A G-8 meeting is coming up next week, and Coy thinks that the leaders will have enough sense to recognize that the Merkel-Cameron-Hollande-Troika austerity policies are a train wreck: "The big economies of continental Europe are shrinking or barely growing. Britain’s economy has expanded less than 1 percent over the past year. In the U.S., the chill of sequestration spending cuts is expected to reduce annual growth to 1.6 percent in the current quarter."
We can always hope.
Coy spells out how badly things have gone in Britain:
Cameron's big idea when he campaigned in 2009 and 2010 was to reassure global bond investors with promises of big cuts in spending that spared only the National Health Service and foreign aid, while raising the value-added tax on sales. Smaller deficits would lower interest rates, allowing businesses to borrow, invest, and hire. Interest rates fell, as promised, but growth never picked up because consumers remained overindebted, the banking sector was undercapitalized and in no shape to lend, and businesses didn't see enough demand to justify expansion. The European debt crisis, which suppressed British exports, was a factor. But so was the dampening effect of decreased government spending. Cameron envisioned a Big Society—his equivalent of compassionate conservatism—in which private charity would fill the hole left by government. That hasn't happened, either. As Spain and Greece have discovered, economic weakness cuts into tax receipts. So the budget deficit was still over 7 percent of gross domestic product in the year through March even though inflation-adjusted discretionary spending was down nearly 12 percent, according to the Institute for Fiscal Studies. [my emphasis]This is no surprise to economists who still remembered basic macroeconomics. The idea that government austerity in a depression would be anything but harmful to the economy was demonstrated very effectively decades ago by Herbert Hoover and Heinrich Brüning.
But Coy proceeds to make this argument as though he doesn't realize its inconsistency with the section just quoted: "Some retrenchment was essential after the deficit surpassed 11 percent of GDP in 2010, a post-World War II high. The Conservatives argue that if Cameron goes wobbly in the knees now and eases up on austerity, the bond market might react badly, driving interest rates back up and worsening Britain's predicament."
When a depression starts, GDP shrinks. Debt doesn't shrink as fast as GDP, and automatic stabilizers like unemployment insurance pay out more and tend to push the deficit and debt up. This is exactly what needs to happen in a depression. So what is Coy talking about when he says that "some retrenchment" was necessary just after he's described what actual harm resulted from the real existing "retrenchment" Cameron's government?
Tags: angela merkel, austerity economics, britain, david cameron, eu, euro, european union