Wednesday, January 26, 2011

British Contractions

'Tis perhaps premature, for one quarter does not a trend make, but the contraction of British economy by 0.5% is hardly a startling vindication of the "cut and grow" line of economic thought. To paraphrase Paul Krugman, contractionary measures, it turns out, are in fact contractionary.

Now, to be fair, we shouldn't attribute much to the direct effects of the austerity politics in this number. The bulk of the cuts (and tax hikes) will really start to bite this year. But if the theory was: Step 1 - shrink the government and reduce deficits, Step 2: business confidence returns, Step 3 - watch the economy grow, then Step 2 should be occurring already and slowly percolating down into Step 3. This isn't happening.

But let me put my pseudo-Austrian hat on for a bit and try to find some nugget of gold in this puddle of extrement. While I'm no fan of drawing arbitrary lines in the sand, the size of the British public sector relative to the overall economy did seem a wee bit large there, in excess of 50%. Some shrinkage is perhaps in order. The shrinkage is currently mis-timed, because unless Christ brings some fishes to the hungry people, it will presently only cause more suffering and, very likely a double-dip. But that will boot the Tory-LibDem coalition out of office in no time, and maybe Labor will be swept into majority on a new platform of increased public investmment in infrastructure, clean energy and secondary education - which are all things that, I hear, Britain needs almost as much as America.

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