Monday, 6 May 2013

Fiscal austerity finale meme

Expansionary austerity was always an implausible contradiction in terms that fitted right-wing political sensibilities better than the facts. Now though a run of events have made its increasingly (oxy)moronic nature indisputably clear.

Here, cutting spending to retain the UK’s AAA rating – and by so doing holding down borrowing costs – largely defined ConDem economic policy with the rating to provide a benchmark for assessing George Osborne’s success as chancellor (remember that?). Well, the UK is AAA no longer AND borrowing costs remain at record lows i.e. Osborne couldn’t do something he shouldn’t have been doing in the first place.

Then there’s been the Reinhart and Rogoff debacle were an apparently empirical justification for cutting government debt turned out to be based on a sloppy methodology, bad arithmetic and wishful thinking.

Except, this only followed on from the debunking of the notion that government spending in response to a downturn had only a limited multiplier effect i.e. why bother spending more and anyway cutting spending wouldn’t be that painful. Paul De Grauwe's work carried this critique a step further by setting out the “strong negative correlation” between “austerity measures introduced in 2011 and the growth of GDP over 2011-12” i.e. funnily enough the countries that've cut spending the most have suffered the sharpest reductions in GDP etc., And no them doing so didn’t put a cap on their borrowing costs, that was the ECB stating it was “ready to do whatever it takes”.

Really, picking thru the above, rather than apologise Professor Ferguson should be applauded for setting out the one remaining argument spending cut supporters appear to have as to why Britain should not adopt an actively counter-cyclical fiscal policy. 

Increase government borrowing by say £25bn to finance a 3 year social housing programme? Ha .......

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