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Sat May 26, 2012, 03:09 PM

Gotcha! (Austerians hoist themselves on their own confidence petard.) [View all]

The UK is, as I write this, in recession. Q4-2011 and Q1-2012 saw a reduction in UK GDP.

Now, when you announce a radical new approach to the economy that makes no sense, and your critics say, "Ummm... that will further depress the economy," and you then promptly enter a recession... well, it looks bad.

But the Austerians are undaunted. They say that austerity cannot be the cause of the slump because in Q1-2012 the only positive sector in the GDP in the whole report was government, which contributed +1.3%. They claim that austerity cannot be at fault because there is no austerity yet, only the promise of austerity.

(There actually is austerity, but I am playing along with their claim. "Arguing in the alternative."

But wait a second... the entire Austerian argument is not that cutting government directly benefits GDP, but that it indirectly benefits GDP. When the government promises to go Austerian that increases confidence, which helps the economy.

The promise of austerity is precisely what they said would create the miracle!

Okay... so what expectations did people in the UK have? That Cameron would cut government.

And in light of those expectations, what did they do? They canceled construction projects. (Construction was the sector dragging the UK into recession.)

Construction is a very forward-looking sector. What will demand for this building or house be one or two years from now when we finish it?

The Austerians are right. Confidence is a big factor in the economy.

What they are wrong about is thinking that promising to do things that conventional economics says will plunge a nation into recession builds confidence!

Why would a promise to wreck the economy build confidence? "Oh look... the government is going to stop spending. Guess we better tighten our belts."


This OP dovetails nicely with this Krugman blog entry:

Cameron and the Confidence Fairy

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Reply Gotcha! (Austerians hoist themselves on their own confidence petard.) [View all]
cthulu2016 May 2012 OP
unblock May 2012 #1
malaise May 2012 #2
Prophet 451 May 2012 #3