How’s the Growth-Through-Austerity Mousetrap Game Going in England?

I actually forgot one of the most important point about the growth-through-austerity mousetrap game. My cousin’s mousetrap board game was broken, so it was always disappointing to get it set up and have it randomly breakdown halfway through the game. That said, I imagine it would have been far more disappointing  if we had it set up perfectly and the last step in the game, where the diver jumps in the bucket and drops the net, consistently failed.

Last summer Businessweek ran an article Keynes vs. Alesina. Alesina Who?, subtitle: “Economist Alberto Alesina argues that austerity triggers growth.” I’ve heard from many that Alesina’s research is very influential in England in addition to providing the backbone for what is the current GOP economic platform. From that article (my bold):

This is Alesina’s hour. In April in Madrid, he told the European Union’s economic and finance ministers that “large, credible, and decisive” spending cuts to reduce budget deficits have frequently been followed by economic growth. He backed his proposal with historical research on rich countries’ experiences since 1980….That put pressure on President Barack Obama to follow the lead of cost-cutters such as Britain’s Chancellor of the Exchequer, George Osborne, and German Chancellor Angela Merkel. Says Alesina: “I think the Germans are right.”

Alesina argues that austerity can stimulate economic growth by calming bond markets, which lowers interest rates and promotes investment. In addition, he says, deficit-cutting reassures taxpayers that more wrenching fiscal adjustments won’t be needed later. That revives their animal spirits and their spending. Alesina says that as a way to shrink deficits, spending cuts are better for growth than raising taxes. The Madrid paper, a summary of his views, was influential enough to be cited in the official communiqué of the EU finance ministers’ meeting.

Remember, that bold is the last step in the mousetrap game – the diver that goes in the bucket. Cut deficits and spending and confidence will take off.

So how’s that working in England? England is having a very painful austerity experience, with GDP declining, just like everyone said it would. But it has kept its “political” will in spite of huge protests and organizational pressure from places like the excellent UK Uncut movement. So confidence is about to return, right?

Krugman:

In the debate over the budget, Republicans seem to be leaning on the claim that austerity will actually increase employment, because it will raise business confidence; at least that’s what John Taylor seems to be saying.

But how’s that going in Britain, where the Cameron austerity program was supposed to lead the way?

Most of the discussion of Britain I’ve seen focuses on GDP numbers, with the debate then centering on how much of the decline in the 4th quarter was weather-related. But a lot of things affect GDP. Why not look directly at confidence? The BDO has a convenient survey of business optimism (pdf); numbers for December and January here. Here’s what it looks like:

Austerity seems to have hurt, not helped, business confidence; as the BDO says, “Private sector unprepared to fill the hole left by public sector cuts.”

Why do we think the US experience — with the GOP proposals far less serious and responsible than Cameron’s — would be any better?

Let’s be clear. This isn’t the diver missing the bucket in the growth-through-austerity mousetrap game. This is the diver exploding. This is the diver running away and hiding in a corner. This is the idea that the entire theory – producing confidence – got it backwards, and that cuts decrease the confidence of the business sector that there’s going to be a growing, prospering economy at any point in the near future worthy of investment.

I hope with the immediate government shutdown coming the Democrats grow a spine and fight against these useless and dangerous short-term discretionary cuts.

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6 Responses to How’s the Growth-Through-Austerity Mousetrap Game Going in England?

  1. Pingback: Collective Conscious » By the Way, Austerity Doesn’t Work

  2. Chris Dornan says:

    Agreed, but its difficult to see it happening. The crazies are now in charge of the asylum.

  3. Bruce S says:

    Most of you have probably seen this, but Joe Stiglitz wrote a great counter to the other former CEA chiefs who banded together to support the opinions of Deficit Commission co-chairs Simpson-Bowles on cutting…

    http://titanicsailsatdawn.blogspot.com/2011/03/shoeless-joe-vs-deficit-hawks.html

    Actually a very good Keynesian primer.

  4. Bruce S says:

    don’t post this – just using the email subscription check-box

  5. Pingback: Around The Dial – 3/29/11

  6. Solving a Keynesian problem with extreme austerity will never work. Austrian economics is better at preventing financial problems. However, once an economy is overwhelmed with debt, an Austrian solution becomes counterproductive and dangerous.

    When making a decision, you have to make one based the current environment. Sticking to an ideology at all costs is very dangerous.

    Over time, it will be necessary for us to get our fiscal house in order. I also think Paul Krugman’s idea of even more spending than what we already have is not the solution either. The correct answer is somewhere in between and we will still have some financial pain in our future because of how overextended we got.

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