Blue Mass Group

Reality-based commentary on politics.

UK announces major austerity program.

By

Some people like Paul Krugman have said an austerity program for the US (or other major countries) is the worst thing you can do in a recession. Well, contrary to this opinion, the UK has decided to follow many other European nations by announcing a major program reducing spending. Major reductions!

Some of the highlights include…

– half a million public sector jobs will be lost

– about 18 billion ($28.5 billion) axed from welfare payments

– pension age raised to 66 by 2020,

– Queen Elizabeth II will trim the budget by 14 percent.

– 1.5 million “better off” families lose child benefit payments. – housing payments and about a dozen other benefits for poorer Britons will also be restricted.

– all areas of government (except health and education) face average cuts of 19 percent to their budgets.

– 8% reduction in defense spending.

and many more.

This program has been approved by both ideological sides of the UK government. The unions are going ape and some social welfare people are predicting doom and gloom.

My question to BMGers and Paul Krugman followers is, will this large scale auterity effort on the part of the UK answer the question whether cutting during a recession helps or hurts a recovery? Krugman has said continuously that this type of thing “will not work!”.

Well, I guess we’ll find out. So… if the UK does well by this plan does it prove Krugman wrong and if it drives the UK even further into economic collapse, will he be proven right?

Please share widely!
fb-share-icon
Tweet
0

Comments

  1. I suggest that you look up what interesting things Krugman has had to say about Ireland compared with Spain.

    • From Who You Gonna Believe? on Sept 21:

      Suppose you had spent the last five years actually believing what you read from the usual suspects – the WSJ opinion pages, National Review, right-wing economists, etc.. Here’s what would have happened:

      In 2006 you would have believed that there was no housing bubble.

      In 2007 you would have believed that the troubles of subprime couldn’t possibly spread to the financial system as a whole.

      In 2008 you would have believed that we weren’t in a recession – and that the failure of Lehman was unlikely to have bad consequences for the real economy.

      In 2009 you would have believed that high inflation was just around the corner.

      At the beginning of 2010 you would have believed that sky-high interest rates were just around the corner.

      Now, we all make mistakes and get things wrong – although it’s striking how often the trolls on this blog feel the need to accuse yours truly of saying things I didn’t. But after this string of errors, wouldn’t you at least begin to suspect that the people you find congenial have a fundamentally wrong-headed view of how the world works?

    • I find him a bit polemical.  The last of these comparisons included graphs that changed the scale of the Y-axis to make the contrast seem extra dramatic.  

      <

      p>Another major problem with these particular comparisons is that neither Ireland nor Spain has its own currency.  They are effectively on the gold standard, in that the difficult decisions they must make RIGHT NOW are strongly influenced by their inability to simply print more money.

      <

      p>Another thing I recall hearing (not reading, so no link, apologies) is that Spain is driving down its own interest rates by buying a lot of its own debt with its pension system (exactly what the US does with Social Security).  

      <

      p>Lastly, Ireland started off in a much worse position than Spain did, which makes a direct comparison difficult.

      <

      p>Lastly, Greece isn’t exactly getting cheap debt, and two decades of pump-priming government spending after a credit bubble in Japan has produced little other than scary levels of government debt.

      <

      p>In short, when writing as columnist, he seems to grab for the bumper sticker version a little too easily.

    • I thot it the whole time I was writing the diary. LOL. 2 points to you…

      <

      p>But seriously, I would never move there. The question is, will this move by the UK actually save them or will it hurt them. Krugman is adamant that this type of move will devastate the economy of the UK to even lower levels. I don’t think it will.

      • He put the “Great” in the Great Depression, John.  In fact, Democratic control of the economy is vastly better that Republican control – see this handy chart:

        <

        p>

        <

        p>That chart shows the growth of a hypothetical $10,000 invested during Democratic and Republican administrations.  Under the Dems, it grew at an average of 8.9% to a little over $300,000, while it would grow to only $11,733 under the GOP with an anemic ROI of 0.4%.  

        <

        p>See that enormous downward arrow on the right of the chart?  That’s Hoover – and the UK should expect similar results from this austerity program.  

        <

        p>That said, I have to say that I’m glad I got a chuckle out of you – gave me quite a chuckle writing it!

        • Do they know about this chart?

          <

          p>Or… is it possible that situations have changed in economies from 1933 which make comparisons interesting but irrelevant? I’ll admit that I have no idea whether their program will work but what I am saying is it should be a good pilot project for American economists to watch and learn from. It will almost certainly prove some people wrong and I would hope they admit it vs. explaining away why the results were contrary to their theories but that their still right (in other words stubborn fools), regardless of who they are and which side they fall.

          • …do you and the rest of the Republicans in the country know about and understand this chart?  Nothing has changed since the thirties – massive cuts in government spending during a recession will only make that recession worse, as evidenced by Hoover.  The policies of FDR throughout the thirties brought us back from that abyss, and then the deficit spending on WWII created the strongest middle class we ever had.

            <

            p>Stop voting for Republicans, John – they’re no good for the economy, and no good for you or anyone else.

            • Hoover’s mistake was not to cut spending but to raise taxes massively to cover the budget deficit. Sound familiar?

              <

              p>Your graph is selective too, why not go back to Coolidge? He had a good run.  

              • …by which time he had already put the “Great” into the “Great Depression” by freezing government spending.  

