What happens without the stimulus ...

[rubato]

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http://delong.typepad.com/sdj/2012/01/t ... ssion.html



The British Economy Is Now Doing Worse than it Did in the Great Depression

Untitled 2
Source: NIESR http://www.niesr.ac.uk/, via the Guardian.

Yep. This many months after the start of the Great Depression, the British economy was rapidly converging back to its pre-depression level of production under Chancellor of the Exchequer Neville Chamberlain's policy of using stimulative policies to restore the price level to its pre-Great Depression trajectory.

By contrast, the Cameron-Osborne policies of expansion-through-austerity have produced a flatline for real GDP, and the odds are high that British real GDP is headed down again.

In less than a year, if current forecasts come true, the Cameron-Osborne Depression will not be the worst depression in Britain since the Great Depression, but the worst depression in Britain… probably ever.

That is quite an accomplishment.

As Phillip Inman of the Guardian puts it:

the UK's plan for recovery from the financial crisis was based on a full-throttle recovery in 2012... consumer confidence, business investment and general spending would converge to send the economy on a trajectory of above-average growth... the lack of investment will perplex ministers. They have done what the right-wing economists told them to do and moved out of the way – the theory being that public sector spending and investment was ‘crowding out’ the private sector...

It did not work: “Spain is showing the way with its austerity-driven recession. Where the weak tread, we [in Britain] look keen to follow...”

That expansionary austerity is not working in Britain should give all of its advocates great pause, and lead to a great rethinking. Britain is a highly open economy with a flexible exchange rate. Britain has some room for further monetary ease. There is no risk or default premium baked into British interest rates to indicate that fear of future political-economic chaos down the road is discouraging investment. There was an argument--I’m not saying that it was true, but there was an argument--that the Blair-Brown governments had overshot Britain’s long-term sustainable government-spending share of GDP (in contrast to those countries that had reduced their debt-to-GDP levels in the 2000s, where there was no such argument, and in contrast to the United States where the problem was not spending overshoot but taxation undershoot under the Bush administration) and that spending cutbacks were advisable in the long run.

Yet with a ten-year nominal interest rate in Britain of 2.098% per year, if low long-term Treasury interest rates were the key to recovery, Britain would be in a boom. If there was ever a place where expansionary austerity would work well--where private investment and exports would stand up as government purchases stood down--if its advocates’ view of the world was reality rather than fantasy, it would be Britain today.

But it is not working.

And the lesson is general.

If it is not working in Britain, how well can it possibly work elsewhere in countries that are less open, that don’t have the exchange-rate channel to boost exports, that don’t have the degree of long-term confidence that investors and businesses have in Britain?

Liberal Party leader Nick Clegg ought to end this farce today. He ought to tell Queen Elizabeth II Windsor that his party has no confidence in her government, and that his humble suggestion is that she ask Labour Party leader Ed Milliband to form a government.

It is true that if he does this his political career and his party’s electoral future are dog vomit. But his political career and his party’s political future is dog vomit anyway. At least defection from the ill-advised Conservative-Liberal coalition now would benefit his country.

Policy makers elsewhere in the world take note: starving yourself is no road to health, and pushing unemployment higher now is no road to market confidence.

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yrs,
rubato

[rubato]

The All Austerity method has failed conclusively.

"The worst depression in Great Britain's history" marches on:


"... The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia. "

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http://www.nytimes.com/2012/01/30/opini ... .html?_r=1

The Austerity Debacle
By PAUL KRUGMAN
Published: January 29, 2012

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.
Fred R. Conrad/The New York Times

Paul Krugman
Blog: The Conscience of a Liberal

Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

O.K., about those caveats: On one side, British unemployment was much higher in the 1930s than it is now, because the British economy was depressed — mainly thanks to an ill-advised return to the gold standard — even before the Depression struck. On the other side, Britain had a notably mild Depression compared with the United States.

