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The British Conservatives Have No Theory - Grasping Reality with Both Hands

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10/21/10 10:41 AM

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Grasping Reality with Both Hands The Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and EvenHanded Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.

Economics 210a Weblog Archives DeLong Hot on Google DeLong Hot on Google Blogsearch October 21, 2010

The British Conservatives Have No Theory Shame on David Cameron. Shame on Nick Clegg. Shame on George Osborne. Their shame would not be quite so great if they had a theory about what elements of spending will grow to offset their 9% of GDP planned fiscal contraction. Is the pound supposed to collapse and are exports than to surge? Is the prospect of rising unemployment in the U.K. supposed to greatly enhance business confidence and trigger a surge of private-sector investment? Is the 30-year gilt yield supposed to fall from 4% to 1% and that reduction in the cost of capital cause a surge of capital formation throughout Britain? Cameron, Clegg, and Osborne don't tell us. They don't tell us because they are clueless dorks. They don't even have a theory about how the economy will avoid a double dip. They hope that--somehow, some way--Mervyn King will save them from themselves. But if they actually carry through with their policies, I don't see how he can. Ryan Avent: Austerity: Cut to the bone: A TIDE of austerity has swept over much of Europe since markets rebelled at high debt levels in Greece and elsewhere in the spring. Still, the world is watching in amazement as Britain's new government prepares to enact budget cuts that have not inaptly been called revolutionary. Yesterday, George Osborne, the government's chancellor of the exchequer, stood before Parliament and detailed the scope of the plan, which will slash government spending by ÂŁ81 billion over four years in an aim to reduce Britain's deficit from its present 11% of GDP to 2%. [T]he scale of the cuts is... breathtaking. The police budget will fall by 20%. Spending on social housing will fall by three-fifths.... Nor will the damage be confined to the public sector. The government is a significant buyer of goods and services from private firms, after all. PwC, a consultancy, said the other day that it thinks that another half a million private jobs could go over the coming five years as a direct consequence of public-sector austerity.... http://delong.typepad.com/sdj/2010/10/the-british-conservatives-have-no-theory.html

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The British Conservatives Have No Theory - Grasping Reality with Both Hands

10/21/10 10:41 AM

If the private sector does trim half a million jobs due to austerity, it will come on top of the half million public sector positions that will be done away with as part of the cuts. Buttonwood does a good job explaining why such austerity is unthinkable in much of the world, and especially America. And he notes: The second lesson concerns the division between spending cuts and tax rises. History suggests that it is better to concentrate on the former if you want the plan to succeed. But there is no getting away from the fact that this will affect the poor most; since they are the chief recipients of benefit payments.... The package creates the understandable impression that the poor are paying the price for the folly of the bankers.... From an economic standpoint, the most pressing question is how this will affect the British economy. Mr Osborne is counting on the Bank of England to pick up the slack created by budget cutting, but the Bank has its work cut out for it. It will be very difficult to encourage private borrowing amid such substantial cutbacks.... For now, Mr Osborne and the ruling government are the heroes of deficit hawks and supporters of a small state the world over. But Britain's conservatives have gambled heavily. If deep budget cuts amid economic weakness send the economy plunging back into recession, the government may be unable to make the cuts stick, and austerity could be discredited around the world. If disaster is avoided, it will strengthen the hand of fiscal conservatives everywhere. It would be an exciting experiment to watch if so many livelihoods weren't caught in the balance. They aren't even holding a King, Queen, 10, and 9, and drawing to an inside straight: they are holding a Deuce, a 5, an 8, and a Jack and claiming that they are drawing to an inside straight. Brad DeLong on October 21, 2010 at 09:36 AM in Economics, Economics: Fiscal Policy, Economics: Macro, Utter Stupidity | Permalink Favorite

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Comments postescript said... The only thing worse than a bad theory is no theory at all. Milton would agree. I stick to my point about specious association. We are not Greece and neither is Britain. The key difference is GDP. It gives you a lot more latitude in how you manage your problems. It's frustrating that people aren't paying attention to this component of the equation. Reply October 21, 2010 at 09:57 AM the idler said... The Conservatives have a theory: There is no such thing as society. If only Mrs. T were "alive" to savor the iron rigor of this bold coup! Reply October 21, 2010 at 10:12 AM djsandbox said... So what's the best investment move here? How do you best bet against the UK plan? Reply October 21, 2010 at 10:17 AM David said... Although the conservatives' economic policy of austerity should prove disasterous for Britain, it does allow for a fine case study of a comparison between growth in a country, the United States, which runs a (mildly) expansionary fiscal policy, as opposed to the British policy of austerity. http://delong.typepad.com/sdj/2010/10/the-british-conservatives-have-no-theory.html

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The British Conservatives Have No Theory - Grasping Reality with Both Hands

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Perhaps one day we shall see the results compared and contrasted in an economics textbook (ok, not one used at the University of Chicago). Reply October 21, 2010 at 10:17 AM Comment below or sign in with TypePad

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Economists Debate The Philosophy Behind British Budget Cuts

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NPR (blog) - 3 hours ago Brad de Long, an economist at UC Berkeley, and a prolific blogger, is quoted in the Times as mourning the dismissal of Keynes. ... Related Articles » « Previous Next »

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The British Conservatives Have No Theory - Grasping Reality with Both Hands

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The British Conservatives Have No Theory - Grasping Reality with Both Hands

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The British Conservatives Have No Theory - Grasping Reality with Both Hands