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Reply #9


Response to Tansy_Gold (Original post)

Tue May 1, 2012, 10:28 PM

9. Britain 'Does' Austerity So The US Doesn't Have To By Dean Baker

http://www.aljazeera.com/indepth/opinion/2012/05/20125142044487975.html

A little less than two years ago, the people of the United Kingdom made an implicit deal with the people of the United States. They installed a government that committed itself to an austerity package as the best way to deal with the ongoing effects of the recession. Rather than trying to boost demand with increased spending or lower taxes, the Conservative-led coalition government committed itself to an agenda of spending cuts and tax increases. The argument was that the financial markets would be impressed by the UK's commitment to reducing its budget deficit. This would supposedly lead to lower interest rates which would help to boost investment, housing and consumption. Lower interest rates should also reduce the value of the pound relative to other currencies. That would make imports more expensive for people in the UK, leading to fewer imports. It would also make exports cheaper for people in other countries, thereby increasing exports. Fewer imports and more exports would provide a further boost to demand. The commitment to deficit reduction was also supposed to instill confidence in business. They would see that the UK had a responsible government in power that would ensure that the debt would not get out of control. This would encourage them to invest, since they could be assured that the UK had a stable future and there was no reason to fear a Greek-style debt crisis.

We have now had almost two years to evaluate the effects of the UK's austerity policy, which is longer than most governments get to test the results of their policy experiments. After all, President Obama got his head handed to him in the November 2010 elections, which were just 20 months after the passage of his stimulus package...It sure looks like the austerity critics won this one. While interest rates have remained low in the UK, this has been true of every wealthy country with its own currency, regardless of whether or not it was pursuing an austerity path...The UK economy does not appear to have done any better in terms of the rest of the picture. If austerity boosted business leaders' animal spirits, it is not showing up in the data. Nearly every component of the private sector has contracted over the past two quarters with construction leading the way, falling at a 0.8 per cent annual rate in the fourth quarter of 2011 and a 12.0 per cent rate in the first quarter of this year.

When taxes rise and government spending falls, and there is no offsetting boost from investment, our old friend Mr Arithmetic tells us that the economy contracts. And that is what is happening now in the UK. The economy shrank for the second consecutive quarter, pushing it back into recession. While the UK economy was growing rapidly at the time the Conservatives came to power in May of 2010, the economy is now smaller than it was in the summer of that year. This is all very bad news for people living in the United Kingdom. There has been no job growth since the summer of 2010 and the unemployment rate has risen from 7.7 per cent to 8.1 per cent in the most recent data. It seems certain to rise more in the months ahead. If anything, the situation is likely to worsen over the course of the year as more of the spending cuts take effect.

But the bad news for the British people can be good news for the United States. Thanks to their generous offer to experiment with austerity, people in the United States can now see more clearly than ever that austerity does not work....But there are many people in positions of power who want to push austerity for reasons that have nothing to do with economic growth - and they are prepared to lie, cheat, and steal to advance this agenda. For this reason, however much we may sympathise with the people of the UK for their suffering, we should be thankful that they have given us such a beautiful example of how austerity wrecks an economy.

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Dean Baker is co-director of the Centre for Economic and Policy Research, based in Washington, DC. He is the author of several books, including Plunder & Blunder: The Rise and Fall of the Bubble Economy, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich, Get Richer, The United States Since 1980 and The End of Loser Liberalism: Making Markets Progressive. Follow him on Twitter: @DeanBaker13

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