Mythical austerity: Spending cuts help the economy in the long run

Mythical austerity: Spending cuts help the economy in the long run

UnicornOpposition to spending cuts in America has been based heavily on Britain’s economic setbacks and “the myth of British austerity,” even though “if the British government is practicing austerity it is hard to see,” since government spending still consumes half of Britain’s GDP, and government spending there is virtually unchanged.

Indeed, spending is projected to grow modestly in England over the next several years. If England is not actually practicing austerity, why have critics of austerity falsely made Britain the poster child for austerity? A commenter at Bloomberg explains it in a nutshell: due to the United Kingdom’s structural economic weaknesses, and its heavy dependence on the devastated and anemic financial sector, Britain will underperform much of the world over the next few years no matter what it does. So whatever government policy is associated with it will look bad by association — giving those who oppose austerity, like liberal Washington Post bloggers, and Paul Krugman of The New York Times, a motive to falsely claim England is practicing austerity and suffered as a result of it (ludicrously, Krugman calls Obama a “small spender”). With government spending at around half the size of England’s economy,

there have been very few budget cuts [in England] so far. The economic weakness is a result of Britain’s heavy dependence on international finance, with the city of London being the investment banker to the whole world except the US, and the decline in North Sea oil and gas production. Domestic stimulus will have little or no impact on either. Keynes was a brilliant economist, but he recommended stimulus for situations where there is a large output gap. British unemployment is relatively low, showing that there is not a large output gap. British output potential is lower than it was in 2007, and the amount of taxes it can expect to raise is lower than thought then, and so spending must also be on a lower path. There is no choice. More spending would eventually bring bankruptcy.

With Bloomberg based in New York, the editors clearly read the New York Times (the trend-setter and ultimate source of many editorials in Bloomberg and the US media in general), and are very influenced by Paul Krugman’s characterizations of supposed British austerity, which he never supports by showing any actual austerity measures. They fail to understand that Krugman has little interest in what is actually happening in Britain. He condemns Britain’s supposed austerity because he believes by doing so, he can discredit austerity in the US, where the situation is far less troubled. Krugman knows that the relative weakness of the British economy, with falling hydrocarbon production there contrasting with a surge of oil and natural gas production in the United States, and with its greater dependence on depressed continental Europe and international finance, ensures that Britain’s economy will grow slower than the US economy over the next few years no matter what the US does. When it does, having convinced people like the editors that Britain is practicing austerity, Krugman will be able to say, “See, I told you so, austerity doesn’t work!” But he will have proven no such thing.

Britain will ultimately be forced to practice austerity because of economic weakness. There will simply not be enough taxpaying capacity to support the large government Britain built in better times. The austerity will be the RESULT of economic weakness, NOT its cause.

Government spending is not a miracle cure for recessions. Herbert Hoover increased government spending in the Great Depression, both in real terms and as a percentage of the economy, but the economy failed to revive. As Megan McArdle of The Atlantic notes, government spending more than doubled as a percentage of the economy from 1929 to 1933. Although the economy temporarily revived under Roosevelt, it then went back into a nasty recession in 1937-38, the so-called Roosevelt Recession. A sustained recovery from the Depression finally occurred only after a coalition of conservative Democrats and Republicans effectively took control of Congress in 1938 and blocked (or, in one case, repealed) various anti-business measures that had been stalling a natural recovery by discouraging investment. On the other hand, America experienced an “economic boom” after our government slashed spending in 1946, and Canada’s economy grew after it slashed government spending in the 1990s.

Hans Bader

Hans Bader

Hans Bader practices law in Washington, D.C. After studying economics and history at the University of Virginia and law at Harvard, he practiced civil-rights, international-trade, and constitutional law. Hans also writes for CNS News and has appeared on C-SPAN’s “Washington Journal.”

Commenting Policy

We have no tolerance for comments containing violence, racism, vulgarity, profanity, all caps, or discourteous behavior. Thank you for partnering with us to maintain a courteous and useful public environment where we can engage in reasonable discourse. Read more.

You may use HTML in your comments. Feel free to review the full list of allowed HTML here.

Facebook Comments

Disqus Comments