In the spring of 2010, fiscal austerity became fashionable. I use the term advisedly: the sudden consensus among Very Serious People that everyone must balance budgets now now now wasn’t based on any kind of careful analysis. It was more like a fad, something everyone professed to believe because that was what the in-crowd was saying.
And it’s a fad that has been fading lately, as evidence has accumulated that the lessons of the past remain relevant, that trying to balance budgets in the face of high unemployment and falling inflation is still a really bad idea. Most notably, the confidence fairy has been exposed as a myth. There have been widespread claims that deficit-cutting actually reduces unemployment because it reassures consumers and businesses; but multiple studies of historical record, including one by the International Monetary Fund, have shown that this claim has no basis in reality.
No widespread fad ever passes, however, without leaving some fashion victims in its wake. In this case, the victims are the people of Britain, who have the misfortune to be ruled by a government that took office at the height of the austerity fad and won’t admit that it was wrong.
Remember, I never argue with the Nobel Prize winner's numbers.
Unless of course, you're Andrew Sullivan, who's celebrating this as the rebirth of a geninue Thatcher-esque Conservatism:
Remember: Thatcher preceded Reagan. And Toryism can be radical if the circumstances are dire enough. So much for all that talk of Cameron's wetness. And remember also that this is a Coalition government, in which the Liberal Democrats have also placed their bets on fiscal retrenchment - and the Labour opposition is in great disarray.
Erza Klein:
Like Paul Krugman, I think Britain's decision to pair a sharp economic contraction that's outside its control with a sharp contraction in the part of the economy that's in its control (the public sector) will be a disaster. But it'll at least be an interesting experiment.
For one thing, it's a good test of whether austerity economics works amid a weak economy and low interest rates. Seems unlikely, and I think a lot of British people will suffer while the government tries to figure it out, but we'll know soon enough. But it'll also be interesting to see whether the fact that the government has a decisive plan creates some of the "confidence" that people are always saying we need.
What's gonna happen? We go back to Krugman for an overview:
Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.
The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.
Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative.
Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks — a shift from hope to fear. In his speech announcing the budget plan, George Osborne, the chancellor of the Exchequer, seemed to have given up on the confidence fairy — that is, on claims that the plan would have positive effects on employment and growth.
David Cameron is no Tea-Bagger, by any stretch. He would be considered a liberal by that set. At the same time, he's doing a watered down version of what the Tea Party says it wants, and what its been Jedi-mind tricked into believing will spur the economy.
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