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10/31/2010

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Stuart

You refer to "England" and the "English government" when in fact you mean "Britain" and the "British government".

England does not have its own Parliament or Government. It is one of four countries - along with Scotland, Wales and Northern Ireland - that make up the United Kingdom of Great Britain and Northern Ireland. The policy of fiscal tightening to which you refer is being carried out by the British government.

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Rick

Here's how it looks from the UK.

The previous Labour administration (since 1997) ran a large deficit during a time of growth. When the financial crisis hit and our financial services industry had to be supported, borrowing went through the roof.

So while a Keynesian stimulus is the orthodox and preferred route toward growth, it's only viable if you've run a Keynesian macroeconomic policy over the length of the business cycle.

Everyone's a Keynesian when times are bad. But unless you've paid back some national debt during growth, you're simply transferring the price of today's recovery to your children.

So nobody in government wants to sack half a million public sector workers, or raise taxes (VAT in particular), or slash benefits to the poor. But profligacy rather than prudence during years of growth has left little room for manoeuvre.

One final point. The spending cuts are spread over four years. This means that the average 20% departmental cut is actually only a 5% cut each year. At the end of this period, 2014/15, UK public spending will be roughly what it was in 2007.

So with all sympathy to those affected by the cuts, it's hardly Armageddon. Civilisation will endure. It's not exactly a State of Nature either - the UK will remain European in its spending and attitude to State intervention.

Jim

Might I suggest that the good professors and the readers of this blog re-read the mythological life of Sysyphus and his ultimate fate for his misdeeds. While it is always good to argue the details of macroeconomics, our professors might be more instructive if they were to re-define human nature and the repititious nature thereof. Stated simply, will we ever learn or will we have to wait for some Malthusian disaster to make the management of societies more facile.

Gordon Longhouse

The remarks written by Rick above are interesting on a number of levels.

First of all it should be obvious that an economy has to be managed over the whole cycle and not just in recession yet, perhaps because of the extreme situation the US finds itself economic foresight does not extend beyond the end of the year.

Next the lack of vituperation should be noted. The Labour government was not criticized because for being "left wing" or "socialist" but for its profligacy.

Posner rightly says that the British system of government is more centralised than that of the US which is true. However because the governing Conservatives do not have a majority in Parliament they can be tossed out at anytime which makes their program a remarkable success at consensus building.

I look forward to seeing what, if anything, the UK does about the financial services monster it created.

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So nobody in government wants to sack half a million public sector workers, or raise taxes (VAT in particular), or slash benefits to the poor. But profligacy rather than prudence during years of growth has left little room for manoeuvre.

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So while a Keynesian stimulus is the orthodox and preferred route toward growth, it's only viable if you've run a Keynesian macroeconomic policy over the length of the business cycle.

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Jim

Has anyone looked at the relationship between population number, government services required at a minimum for that population,revenue required for those services and tax requirements which allow for that revenue. In other words, do fewer people reduce government cost per person and/or inefficiency.

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Jim, I agree with you..

Jack

"Defense expenditures are to be reduced by 8 percent, education spending by 3.6 percent, and the teaching budgets of public universities by 40 percent."

.......... My god! Cut the military! If the US trimmed our bloated military budget, which costs us twice as much per capita as Britain spends, by 8% it would be nearly $50 billion/year; a sum that is still small compared to the deficit, but it will be difficult -- if not politically impossible to carve a similar amount from other areas.

http://www.globalissues.org/article/75/world-military-spending#InContextUSMilitarySpendingVersusRestoftheWorld

Ha! are we so incompetent at warmongering that we have to spend as much as does the rest of the world combined???

F-35 program will tally over a TRILLION this decade to supply 2,500 planes. A wise use of scarce public dollars?

As for the different approach between us and Britain, we have some $2 trillion in needed infrastructure repairs and upgrades. Also it could be argued that we are still a developing nation in which public investment now will pay far more dividends in the future than will a kneejerk attempt to "cut" our way out than would a few "saved?" dollars.

Consider: As Feds and states chop jobs, in this Mess, many will go straight to the unemployment, early SS, or welfare rolls, which will leave them with even less to spend in a nation some 75% dependent on consumer spending. Better to "go down" if need be, swinging and fixing up our tattered nation than idling at home doing nothing........ or worse.

