompanied it, as in the U.K. under Margaret Thatcher in the 1980s. The most frequently cited example is Canada, but it was able to cut interest rates while at the same time benefiting from the Clinton boom of the 1990s.
The U.K. may be a purer case of the harm austerity at the wrong time can inflict. Britain now looks as if it is headed back into recession on fear about the damage that will be done by massive spending cuts and tax increases, which haven’t even gone into effect yet. Government ministers with their talk of austerity have already smashed confidence.
Earlier this week, the Office of National Statistics reported that fourth-quarter gross domestic product slumped 0.5 percent while forecasters had expected a gain of 0.5 percent. The ONS suggested that bad weather -- as if the U.K. had any other kind in the winter -- had contributed to the decline and without it growth would have been zero.
Even so, this was consistent with a sharp slowing of the economy following growth of 1.1 percent in the second quarter and 0.7 percent in the third, which at the time led Osborne to pronounce that the government’s policies were working.