Even so, surpassing the track record of the 1930s shouldn’t be a tough challenge. Haven’t we learned a lot about economic management over the last 80 years? Yes, we have — but in Britain and elsewhere, the policy elite decided to throw that hard-won knowledge out the window, and rely on ideologically convenient wishful thinking instead.

Britain, in particular, was supposed to be a showcase for “expansionary austerity,” the notion that instead of increasing government spending to fight recessions, you should slash spending instead — and that this would lead to faster economic growth. “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.”

How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.

Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.

And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.
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[rubato]

Amazing how none of our UK correspondents want to discuss the sorry-ass truth ... which is that they have followed the US Republican programme with predictably disastrous results.




yrs,
rubato

[Sean]

LMAO - Feeling lonely Pops?

[Lord Jim]

rube's the only one I know who can carry on a circle jerk all by himself....

[rubato]

And output gap of more than 3.5% after 4 years, hundreds of billions of dollars, is less interesting than spending 1k pounds on a movie?

We are at a juncture where it is of urgent interest to the citizens of most EU countries (as well as the US) to decide whether a stimulus will produce a better outcome or merely cutting costs will. So far the evidence is that austerity alone is disastrous, the US used a stimulus and GDP has returned to the pre-collapse levels.* Countries with no stimulus have had little or almost no recovery or are going into a double-dip recession (GB, Spain, Ireland, Greece, Italy) .

This is a matter of significant importance to us, because you are markets for our goods, and I would have thought to some of you as well.

Beyond you?

yrs,
rubato

*China used a very very large stimulus and growth continued.

[dales]

If the EU goes down the toilet, the feeble growth of the US economy will sharply reverse itself.

Leading to a disaster that will make the 2008 slide look like "good times".

[Sean]

Beyond you?

Didn't you know Daddio? You are the only person here who can understand your posts.

[rubato]

The US used a stimulus and GDP recovered to the pre-recession levels (although still lagging potential GDP).

The UK no stimulus and no GDP recovery.



yrs,
rubato

[rubato]

UK no stimulus. Unemployment went up, stayed flat and then shot up sharply again.




Sweden, stimulus. Unemployment went up and then came down.




US, stimulus. Unemployment went up and then came down. (our stimulus was smaller in proportion to Sweden so the effect is less).

[rubato]

Italy, on the 'all austerity programme'. Like England only worse. Unemployment shooting up again:

[rubato]

Spain, Greece, Ireland, all Austerity, and all bad:




yrs,
rubato

[rubato]

This is the largest tidal force driving history for the coming years. I am astonished that you are all wholly ignorant of it, and don't care.


We can intervene to make the future better but we have to be informed and interested. Focusing everything on cutting spending now is like rationing water when your house is on fire.


yrs,
rubato

[The Hen]

Aus, stimulus two years before any other country thought of it.

Unemployment is down, jobs are up, economy booming..

I see that the Oz dollar is still a better investment than the yank one at present.

Thank you Mr Rudd.

[rubato]

People in the currency markets make money on change. They don't care what direction the change is.

A currency going up is a not always a good thing and a currency going down is not necessarily bad. Witness the pressure on the PRC to raise the value of the Yuan, and the degree to which they resist!



yrs,
rubato

[Gob]

The Bank of England has agreed to extend its quantitative easing (QE) programme by £50bn to give a further boost to the UK economy.

When completed, it will bring the total amount of QE stimulus to £325bn.

The Bank started its QE programme, through which it buys mainly government-issued bonds, freeing up cash for lending, in 2009.

The Bank's Monetary Policy Committee (MPC) also said it would keep interest rates at their record low of 0.5%.

UK interest rates have been held at that level since March 2009.

The BBC's economics editor, Stephanie Flanders, said the £275bn of QE undertaken so far was an amount equivalent to nearly 20% of the country's gross domestic product.

Inititally, experts were predicting an extra of £75bn of QE, but this figure was reduced to £50bn when economic surveys released last week indicated that the manufacturing and service sectors had performed better than expected in January.

However, concerns remain over weak consumer spending and the eurozone crisis.