Econowatch

Economists Stephen Gordon (ULaval), Mike Moffatt (Western) and Kevin Milligan (UBC), as well as Macleans.ca’s Erica Alini and guest bloggers write about the economy and economic policy in Canada, the U.S. and the world. We like charts. On Twitter, follow Stephen: @stephenfgordon; Mike: @mikepmoffatt; Kevin: @kevinmilligan and Erica: @ealini.

Categories: Econowatch

Stimulus vs Austerity 2.0

by Jason Kirby on Thursday, April 28, 2011 2:56pm - 9 Comments

Economic arguments are, by their nature, complex and abstract. Few more so than the question of whether massive government spending helps or hurts the economy. That’s why there’s been so much attention paid to the divergent paths the U.S. and U.K. took after the Great Recession. Under Prime Minister David Cameron the U.K. pursued hard-nosed austerity to tackle the country’s deficits, while the U.S. resisted all such moves and instead opted for more stimulus. Here we had a massive lab experiment pitting two economic theories against each other, playing out in real time on the world stage. Back in January Maclean’s delved into the battle in our story Which Country is Right.

How’s the experiment going? The results so far are inconclusive. Both sides have claimed some measure of victory. Just as critics predicted, cuts to government spending in the U.K. have kept a lid on economic growth, with GDP stagnant for the past six months. Writing on his New York Times blog economist and arch-Keynesian Paul Krugman has hammered away at the notion that spending cuts would awaken the so-called confidence fairy and lead to an investment boom. But at the same time U.S. economic growth slowed dramatically in the first quarter, despite the continued steroid infusion from fiscal stimulus and the Federal Reserve’s quantitative easing strategy. Worse still, rating agency Standard & Poor’s fired a shot across the bow when it downgraded the outlook for Uncle Sam’s debt from stable to negative for the first time in 70 years.

The experiment continues.

In the meantime, EconStories is back with Round 2 of their video battle between economists John Maynard Keynes and F. A. Hayek. In their first video, Fear the Boom and Bust, the two rap battle over their economic theories. Now they’ve been summoned from history again to appear before a Congressional committee. Watch and learn…

Tags: austerity, keynes, stimulus, U.K., U.S

More by Jason Kirby

Thwim

I need to read me some Hayek, I think. What strikes from this little bit though is, like most libertarians, he's assuming that without government we have a level playing field and that resources will tend to diversify rather than pool.

'course, that may be just the treatment that's being applied here.

madeyoulook

While I must certainly read me some more Hayek, too, I sure like what I have seen so far. I am not so sure he was as libertarian as you are assuming, although most libertarians will likely appreciate a lot of his academic output.

I see Hayek (through an incomplete, non-economist's lens) as an anti-socialist, anti-fascist, extreme sceptic of central planning. Let a free market sort out price, and may the government be there to ensure the rule of law. A central authority believing its conceit of greater wisdom than the "distributed knowledge" of all market particpants will inevitably require violence-backed control of those participants. And he had certainly seen enough miserable examples of that.

madeyoulook

Thus those who control can hold out beyond a "fair" price until someone…
…else would like to undercut the overcharging b@st@rds on price…

And I would submit that we have probably NEVER seen a truly unfettered free market. What we have seen instead is powerful corporatists greasing the palms of the poltically powerful to ensure as much fetter-ing as possible to throw up artificial barriers to competition.

The preceding paragraph may well be the most persuasive argument (to me, anyways) against total laissez-faire free market economies. Mere mortal humans can't be trusted to avoid screwing it up. So the next best option is likely one that resembles it as closely as possible.

Thwim

Except that someone else would have to be able to produce it for less.. which is where economies of scale and first-mover advantage come in, that allow a person with significant leverage to undercut competition long enough to put it out of business before hiking prices. This only needs to be done a couple of times before people get the hint and stop trying.

That where the bit about assuming there'd be a level playing field without government involvement comes in. There never is, there never will be, I'd go so far as to argue that there never can be.

madeyoulook

The US economy is slowing, and can anyone tell us how the value of the US dollar is faring?

Spending non-existent money based on the faith that the impossible repayment of unsustainable debt might happen sometime in the future, thanks to people upon whom you have imposed this unfair non-choice: there's your "so-called confidence fairy."
madeyoulook

Here we had a massive lab experiment pitting two economic theories against each other, playing out in real time on the world stage.

No, we don't have a massive lab experiment. When Uncle Sam goes belly-up, everyone will suffer, including the UK.

This is not a lab experiment, where all other conditions were held the same and one variable was altered between two independent subjects of study. It is not even a natural experiment, where two independent subjects just happened to have one differing variable. It is one interconnected pool, and a very significant swimmer is unloading arsenic in his corner.
Lee_JD

It's still acceptable to do experiments where multiple variables are changed at one time; this can be argued to be the most efficient way to extract data. This can also discover complex relationships between variables that can't be found using single-factor experiments.
madeyoulook

Uh, ok, but look again over the subjects-aren't-independent-of-each-other detail…
Lee_JD

"This can also discover complex relationships between variables that can't be found using single-factor experiments. "

This point directly relates to dependent variables. Independently changing dependent variables won't tell you how the dependent variables will behave when both are changed.