Reply #50: Britain Still Awaits Good Results From Bad Ideas by: Paul Krugman

[Demeter]

http://www.truthout.org/britain-still-awaits-good-results-bad-ideas/1305036855

The bad gross domestic product number for Britain, announced on April 27, wasn’t a surprise — in fact, judging from market response, investors seem to have expected something even worse. Still, if you step back and look at what has been happening, it’s double-plus-ungood: zero growth over the past six months, with every reason to be worried looking forward, as Prime Minister David Cameron’s austerity bites deeper.

Jonathan Portes, director of the National Institute of Economic and Social Research in Britain, got to the nub of it in an article for the Financial Times that day: “On fiscal policy, the message is that we should listen to economists, not credit rating agencies. Most mainstream economists argued that the impact of the government’s fiscal consolidation on confidence and consumer demand would be negative; so it has proved,” he wrote.

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Economics 101, buttressed if you like by fancier New Keynesian models, says that contractionary fiscal policy is, well, contractionary.

Yet much of the world of movers and shakers bought into the exotic notion that expectational effects — the confidence fairy — would make contractionary policy expansionary. And they clung to this belief even as the supposed historical evidence in favor of expansionary austerity was thoroughly debunked.

READ THE WHOLE THING--IT'S SHORT, IT'S PITHY, AND IT'S BLACK HUMOR AT ITS BEST.