Salient to Investors:
Austerity policies are self-defeating because they cripple growth and reduce tax revenues. Cutting government spending causes output to fall, tax revenues to fall, and benefit spending to rise, ending almost invariably in slower growth or recession, and high budget deficits. The proper reaction to a negative external shock is to loosen fiscal policy, not tighten it.
Adopting the economics of Keynes, the US has grown more than twice as fast during the past 3 years as Britain, which adopted the economics of Hoover and Paul Ryan. Many expect Britain to lose its “AAA” credit rating.
The Office of Budget Responsibility expects another decline in Britan in Q4, growth of 1.3 per cent in 2013, the unemployment to rise to 8.2 per cent, and the deficit will be 6.1 per cent of GDP. Most OBR forecasts have proved too optimistic. Britain’s debt-to-GDP ratio is set to keep climbing until at least 2017-2018.
Republicans are still intent on pursuing a strategy similar to the failed one adopted by the Brits. The only sustainable way to bring down the U.S. deficit is to keep the economy growing, with spending cuts and tax increases introduced gradually.
The Congressional Budget Office and the OBR expect the US deficit to be 4 per cent of GDP in 2013.
Read the full article at http://www.newyorker.com/online/blogs/comment/2012/12/austerity-economics-doesnt-work.html