If you have been reading the news coming out of England recently (and really, who doesn’t read the news coming out of our former imperial homeland?) you would notice that Great Britain is on the verge of a third dip recession. That’s right, ever since the recession, Great Britain could be facing a third recession within the past five years.
The Conservative-Liberal Democratic coalition government led by the Prime Minister David Cameron and their Chancellor of the Exchequer (coolest name ever, but the equivalent of the Treasury Secretary) George Osbourne has over the past few years been trying to take control of their short and long run budget deficits. They have done this by lowering government spending in these tough times for many British citizens and increasing the VAT, or national sales tax, in Britain.
The ironic part of the efforts by this government is very simple. While they are tightening their fiscal policy, unemployment is going up and GDP is shrinking. Not ironic, you might ask? True, but if the economy continues to shrink, it means less people will be employed and wages will decreases, thereby leading to less consumer spending, leading to firms producing less and laying off workers to make sure their businesses don’t go bankrupt.
Such a paradox of thrift is a key tenant of Keynesian economics and while some people think it is out of the mainstream of economic thought, it makes perfect sense. Cutting government spending and lowering private consumer spending will lead to less GDP spending and a weaker economy. It’s basic macroeconomics, people, and logically just makes sense.
Yet, many of you are probably asking, why should we care what is going on in Great Britain? Well first off, we live in a globalized world and what happens around the world can have an effect upon our nation. With an unstable stock market and many countries having volatile bonds, people are more willing to invest in say U.S. bonds, thereby leading to lower yield rates, making it very cheap for us to borrow money.
But more importantly, the reason we pay attention to these facts is that while economic growth is shaky and unemployment rate hovering around 8%, the Republican Party continues to push the same sort of plan that is being implemented by the Conservative-led government of Britain. They continue to push the agenda that we must reduce our deficit in the short run because in a logic defying way, lowering government spending and transfers to people will somehow increase GDP growth and lower the unemployment rate.
But listen, don’t trust me that this will be bad for the economy, there are others much smarter than I, that study things like this, that agree with what I am talking about. Paul Krugman, who has won the Nobel Prize in Economics, has described the efforts by the Conservative led government to cause “Britain’s economy [to be] dead in the water.” The IMF and World Bank have also advised the British government to slow up on the austerity to allow for growth in the economy. I mean these are only people whose entire life has been devoted to studying economics.
I say all of this because while the long term deficit is important, right now what is important is to focus on getting people back to work.
Questions? Email Dylan at email@example.com.