Contention of the Day – Cut to the Bone

Ryan Avent in The Economist:

Britain’s conservatives have gambled heavily. If deep budget cuts amid economic weakness send the economy plunging back into recession, the government may be unable to make the cuts stick, and austerity could be discredited around the world. If disaster is avoided, it will strengthen the hand of fiscal conservatives everywhere. It would be an exciting experiment to watch if so many livelihoods weren’t caught in the balance.

The article provides a useful overview both of the measures being taken and of the political and economic risks.  However, Mr. Avent seems to have gotten one thing completely wrong:  “It” is an “exciting experiment” because, and precisely to the extent that, “so many livelihoods [are] caught in the balance.”

29 comments on “Contention of the Day – Cut to the Bone

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  1. CK,
    It no longer matters who controls the Congress or Presidency as regards the nation’s fiscal policy as of today. Of course anything can change,but it appears that the die is set on QE2. All this means is that a policy of inflating our currency further is the current tactic of the Fed. The method will be,AGAIN,for the Fed to purchase toxic assets at the value that the Banks place on them. The target is an Inflation rate of 2% which,the hope is,will stimulate demand(if your money goes down in value tommorow,it will be spent today),and decrease unemployment to an official 6-8%rate. The potential negative effects of QE2 are so numerous and complex that we should discuss them individually,but just a few of these unintended consequences could be hyperinflation,civil war,or world war,oh well,anything is better than losing our Imperial Economic power in order to become Western Europe.

  2. Focus, Rex we’re talking about the UK, now, even though the lesson
    is instructive on our future prospects, will Cameron’/Cleggs coalition suffer the same fate as Ramsay McDonald’s in ’31, locking them out of office for a generation, doubtful, as unlike the 20s, the OOs were not an era of austerity

  3. @ Rex Caruthers:
    As long as powerful interests can sell the idea that “the economy” would come “roaring back” if we pretend to take any of several easy ways out – e.g., partly implement an imaginary version of Reaganism, the unity position on the right – then that’s what we’ll do. In that sense alone contemporary conservatism really is very conservative, even if the dreams it pursues seem much more radical. As for the American left, it’s dominated by politicians who learned very well over the last 30 years never to discuss what they really believe (sometimes without even recognizing what they really believe) except in a fragmentary code, for fear of being called Socialists or worse.

    You may be right about the irrelevance of the elections, though I do think that some political configurations may be less risky than others, somewhat reduce the likelihood of some of the worst catastrophes you refer to, potentially ease the transition to a new equilibrium. If the political system can’t produce more forward-looking and consensually acceptable economic/fiscal adjustments, then the Fed and other administrative/non-elected bodies will try, apparently, to do whatever they can, while waiting for the global political and financial tectonic plates to shift.

  4. Focus, Rex we’re talking about the UK

    No we’re not,they’re irrelevant since they controlled the world currency,and their cost cutting is a pitiful futility. Keep in mind what was said back when by John Connally to our Euro Alies,“The dollar is our currency, but your problem.”

  5. You may be right about the irrelevance of the elections

    QE2 is a done deal,believe it,no matter who wins in two weeks.

  6. U.S. wants G20 commitment to let currencies rise, Reuters

    Excerpt: The United States wants the Group of 20 countries to reduce global economic imbalances by committing to curb trade surpluses or deficits and by letting currencies rise more freely, a senior U.S. official said on Wednesday.
    Ahead of weekend meetings of G20 finance ministers in Gyeongju, South Korea, the Treasury Department official made clear Washington wants currency values to be a focal point and sees current account levels as a vital part of the discussion.
    China wasn’t mentioned by name but Beijing’s practice of managing the value of its yuan has angered the United States, which argues the currency’s low value is fostering global currency tensions. (Expect a China/US clash this weekend)

    LOL,after decades of dogma about Globalization and Free Trade,we change course,not to save the American middle class,but to save Obama,and our “Economic dominance” LOL REDUX.

  7. Rex Caruthers wrote:

    QE2 is a done deal,believe it,no matter who wins in two weeks.

    I was referring more to economic policy more generally. Don’t know how much QE2 can do or is expected to do.

    Not sure that the US position vis-a-vis the G20 would be all that different if someone else was president, or that “economic dominance” is the issue. In a world of floating currencies, having an super-ultra-major player like China play by a different set of rules is a problem that’s bound to lead to conflict.

