Today's Coming Crisis Movie

Wednesday, July 6, 2011

Will Fiscal Austerity Lead to a Depression?

In the video at the end of this post I speak to RT Television about fiscal austerity in the UK and the likelihood of fiscal austerity in the US.

A few thoughts here:

Barack Obama says:

Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.

Wrong on every single count. This is why the US is probably headed for a repeat of 1938. The President knows better, but he’s saying this stuff anyway. If you have the President spouting this nonsense, you know the Republicans will use it to force cuts that will weaken the economy.

The key here is that it does no good for the Republicans politically to compromise with President Obama. His policies are rightfully seen as failed. The right thing to do politically (but not morally) is to try and strike as much contrast to the President as you can, especially if it makes him look more failed. So that means favouring gridlock and pushing deficit reduction, looking for spending cuts and so on – even if it leads to a government shutdown stare-down as it did under Clinton. Is this the right thing to do? I don't think so, if only because it reduces the number of potential positive economic outcomes. But I am speaking now more from a forecasting perspective than one of advocacy.

-A few comments about Tuesday's election's impact on the economy, Nov 2010

The cuts are coming. The President has assured as much through his misguided rhetoric. We’ll just have to see whether the economy in the US is weak enough that they cause a double dip.

On the UK:

the US has resisted austerity while the UK has embraced it. In my mind, this is the best real-time economic experiment we can have on what does and doesn't happen as a result of government spending.

The UK is noticeably weaker than the US. They have failed. Expansionary fiscal consolidation is nonsense. It didn’t work in Ireland, Greece or Spain. And it won’t work in the US or the UK either. (read more)