One of our heroes of the Modern Monetary Theory school, Marshal Auerback is following the experiment that is the UK economy that will disprove much of current economic fiscal orthodoxy, with deep understandable interest. The experimenters are so convinced of the rightness of their judgement and approach, they have cut spending to the bone to maximise and speed the confidently effected return to economic health. The resulting deluge of unemployment, repossessions, and bankruptcies will not doubt be explained away as a natural purgative before rude health recovers. How long can that old quack story be told before the patient demands the bloodletting end? All we Irish can do is watch on the sidelines and hope the strength of the ‘Austerians’ treatment of the UK and violent collapse into deflation will inform the Irish government in sufficient time to halt their damaging policies here. The daft thing is, the UK is a sovereign government with full control of its currency unlike Ireland which is hostage to the Euro and the German inflation psychosis.
Welcome to the World of the “New Normal,” UK Style, Huffington Post 11.8.2010
from Marshall Auerback
We are now starting to see the economic impact of the ‘new normal’ in practice, as Paul Krugman outlined the other day. Having been bullied into adopting austerity measures apparently thinking they will help their economies grow, it is beginning to dawn on many “Austerian” governments that their embrace of hair shirt economics is beginning to undermine growth.Exhibit A is the United Kingdom. The NY Times gave an account of British towns “reeling” from the implementation of nationwide expenditure cuts of some $130 billion introduced in last June’s budget. “A mass execution without appeal” is how the Times described it.
Along with this article comes a report from the Financial Times, “Economic Fears Rise as House Prices Dip”, documenting how UK house prices have began to fall for the first time in over a year this past July. The article notes that this setback has come “after a year when the recovery in house prices surprised almost everyone and brought relief to Britain’s stretched banks, [so] the return of a buyers’ market threatens to increase jitters in a fragile economy.”
Well, to us neither today’s news about British municipalities reeling from the impact of the new Tory coalition government’s budget cuts, nor last year’s recovery in UK housing, was at all “surprising.” Beset by the greatest financial crisis in the post World War II period, the last UK Labour Government did what any sensible administration ought to do when there is not enough activity in the economy to maintain employment and labor force growth: they increased public demand via increased net government spending……
Having publicly deprecated the impact of fiscal policy and warned of the long term deleterious effects of climbing public debt, of course, the Federal Reserve and/or the Bank of England cannot now reverse course and credibly back more fiscal stimulus. To cover up the flaccid nature of their respective central banks’ ineffectual monetary policy response, a number of economists present the current high levels of unemployment as “structural”, implying that there is little that can be done about it. It is simply the “new normal”, which in reality represents the ultimate in political failure. Our policy elites don’t dare concede the futility of fiscal austerity. Hence, they resort to invoking theories like the “equilibrium unemployment rate”, or “non-accelerating inflation rate of unemployment” (NAIRU, for short), the implication being that attempts to reduce labor underutilization by expansionary fiscal policy would be inflationary in the absence of “structural reforms” , such as privatization, labor market deregulation, anti-union legislation and harsh welfare measures. But these “supply side” measures in effect reflect the agenda preferences of the late 20th century, which have destroyed incomes and eviscerated the middle class. Our “new normal”, then, represents a collective shrug of our policymakers’ shoulders, ignoring a growing undercurrent of anger and despair.
Cross-posted from New Deal 2.0.
