As we’ve all heard so often from the Austrian School adherents, the proper behavior for government in times of economic downturns is to reduce spending to match the lower tax revenues resulting from the lower amounts of economic activity.
American Republicans, of course, double down on this by suggesting that we should not only reduce spending to match the lower tax revenues, but that we should also lower tax rates to further reduce tax revenues, and reduce spending even further to match that lower amount of tax revenues. But today let’s look at the Austrians. Well, not the Austrians, per se, but rather a nation that has opted to hew pretty closely to the Austrian School of economics.
Yes, we don’t have to merely theorize about what the results would be in following the Austrian model of reduced government spending during a recession. We can make a pretty direct comparison.
You see, the United Kingdom’s Prime Minister David Cameron has been moving steadily toward the Austrian austerity model since he took the job in 2010. Much of the UK’s citizenry were enthusiastic in support of spending cuts. Cameron’s Finance Minister, George Osbourne, quickly cut government spending by 19 percent. He also cut the top income tax rate from 50 percent to 45 percent. Within a few months, the nation’s economy slowed noticeably. What was the administration’s response? More spending cuts, naturally.
And here we are, a few months after the second round of cuts. Would you be surprised to learn that the UK has gone back into a recession? In fact, it has now eclipsed the Depression era as the worst recovery period in the nation’s history. If you believe the Keynesian countercyclical economic theory, then you were expecting it. If you’re an Austrian adherent, you’re probably trying to come up with evidence that they simply hadn’t followed it closely enough…sort of how many Republicans believe that every GOP loss means that their candidate was so liberal as to be indistinguishable from a Democrat.
The UK now finds itself in a downward spiral. As Osbourne cuts spending, tax revenues are dropping even faster. Even in the rosiest projections, and despite his cuts, the national debt is expected to rise from its current 63.1 percent of GDP to 76.3 percent over the next two years.
The United States economy has more in common with the United Kingdom economy than it has with any other in Europe. Comparing the two, then, where the one major difference in 2010 and 2011 is the Keynesian versus Austrian model, is quite reasonable.
That’s not to say that the single data point is conclusive evidence. There are always local effects that can have additional impact, and introduce noise into the comparative model. That certainly could be the case here. Nonetheless, it’s yet another nail in the Austrian coffin.
It’s worth examining the United States economy during the Franklin Roosevelt years for an additional comparison. The economy showed a few signs of recovery after several Keynesian programs were implemented. Under pressure from Congress, stemming from concern regarding mounting debt, Roosevelt agreed to substantial cuts in these programs. Just as in the UK in 2011, the US recovery stalled. Unlike the UK, however, Roosevelt used that result as evidence in favor of additional Keynesian programs, which he was able to get enacted.
Here’s some food for thought: Republican Presidential candidate Mitt Romney proposes exactly the same sort of economic medicine as that implemented by Cameron & Co.: tax cuts on the wealthy, coupled with cuts in government spending.
Do we really want to follow in the footsteps of David Cameron?
- The Austrian School Edge Over the Clueless Keynesians (economicpolicyjournal.com)
- Weisenthal, Again (economicpolicyjournal.com)
- An Austrian in the lion’s den (wnd.com)
- My Fed Speech, The Details (economicpolicyjournal.com)
- Balls Slams Coalition’s Economic ‘Catastrophe’ (news.sky.com)
- UPDATE | The cry of an innocent | David Cameron is disappointed by his “remarkable achievement” (jobmarketmonitor.com)
- Conservative Policies Fail In U.K. (lezgetreal.com)
- The Austerity Myth (spectator.co.uk)
- US economy grows as UK economy shrinks (leftfootforward.org)
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- Math Beat Ideology
- Election Watch: Election Day
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