    As for the main topic, Britain is hardly irrelevant, for the reasons Avent points to, and, to amplify the point, in addition to being a major U.S. ally and trading partner, it conducts its public discussion in a language we understand. It will be watched closely, and people will attempt to draw conclusions from the results. They may be the completely wrong conclusions, but that’s another question…

  8. Actually we know what they believe that why they’ve won only four of the last eleven elections, one tried to point out why this particular candidate was so noxious but the national and frankly international media was too enthralled to pay attention, China is playing with a set of books that would make Madoff blush, but since there are PLA Generals running the show, no enquires too deeply

  9. Hey CK,it looks like Krugman read your post and commented:

    “Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks — a shift from hope to fear. In his speech announcing the budget plan, George Osborne, the chancellor of the Exchequer, seemed to have given up on the confidence fairy — that is, on claims that the plan would have positive effects on employment and growth.
    Instead, it was all about the apocalypse looming if Britain failed to go down this route. Never mind that British debt as a percentage of national income is actually below its historical average; never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control. Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”
    What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.”

  10. That’s a unusually stupid analysis even from Krugman, what happened in ’31, was the result of the collapse of the international capital flow due to Smoot Hawley, signified by the collapse of Creditanstalt, What
    happened in ’37, is an example of why elections have consequences,
    FDR declared war on private industry, lumping them all as ‘great malefactors of wealth, of course, there was a clique, Kennedy, Forrestal, and the like that were exempt. Similar can be seen with Obama bringing Donilon (Fannie Mae) Nides, (Fannie, CSFB, and Morgan) and any number of players responsible for the crisis we are in

  11. unusually stupid

    It is stupid,but for different reasons. What neither the Free Marketers or the Keynesians realize is that there’s no way to recreate the “demand” that fueled the 70% of GDP that came from consumer DEBT that constituted the American economy from 1988-2007. The demand has been eroded by the Consumer Debt Overhang,not much of which can be discharged by Bankruptcy. (From 1978-2005,the old style Bankruptcy system helped sustain Consumer Demand.) It has also been eroded by an awareness that if we need to obtain something new,all we need to do is go to our basement or garage,and we discover troves of hidden treasure that we have already paid for or already used our MC for.

  12. was the result of the collapse of the international capital flow due to Smoot Hawley

    S-H was passed in 1930 after the economic catastrophe was already under way. This economist prefers the word “comical” for those who claim it as the “cause” of the big D:

    At the time of its enactment, exports were only about 5 percent of the economic output of the United States and still outweighed imports. (Even now, exports are a smaller part of output in the United States than in any other large developed nation.) To say that the act, which applied to a distinct minority of imports and which raised tariffs generally by only about six percentage points, caused the Depression is almost comical. It did no good, but compared with the titanic monetary policy disasters of the era, the effect of Smoot-Hawley was probably very small, or so most mainstream economists believe.

    However, certain figures- who just happen to be forefathers of the dependably ideological conservatism that miguel can always be depended upon to recite – seized upon S-H as a preferred explanation for what went wrong. It suited doctrinaire Republican free trade arguments of the ’80s and ’90s particularly well. (It has now reached the point where the same conservatives attacking Democrats as tools of the Chinese are the ones pushing policies most disproportionately beneficial to China – and to corporations seeking cheap labor especially.)

    Andy Xie pointed to one problem with “stimulus” policies, that in the contemporary world, rather than the time of the Big D, capital flows and trade are highly globalized: Stimulus may over-stimulate the economies of China and other exporters, while the effect in the U.S. or other stimulators is diluted. However, social spending of the type that Britain is cutting and that conservatives salivate over the idea of cutting is more likely to keep more of the effect “domesticated” than blanket disbursement of tax cuts and QE also, both of which operate almost as direct transfers into foreign bank accounts.

    I’ve never seen Krugman directly address Xie’s argument. He’s laid down a marker, however, on Britain.

  13. That still doesn’t explain how a typical cyclical downturn like 1893 or
    1873, devolved into the Great Depression, worldwide

  14. This struck me as telling from Krugman’s column:

    It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment.

    and – this is the common K refrain:

    Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

    We have a time when deflationary pressures are such that, despite deficits that appear massive when viewed from one or another perspective, money remains super-cheap. Krugman’s position has a certain logic: The economic system is saying “Take the damn money.” The politicians and public are responding, “No, we’re too depressed and afraid.” They’re afraid of “hyperinflation” when the interests rates are still near-zero. Could the whole thing tip into hyperinflation? Possibly. But while we’re too depressed and afraid to imagine handling that threat as it actually arises, the economy stagnates and the people, never given any other option (Krugmanism, Hudsonism, anything else other than muddling-through-ism), start fantasizing about Khmer Reaganism… start all over again at government (except the military) year zero, trusting Industry to carry us to Shining Paradise in its invisible hands.

