The expansionary fiscal contraction bust

The UK was always going to be an important laboratory experiment for the US, as it imposed austerity by choice. This strategy has demonstrably failed, as the UK economy looks to have gone back into recession, public borrowing is on the rise, business and consumer confidence and spending have collapsed and unemployment is rising inexorably. Larry Summers’ claim last year that the whole idea of an expansionary fiscal contraction is "oxymoronic" looks to have been right.

The various Republican presidential candidates who have moved from Iowa to my home state of New Hampshire for this week’s primary have collectively argued for European-style retrenchment – which simply hasn’t worked. Drastic cuts in public spending any time soon, as proposed by several of these candidates, look wildly irresponsible given the headwinds the US economy is facing from abroad.

-David Blanchflower, The Guardian

If you argue that austerity works in cutting deficits over the longer-term but the short-term pain is worth it, that’s a different argument than the one Republicans are making – and one not likely to get one elected, which is why they’re not making it. But even so, the spectre of debt deflation looms heavily as much in the US as in Europe. After all, BofA is not trading in the single digits because of irrational despondence. The banking sector in the US is still very sick – and will remain so for the foreseeable future.

Blanchflower argues, as I did last January and again last April, that the medium-term performance differential between the US and the UK will do much in telling us how well expansionary fiscal contraction works. So far, it’s a bust.

Source: The Guardian