Lastly? MAYBE a "Keynesian" should save during the good times in order to have some ammo when the predictable recessions come. But, maybe not.

IF deficit spending spurs an economy, then during the apex of the Clinton era boom it could be argued that the much vaunted balanced budget and surplus was too contractionary. In any case in our nation it soon draws a political tax cutter!

So was the Bush admin wrong to run deficits during their early recession and the "jobless recovery?" Perhaps not, instead their mistake was the costly tax break for the wealthy which we know is a weak means of spurring demand; as many dollars collected and spent on infrastructure and beginning transitions such as conserving fossil fuel and developing domestic alternative would have provided FAR more "bang for the buck".

Those poor souls at the top of the heap having to ante up a bit more in taxes? My guess is they'll get more in a strong economy than they would from a tax break in a poor economy.

Jack

"But there is an equally plausible “story” about how the English program will reduce growth by reducing employment and incomes, and that what both England and America need is further deficit spending to increase incomes and employment."

.......... Britain may want to experiment with a contractionary cutting approach and with just a $2 trillion economy the results may matter little to the rest of the world, but the US $14 trillion economy is the super locomotive that hauls along most of the economies of the world. If we cut and put our people out of work the effect will echo and likely amplify around the world and come back to our doorstep.

It's a MESS but at this point keeping our people working and rebuilding momentum is worth a lot more than trying to cut a few bucks off the deficit. Now why IS it that our Chicago boys do not even mention allowing the poorly thought out Bush tax cuts for the wealthy to expire? Surely they've seen this or a similar graph:

http://www.heritage.org/budgetchartbook/growth-federal-spending-revenue

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I think the Obama government should be much more tactical in their foreign and domestic policies. Or else they will be loosing their popularity like the interim election!!

Jim

Jack,

I agree with you but would like to add that waste in both the private and public sector is a huge monetary drain.

On another subject, while buying a pair of sport shoes the other day, I asked the purveyor what was the "average cost of a pair of sport shoes in the US across all levels of quality. His answer was $60.00. So I postualed bring all shoe manufacturing jobs back to the US and asked him what the average price would be in that case. His answer was $250.00. No one here would be buying shoes and either the industry would disappear or the wages of shoemakers would have to be reduced by a factor of 4. My point being that all things being equal, the US standard of living is coming down and to make the economy grow, new innovation jobs will have to be found and right now our education system and government policies are not geared for that. We are being out innovated by a whole slew of countries even with their low labor costs. When I look at Hiroshima and see what the Japanese have done in rebuilding it into a magnificent modern city in 60 years after a nuclear bomb was dropped there and then look at Detroit in the same years, I really wonder if we have what it takes. By the way, what happened to the 1000 years of radiation fallout that was supposed to make Hiroshima uninhabitable? Just curious.

Jack

Jim: While agreeing with the concept that shoe sewing jobs may best be left to low wage countries I think your shoe purveyor greatly exaggerates. The shoe biz is already highly mechanized and were we to HAVE to make our own tennies I'm sure it would be far more mechanized.

I've (semi) bought the "leading innovator" pitch.. ala Apple designs the Iphone with 25,000 employees while ten times as many assemble it in China. But! as fast as tech moves these days........ how long before the whole thing is "over there?" Consider the short timeline of Japanese making kinda junky little cars, then competitive, then leading for a considerable time.

Another problem? How many folks do you know who are "innovators"??" Truth is no matter how high the educational level we'll require all those blue collar, retail clerks etc....... and currently there is no way for the profits of the innovators to increase the long stagnant wages of working folk. It seems simple equation: Stagnant wages for the middle and lower class millions equates to a stagnant (or worse) economy.

(A universal H/C system paid in part through taxes would be one means of lessening the (too) steep income curve AND those in mid-life assured of decent H/C would be far more inclined to build or join a start-up biz or innovate)

I don't know what Hiroshima did to clean up, I suppose the daunting task of removing earth?

Detroit: I've never been there but have spent time in Chicago (though Ha! not at the Milton Friedman Memorial Econ school) but looking at a map it would seem Detroit will have another day. A port city with all those freeways converging? Though transportation, iron ore and infrastructure for a past era of mfg aren't as important these days, I'd bet something will revive Detroit. With homes and factories being sold by the sixpack someone will have to take advantage!

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