  15. miguel cervantes wrote:

    That still doesn’t explain how a typical cyclical downturn like 1893 or
    1873, devolved into the Great Depression, worldwide

    And Smooth-Hawley does? The economy of the US (and the world) ca 1930 was inexpressibly different from the economy of the US ca. 1873, and rather vastly different from the economy of 1893. And politics was having a bit of a “moment,” too.

  16. In order to facilitate communications on Economics,my premise is that we entered a full blown Depression in July 2007 in which we are now in our 4th year so it’s very early in the Depression process. If you disagree with my premise,you have plenty of company,Ben B,TimG,BHO,
    Wall Street,The Banks,and most Economists.*
    It is peculiar that the Conservatives/Tea Partiers only repeat certain very tame mantras,they aren’t discussing the True Unemployment %,and the deeper problems we have along with BHO’s utter failure to confront these issues to include Securitization,Shadow Banking,Our Balance Sheet Fraud among dozens of other issues that just won’t go away. Why are they so timid,I’m sure MC has an opinion?

    *Of Course,in early 2000 when I was discussing the risks to our economy of Securitization/Complex Derivatives having learned that process from Orange County and Enron,the same line-up was in place.

  17. It may be that the TPers fear if we are in a Depression that only Government intervention,(War,Shovel Ready Projects),is the Remedy. So,of course,they don’t want that;also,if we are in a D,and they are in power,their ideas have to address it,which could be a very uncomfortable position,how does small limited Government,fiscal restraint,Family Values address a Depression in a nation of 300M citizens?
    I believe we are in a period of election cycle Repudiation,2006/8 repudiated 2000/2/4,2010 will repudiate 2006/8,and 2012 will repudiate 2010. And the FACT of GD2,repudiates all the economic voodoo of the last 40 years.

  18. @ Rex Caruthers:
    There’s some truth to that, I think. Part of it may be that, in case you haven’t noticed, there aren’t a whole lot of geniuses or even mildly impressive intellects in the public leadership of the TP. Behind the scenes – there may be some geniuses among the prime financial movers, but their interests, intentions, and policy preferences are radically opposed to what you describe. Populism helps keep HotAir types and Glenn Beck viewers excited and to generate votes for Republicans. On its own terms, it’s about “common sense” – i.e., total superficiality, as a ready vehicle for emotionalism and hackery of every type.

    Otherwise, the TP represents an orphaned constituency, struggling to cope with our simultaneous economic, political, and cultural crises according to reactionary conservative precepts. The “statist” response to these crises appears too far outside the American idea as broadly understood – especially by the people who want to feed Woody Guthrie to the goats. So BHO and the rest have struggled to adapt their statisms to an anti-statist political culture, and give off the aroma and appearance of being dishonest, half-hearted, compromised, etc.

    We appear to be at least one evolutionary two-step away from what Judt called the “Social Democracy of Fear” being able to assert itself positively and forthrightly. That seems to imply that things have to get a lot worse first, in one way or another – whether by way of another even worse shock or over a long cultural-evolutionary experience.

  19. Maybe had their been a real stimulus, directed to real infrastructure development, you might have a point, but it was basically a sinecure
    for Democratic causes. The concern is Obama’s policies much like Roosevelt’s could permanently retard any prospect of economic growth, lead to hyperinflation, default, real social schism

  20. No, it would be in keeping with Alinsky’s maxim to ‘rub raw the sources of discontent’, Ayers’, Wright. Van Jones this Maruse Heath chap, all are skilled at agitation and propaganda, not anything productive

  21. @ miguel cervantes:
    Not sure exactly what you’re saying, but it reads as more of the same. It’s only bad when “they” do it, or at least can be portrayed as doing it. “Agitation and propaganda” are all that the TP is. To the extent there is a TP program – rather doubtful – it is a program of destruction.

  22. I support the Tea Party, because I have seen by proxy what the left has done, I didn’t become a Young Pioneer, in part because my family
    was able to spirit me away from that hell hole, You have the luxury of indulging in utopian notions of socialism, I found that trite, pedantic,
    bunk, yet I am critical of certain institutions propensity toward corruption

  23. I support the Tea Party

    Does the TP support QE2?,I haven’t heard it discussed. I know that Ron/Rand Paul want to do away with the Fed,is that the TP position?

  24. I think they are leaning in that direction, Greenspan’s role in occasionally two progressively worse downturns, certainly played
    a part, the last time, he hiked rates 18 times consecutively, between 2004 and 2006, wth was the point there

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