Saturday, October 23, 2010

Article du Jour: England's Recovery Plan is Bollocks

By Marshall Auerback, The Daily Beast

Those searching for a panacea for our economic troubles shouldn’t be tempted by U.K.-style fiscal austerity. Their staggering new spending cuts defy historical wisdom—and are already hurting their economy, says Marshall Auerback.

The philosophy underlying the British government’s huge new spending cuts—namely, that fiscal austerity is good for growth—is spreading across the United States. Governments are increasingly being bullied into adopting austerity measures, apparently thinking they will help their economies grow, and if the recent polls for the midterm elections are anything to go by, this philosophy is likely to predominate in the new Congress. But an embrace of U.K.-style austerity will almost certainly ensure a major relapse for the U.S. economy.

The fiscal austerity measures announced by the British government this week, the largest since World War II, with welfare, councils, and police budgets all hit, follow on from earlier cuts made when the new leadership took power back in June. Then, pay for almost all government workers frozen for two years; now, as many as 500,000 public sector jobs are likely to be lost. Even the queen has taken a hit, as Chancellor of the Exchequer George Osborne has frozen government funding for her household and staff....

That weak business confidence is not a surprise. Companies will not increase production or build new capacity while the state of future aggregate demand remains uncertain. They do not want to hold unsold inventories.

What drives production and employment growth is aggregate demand growth. Implementing fiscal austerity undermines the very foundation of this growth. The report makes this result clear: “Currently the U.K. economy is running at more than 4 percent below pre-recession levels. The public-sector cuts outlined by the new government and consequent reduction in public-sector demand will have a significant downward effect on growth, constraining take up of spare capacity as the private sector recovers.” (Read more)

1 comment:

  1. "What drives production and employment growth is aggregate demand growth."

    True,and True for us also. Our Economy was 70% Consumer Demand which is now encrusted with Debt,and unenabled with tons of "Satisfied Demand" in our basements and garages (to be sold at Garage Sales this coming Wednesday)/stuff that is already bought via credit yet not paid for. I spend more each month on my lawyer defending me against Creditors than I spend on New Consumer Purchases. LOL