Daily commentary: On Austerity and Britain’s double dip

Last January I called the contrast between the US and the UK "the best real-time economic experiment we can have on what does and doesn’t happen as a result of government spending." My point was that the two economies have had similar trajectories and have similar economic models. Watching how Britain using austerity compares with the US using more stimulus would be instructive.

I have said this many times. But a cut in the public sector when the private sector is indebted and needs to net save will produce a similar cut in the private sector. There’s nothing wrong with that to the degree debts are too high, but this fact needs to be recognised. The fact is austerity does not promote growth. It’s one thing to say you are uncomfortable about high levels of government deficit spending and recommend fiscal consolidation despite negative near-term impacts. But, you can’t invoke the confidence fairy and tell us that fiscal consolidation will lead to near-term growth. In the mind of UK Chancellor Osborne, fiscal consolidation would lead to immediate prosperity. This has turned out to be false.

The thing to watch for when using austerity is debt deflation and depression. You can have government and households both cutting back and I believe that could be healthy in many circumstances. I am not against austerity per se. However, if austerity causes a debt deflation that imperils a weak banking system, you have to be careful about unintended consequences and deadweight economic loss. And at a minimum, you have to recognise that austerity leads to recession.

That’s it. Here are the links.

  • UK’s weakest recovery in 100 years | Business | guardian.co.uk
  • FT Alphaville » Hubris and other signs of trouble ‘down under’
  • Facebook phone from HTC due this summer, sources say | VentureBeat
  • IMF encourages Europe’s economic suicide – Telegraph
  • Joseph Stiglitz | Austerity, and a New Recession? – Politics Is at the Root of the Problem | The European Magazine – The Opinion Magazine
  • Warren Buffett Infographic | Compare gold investments
  • Android Is Suddenly In A Lot Of Trouble – Business Insider
  • Mark Carney notes household debt levelling – Business – CBC News
  • Report: Amazon pulling ahead of iTunes in average revenue per user | VentureBeat
  • Apple’s Growth Scorecard for the first quarter of 2012 | asymco
  • Over 50s will be forced to work 11 years longer to get a decent pension – Telegraph
  • Britain in double-dip recession as growth falls 0.2pc – Telegraph
  • S&P cuts India outlook; investment rating in peril | Reuters
  • Goldman Sachs: los bancos españoles deben sanear otros 58.000 millones | Economía | EL PAÍS
  • Bank of Canada governor Mark Carney warns indebted households borrowing costs can only go up | Economy | News | Financial Post
  • Apple Q2: it’s about China | beyondbrics | News and views on emerging markets from the Financial Times – FT.com
  • Amazon to Begin Collecting Sales Tax in Nevada – WSJ.com
  • Dutch fight over how deep to cut – FT.com
  • Apple infringes on Motorola Mobility patent: ITC judge | Reuters
  • AAPL Volatility Compression
  • Rutte verwacht verkiezingen op 12 september :: nrc.nl
  • Maybe no housing rebound for a generation: Shiller | Reuters
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