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August 16, 2012
Britain’s Failed Two-Year Experiment With Romney Economics
In the debate over the contrasting economic visions being put forward by both Obama and Romney, what the mainstream media has largely failed to point out is that the Romney/Ryan approach of cutting budget deficits by cutting services has already been put to the test in Great Britain—and failed. Since David Cameron took power in 2010, his Chancellor of the Exchequer, George Osborne has led Britain on an austerity program designed to generate private sector confidence and thereby spur economic growth.
The result? Britain has slumped into a double-dip recession. And,
The government’s approval rating has plummeted to 25%.
Now, according to a report in the New Statesmen, many of the economists who provided the academic rationale for austerity have second thoughts:
On 14 February 2010, 20 prominent economists wrote to the Sunday Times in support of George Osborne's deficit reduction strategy. They said: "... in order to be credible, the government's goal should be to eliminate the structural current budget deficit over the course of a Parliament, and there is a compelling case, all else equal, for the first measures beginning to take effect in the 2010/11 fiscal year." The Chancellor hailed their letter as a "really significant moment in the economic debate".Two and a half years later, the UK is mired in a double-dip recession and Osborne is set to borrow £11.8bn more than Labour planned. For this week's issue of the New Statesman (out tomorrow), we asked the 20 whether they regretted signing the letter and what they would do to stimulate growth. Of those who replied, only one, Albert Marcet of Barcelona Graduate School of Economics, was willing to repeat his endorsement of Osborne. Nine urged the Chancellor to abandon his opposition to fiscal stimulus and to promote growth through tax cuts and higher infrastructure spending, while others merely said "no comment" or were "on holiday".
With the UK able to borrow at the lowest interest rates for 300 years (largely owing to its non-membership of the euro and its independent monetary policy) the signatories are both surprised and dismayed at Osborne’s failure to invest for growth. Since the coalition came to power, the Chancellor has cut investment spending by £24.4bn, a reduction of 48 per cent.
Meanwhile, Krugman, who has been tearing his hair out for years over British and European shortsightedness, piles on:
Good on them. I was, however, disappointed to see so many of the prodigal economists asserting that they were responding to changed circumstances rather than admitting that they simply got it wrong.For circumstances really haven’t changed; the UK had a depressed economy then, and it still does now. Fiscal austerity while the economy is depressed, and in particular when conventional monetary policy has reached its limits, was an obviously bad idea from day one. Not to put too fine a point on it, what I was writing about austerity back in 2010 looks just fine a couple of years later.
The fact of the matter is that the austerians chose to throw basic macroeconomics out the window. And that, not failure to anticipate negative surprises, is where they went wrong.
See Krugman's post for his links.
Posted by stevemack at August 16, 2012 09:21 AM
