Sunday 1 May 2011

Why Osborne's austerity-addiction will cost us dear

Etonmess is back from a break overseas and has noticed that the economic news hasn't got any better.

An article in the Financial Times asks if Osborne's right-wing monetary policies are making the situation worse, suggesting that the approach of shifting debt held by the state 'most creditworthy entity in the economy' onto the individual may well be precisely the wrong thing to do (and, it wouldn't be unfair for this blog to suggest, pretty hypocritical given previous comments by the Chancellor and his PM).

This, of course, is a long-time theme of the economist David Blanchflower, who offers this typically intelligent dissection of a recent set of comments by Fraser Nelson:

"Cutting too deeply and too quickly as this government is doing, compromises growth. Investing in the infrastructure and giving firms incentives to invest and hire in the long run will lower the deficit. A growing economy generates revenues. As Larry Summers said at Bretton Woods the whole idea of an expansionary fiscal contraction is 'oxymoronic'. The empirical evidence from the real world, rather than Nelson's made up one, is that austerity in the depths of a recession doesn't work. In the US when a similar policy was implemented in the 1930s it plunged the economy into a double-dip recession".

Why Osborne's comparison with Greece is wrong

And, for good measure, this paper Paul De Grauwe of the University of Leuven, which neatly explains why Osborne's repeated argument that the UK must cut or "be like Greece or Spain" is bunkum.

"In a nutshell the difference in the nature of sovereign debt between members and non-­members of a monetary union boils down to the following. Members of a monetary union issue debt in a currency over which they have no control. It follows that financial markets acquire the power to force default on these countries. This is not the case in countries that are not part of a monetary union, and have kept control over the currency in which they issue debt. These countries cannot easily be forced into default by financial markets".

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