                <

                p>

                Prior to the start of the Great Depression, Hoover’s first Treasury Secretary, Andrew Mellon, proposed and saw enacted, numerous tax cuts, which cut the top income tax rate from 73% to 24% (under Presidents Warren G. Harding and Calvin Coolidge). When combined with the sharp decline in incomes during the early depression, the result was a serious deficit in the federal budget. Congress, desperate to increase federal revenue, enacted the Revenue Act of 1932, which was the largest peacetime tax increase in history.[48]  The Act increased taxes across the board, so that top earners were taxed at 63% on their net income. The 1932 Act also increased the tax on the net income of corporations from 12% to 13.75%.

                <

                p>Source:  http://en.wikipedia.org/wiki/H…

                <

                p>You lose that round.

                <

                p>The reason they didn’t go back to Coolidge was so that they could show a roughly equal time period – 39.9 years of Dem administrations vs 39.7 years of Republican ones.

                • What a lot of nonsense. Mellon’s tax cut didn’t cause a deficit. [It was the attempt to use Smoot Hawley for domestic protection that raised a wall between the US and the world. Retaliation by Europe etc made it worse throughout Hoover’s term.] So Hoover and then FDR raised taxes, which…. didn’t get us out of the Great Depression. Big leap of logic in there somewhere.

                  <

                  p>I am for spending in times of distress as welfare the keep people from getting kicked out of their homes and committing suicide etc.

                  <

                  p>Just look around you, what is happening now is the same pattern. A big stimulus package, little effect, and then they try austerity.

                  <

                  p>The old methods are almost dead, but it looks like people are going to have to really feel the crunch before they try something different.

            • I agree that something like the Stimulus Bill was needed to inject money into our economy. My problem was how it was spent. I would actually be in favor of more spending but only if it was really targeted. The Stimulus Bill would have had a lot bigger impact if it was spent on infrastructure projects which really mattered and not the “busy work” I complain about. Let’s stop quoting Pres Obama about “There really aren’t any shovel ready jobs…” and let’s design some projects which  put people back to work, don’t fatten unions, don’t fatten company bank accounts and have a purpose beyond putting someone back to work such as bridge/overpass replacements. I have complained on here about the bridge work in this state being a joke with some bridges being worked on for years and decades… Why? Why can’t we do a better job replacing bridges? Why can’t we alow work and put some EPA… regulations on hold or at least fast track them?

              <

              p>I think people like myself and maybe even middle America would feel better and support programs like that but they get annoyed when they hear about the waste and mismanagement. Remembering the Stimulus was 1/3 tax reductions, 1/3 aid to states and 1/3 for shovel ready projects… maybe we should have spent it all on putting people back to work. I know it’s Monday morning QB’ing but maybe we can learn from where we went wrong and improve the next one.

              • Almost $400 billion of the stimulus was in the form of tax cuts!  If tax cuts stimulate the economy, why did they fail to work when the stimulus passed?  Because they’re only marginally stimulative, that’s why.  Watch the video of Rachel Maddow at this link:

                <

                p>http://www.washingtonmonthly.c…

                <

                p>We need another trillion dollars of stimulus – as Lewis Black said, we need to build a big fucking thing!

                <

                p>

                <

                p>When they built Hoover Dam during the depression, they employed thousands of people at the site, and many thousands more off site building the machinery and turbines, etc.  To this day, we get clean electricity from that dam – we need to build more stuff like that.

                • and so could many other conservatives, as long as we knew it wasn’t full of waste, abuse and fraud. As long as we knew laborers were not making $65/hour to lean on a shovel. Managed properly, a project like the Hoover Dam would be a win-win.

                  <

                  p>I’ve said before that the TVA was a superb project that we still enjoy today, however the EPA would never let the TVA build their dams under today’s rules for fisheries and wildlife… Time for some changes which help all of us.

                • If only a Republican president had not signed the bills creating Fannie Mae and Freddie Mac and de-regulating derivative securities, and had instead exercised their powers over the Chinese economy and to direct American consumers how and where to save their money, all would be well

                • See http://www.nytimes.com/2008/07…

                  <

                  p>

                  while Fannie and Freddie are problematic institutions, they aren’t responsible for the mess we’re in.

                  <

                  p>Briefly, Fannie and Freddie were not allowed to make the kind of sub-prime loans that triggered the housing collapse. They got caught up in it when housing prices fell so much.

                  <

                  p>

                  In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

                  <

                  p>

                  Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

  3. The UK has a lot to cut, they have a really large state sector. I doubt if their services will actually suffer.

    <

    p>However the people who get laid off will have a hard time finding jobs as long as the world is still suffering from slug-flation. Do they enact growth-producing tax policies? Out of their control is the direction of the USA after the election: more inflation from Ben Bernanke? Bush Tax Cuts extended or not?

    <

    p>I’m going to bet that the cuts by themselves do not bring about growth but result in higher unemployment. The Cameron government falls in ten months.  

    • The senior President Bush allowed a tax hike– probably costing him a second term– but it was nevertheless the right thing to do, and his successor claimed a lot of the credit.

      <

      p>Sometimes a good politician will do the right thing, even if it is not the popular thing.

      • As much as many people have said Social Security is just fine, I think it is a train wreck. Much has been said about fixing it (entitlement cuts vs increasing the withholding rate…) but I think the answer which may be more palatable will be “both”. I could live with an increase if I truly felt there was no waste and some entitlements were reduced.

        <

        p>Everyone should have skin in the race.

Archives