Friday, April 15, 2011

Spending Cutters

You need to read this.

Pain of British Fiscal Cuts Could Inform U.S. Debate

”LONDON — In the United States, the debate over how to cut the long-term budget deficit is just getting under way.

But in Britain, one year into its own controversial austerity program to plug a gaping fiscal hole, the future is now. And for the moment, the early returns are less than promising”

For those just joining us (or those with short memories), we’ve been waiting to see how this plays out. Remember this blog entry?

Krugman vs The United Kingdom

”For those paying attention, the United Kingdom has ignored Krugman and Keynes. They have made their decision and it is to cut spending and raise taxes -- exactly the opposite of what is recommended by Keynesian economics. Prime Minister Cameron has decided to go with “conventional wisdom”. Never mind that the conventional wisdom is what got us into this mess.”

Back to The New York Times;

”Doing so, says Mr. Osborne, the chancellor of the Exchequer, secures the trust of the financial markets, and thereby ensures the low interest rates necessary for long-term economic growth.

That approach, and the question of whether it risks stifling an economic recovery that might itself help narrow the budget gap, lies at the root of the deficit debate in the United States. On one side is the go-slow strategy favored by President Obama. On the other is the more radical path championed by the Republicans. The two camps are no doubt closely watching Britain’s experiment.”

You see? I’m not that smart. Everybody that has time to pay attention -- or it’s their job to pay attention -- is looking at this situation. The real question is, what are they going to tell you?

”In that sense, comparing the British and American deficit-cutting plans becomes a bit more difficult. In Europe the bond market is the ultimate judge of deficit-reduction plans. In the United States, by contrast, the global demand for Treasury bills, and the benefits of the Federal Reserve Board’s easy-money “quantitative easing” policy, have kept 10-year bond yields well below those of Britain.”

There isn’t a straight comparison to be made between the U.S. economy and the United Kingdom’s. But we can learn some things if we pay attention.

”But in Britain, the big worry now is not tax rates. Instead, the fear is that Mr. Osborne’s emphasis on cuts in social spending — which aim to achieve an approximate budget surplus by 2015 and are likely to result in the loss of more than 300,000 government jobs — might tip the economy back into recession.”

Read the article and see what you learn.

Don Brown
April 15, 2011

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