The British Conservatives Have No Theory
Shame on David Cameron. Shame on Nick Clegg. Shame on George Osborne.
Their shame would not be quite so great if they had a theory about what elements of spending will grow to offset their 9% of GDP planned fiscal contraction. Is the pound supposed to collapse and are exports than to surge? Is the prospect of rising unemployment in the U.K. supposed to greatly enhance business confidence and trigger a surge of private-sector investment? Is the 30-year gilt yield supposed to fall from 4% to 1% and that reduction in the cost of capital cause a surge of capital formation throughout Britain?
Cameron, Clegg, and Osborne don't tell us.
They don't tell us because they are clueless dorks.
They don't even have a theory about how the economy will avoid a double dip.
They hope that--somehow, some way--Mervyn King will save them from themselves.
But if they actually carry through with their policies, I don't see how he can.
Ryan Avent:
Austerity: Cut to the bone: A TIDE of austerity has swept over much of Europe since markets rebelled at high debt levels in Greece and elsewhere in the spring. Still, the world is watching in amazement as Britain's new government prepares to enact budget cuts that have not inaptly been called revolutionary. Yesterday, George Osborne, the government's chancellor of the exchequer, stood before Parliament and detailed the scope of the plan, which will slash government spending by £81 billion over four years in an aim to reduce Britain's deficit from its present 11% of GDP to 2%.
[T]he scale of the cuts is... breathtaking. The police budget will fall by 20%. Spending on social housing will fall by three-fifths.... Nor will the damage be confined to the public sector. The government is a significant buyer of goods and services from private firms, after all. PwC, a consultancy, said the other day that it thinks that another half a million private jobs could go over the coming five years as a direct consequence of public-sector austerity....
If the private sector does trim half a million jobs due to austerity, it will come on top of the half million public sector positions that will be done away with as part of the cuts. Buttonwood does a good job explaining why such austerity is unthinkable in much of the world, and especially America. And he notes:
The second lesson concerns the division between spending cuts and tax rises. History suggests that it is better to concentrate on the former if you want the plan to succeed. But there is no getting away from the fact that this will affect the poor most; since they are the chief recipients of benefit payments.... The package creates the understandable impression that the poor are paying the price for the folly of the bankers....
From an economic standpoint, the most pressing question is how this will affect the British economy. Mr Osborne is counting on the Bank of England to pick up the slack created by budget cutting, but the Bank has its work cut out for it. It will be very difficult to encourage private borrowing amid such substantial cutbacks.... For now, Mr Osborne and the ruling government are the heroes of deficit hawks and supporters of a small state the world over. But Britain's conservatives have gambled heavily. If deep budget cuts amid economic weakness send the economy plunging back into recession, the government may be unable to make the cuts stick, and austerity could be discredited around the world. If disaster is avoided, it will strengthen the hand of fiscal conservatives everywhere. It would be an exciting experiment to watch if so many livelihoods weren't caught in the balance.
They aren't even holding a King, Queen, 10, and 9, and drawing to an inside straight: they are holding a Deuce, a 5, an 8, and a Jack and claiming that they are drawing to an inside straight.
