The Broader Market

by Jordan Eizenga

In the summer of 2010, I wrote repeatedly (see here and here, for example ) about the negative consequences of implementing austerity measures when there is very weak demand and high unemployment. Cutting spending, under these conditions, means removing demand from the economy when there is already a big hole in the combined demand of households, businesses and the government for goods and services produced domestically.

Until that hole in demand is filled, the economy is not able to provide a job for everyone who wants to return to work. Imposing austerity only makes the hole bigger.

(It can also be counterproductive in reducing the deficit, as higher levels of unemployment mean lower levels of tax revenue).

Yet, also in the summer of 2010, the British government decided to do just that - passing austerity measures despite high levels of unemployment and weak consumer demand. I had argued that this would only weaken the UK economy. Now, a year and half on, the results of those policies are starting to come in. The verdict: they aren’t working.

As the New York Times editorial page wrote on Friday, austerity has slowed growth in the UK and weakened consumer demand to the point that Conservative Prime Minister David Cameron’s government now has to push out its deficit reduction targets. (Remember what I said about austerity measures potentially being counter-productive?)

To be fair, the European debt crisis has not helped things much for the British economy. However, that only makes a stronger case for the British government waiting to implement austerity measures. The Times editorial writes, “[w]ith export markets threatened by the euro zone crisis, it makes less economic sense to reduce domestic demand.”

But, the Cameron government appears undeterred and plans to pass additional austerity measures, somehow believing that imposing the same policy will result in a completely different outcome. The Irish playwright George Bernard Shaw wrote that “If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience.”

He had a point.