When David Cameron became prime minister of Britain and announced his austerity plans — buying completely into both the confidence fairy and the invisible bond vigilantes — many were the hosannas, from both sides of the Atlantic.
Pundits in the United States urged President Obama to “do a Cameron”; Mr. Cameron and George Osborne, the chancellor of the Exchequer, were the toast of Very Serious People everywhere.
Now Britain is officially in double-dip recession, and has achieved the remarkable feat of doing worse this time around than it did in the 1930s.
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Britain is also unique in having chosen the Big Wrong freely, facing neither pressure from bond markets nor conditions imposed by Berlin and Frankfurt.
Now, the defense I hear from Cameron apologists is that the austerity mostly hasn’t even hit yet.
But that’s really not much of a defense.
Remember, the austerity was supposed to work by inspiring confidence; where’s the confidence? Basically, the expansionary aspect should already have kicked in since it’s all contraction from here.
Needless to say, Mr. Cameron and Mr. Osborne insist that they will not change course, which means that Britain will continue on a death spiral of self-defeating austerity.
The New Voodoo
Every time I think we might be making progress against the prejudices and myths that pass for judicious thinking these days, something like the recent editorial in the Financial Times comes along to renew my despair.
The editorial, published on April 25 and titled “Britain Faces Up to the Double-Dip Test,” is a response to the latest bad economic news in Britain, which the writer says offers no reason at all to reconsider austerity policies. Here’s the substantive argument, in full: “Ed Miliband, the leader of the opposition, predictably used the figures to attack the coalition for ‘cutting too far, too fast.’ But this is unconvincing. There is no guarantee that under a more expansionary fiscal policy the British economy would be doing significantly better. And set against this is the risk that the U.K.’s low borrowing cost might rise.”
This is really extraordinary, if you think about it for a minute.
It’s true that there is “no guarantee” that Britain would be going better with less austerity; nothing in life is guaranteed. Hey, my cup of coffee might suddenly turn into a block of ice — thermodynamics is just statistical, you know. But there is now overwhelming evidence that contractionary fiscal policy is contractionary; not least from the results of austerity in Europe. Somehow, though, the Financial Times feels able to reject this evidence based on … what?
Then there’s the assertion that bond yields might rise. Well, sure, and there might be a flu outbreak, or whatever. But nothing in recent experience suggests that countries with their own currencies are at risk from an attack by bond vigilantes — Japan’s 10-year bond rate, after more than a decade of warnings that the bond crisis was coming any day now, is 0.91 percent.
Furthermore, eminently respectable economists now argue persuasively that austerity in a deeply depressed economy may well be self-defeating, so that backing off such austerity should encourage, not worry, bond investors.
So the Financial Times’s argument boils down to the assertion that Britain must stay the course lest it be forsaken by the confidence fairy and attacked by misguided invisible bond vigilantes.
And whoever wrote that imagines himself to be sensible and judicious.