Sunday, December 9, 2012

John Cassidy: "Austerity Economics Doesn't Work"

John Cassidy (left) writes in The New Yorker that austerity economics in the United Kingdom has failed. He reached this conclusion following a report by Chancellor of the Exchequer George Osborne that government budget slashing has neither successfully cut the deficit nor generated economic growth. This example is important for America since the Republicans advocate the same policies that have led Britain into double-dip recession. Further, the United States, which pursued economic stimulus, albeit modestly, under President Obama, is faring better than its ally. For these reasons, Cassidy states, "It's Official: Austerity Economics Doesn't Work":

...At every stage of the experiment, critics (myself included) have warned that Osborne’s austerity policies would prove self-defeating. Any decent economics textbook will tell you that, other things being equal, cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase. Almost invariably, the end result is slower growth (or a recession) and high budget deficits. Osborne, relying on arguments about restoring the confidence of investors and businessmen that his forebears at the U.K. Treasury used during the early nineteen-thirties against Keynes, insisted (and continues to insist) otherwise, but he has been proven wrong.

With Republicans in Congress still intent on pursuing a strategy similar to the failed one adopted by the Brits, this is a story that needs trumpeting. Austerity policies are self-defeating: they cripple growth and reduce tax revenues. The only way to bring down the U.S. government’s deficit in a sustainable manner, and put the nation’s finances on a firmer footing, is to keep the economy growing. Spending cuts and tax increases can also play a role, but they need to be introduced gradually.

...A comparison with what has happened on this side of the Atlantic is illuminating. For the purposes of the natural experiment, the U.S. can be thought of as the control. In adopting a fiscal stimulus of gradually declining magnitude over the past four years, the Obama Administration has administered what was, until recently, the standard medicine for a sick economy.

...Having adopted the policies of Keynes in response to a calamitous recession, the United States has grown more than twice as fast during the past three years as Britain, which adopted the economics of Hoover (and Paul Ryan). Meanwhile, the gaping hole in the two countries’ budgets has declined at roughly the same rate, and next year the U.S. will be in better fiscal shape than its old ally.


Michael The Molar Maven said...

We've been down this road before. But I would not call it Keynesian economics; I would call it Biblical. It was Joseph who cautioned Pharoah to save during the "fat" years because "lean" years are sure to follow. Apparently, republicans invoke the bible at their won convenience.

Jeff Tone said...

Perhaps Kenynes, then, was a modern-day prophet decrying the supply siders.