The austerity experiment

In the world of economics, it’s often hard to be all that confident in how different economic theories actually work out.  There’s a lot of data vague enough to allow economists to interpret it in many different ways.  Of course, in social science the gold standard for testing a theory is to perform an experiment.  Sometimes, the real world actually gives us experiments– a “natural experiment” that allows us to come to conclusions.  When it comes to what to do in the face of a sluggish economy and budget deficits, the British have, kindly for us– not so kindly for their citizens– provided a natural experiment on the budgetary policies favored by Republicans over here (though, fortunately not really enacted).  Here’s John Cassidy:

With all the theatrics going on in Washington, you might well have missed the most important political and economic news of the week: an official confirmation from the United Kingdom that austerity policies don’t work.

In making his annual Autumn Statement to the House of Commons on Wednesday, George Osborne, the Chancellor of the Exchequer, was forced to admit that his government has failed to meet a series of targets it set for itself back in June of 2010, when it slashed the budgets of various government departments by up to thirty per cent. Back then, Osborne said that his austerity policies would cut his country’s budget deficit to zero within four years, enable Britain to begin relieving itself of its public debt, and generate healthy economic growth. None of these things have happened. Britain’s deficit remains stubbornly high, its people have been suffering through a double-dip recession, and many observers now expect the country to lose its “AAA” credit rating.

One of the frustrations of economics is that it is hard to carry out scientific experiments and prove things beyond reasonable doubt. But not in this case. Thanks to Osborne’s stubborn refusal to change course—“Turning back would be a disaster,” he told Parliament—what has been happening in Britain amounts to a “natural experiment” to test the efficacy of austerity economics. For the sixty-odd million inhabitants of the U.K., living through it hasn’t been a pleasant experience—no university institutional-review board would have allowed this kind of brutal human experimentation. But from a historical and scientific perspective, it is an invaluable case study…

With Republicans in Congress still intent on pursuing a strategy similar to the failed one adopted by the Brits, this is a story that needs trumpeting. Austerity policies are self-defeating: they cripple growth and reduce tax revenues. The only way to bring down the U.S. government’s deficit in a sustainable manner, and put the nation’s finances on a firmer footing, is to keep the economy growing. Spending cuts and tax increases can also play a role, but they need to be introduced gradually.

Indeed.  What are the chances that America’s Republicans learn this lesson.  I’m not holding my breath.  That said, this is a really important piece of evidence that Democrats should be emphasizing.

About Steve Greene
Professor of Political Science at NC State http://faculty.chass.ncsu.edu/shgreene

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