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How not to run an economy

April 27, 2012

Another nasty graph, at least if you’re British. Ethan Pollack of the Economic Policy Institute shows that Britain’s economy quickly stalled after the election of the Condem coalition in the summer of 2010. A year and a half later the economy had shrunk and more people were out of work. The United States didn’t cut government spending so heavily, allowing its economy to keep growing.

The UK tax hikes and spending cuts were to be worth an extra 2.2% of GDP, or £40 billion, by 2014-15. On top of the cuts already promised by the previous chancellor Alistair Darling, the total austerity package amounted to 6.3% of GDP. George Osborne made another particularly silly mistake, promising that he’d keep many of Labour’s tax rises and even implement more in the form of a VAT hike, which further strangled growth.

It doesn’t take a genius to work out that if the British economy is worth about £1.5 trillion a year and you rip roughly £94.5 billion out of it over three years something’s likely to go banana-shaped. By shrinking the economy Osborne shot himself in his patent leather, calf-skin brogue. When businesses earn less or go bust and people don’t work, they pay less tax and you need to hand benefits to the jobless. So the government has to borrow more and tackling the deficit becomes harder.

Osborne and co. try to blame the Europeans, but everybody knew the world economy was faltering, and anyway British exports haven’t collapsed.

The financial press made a big noise on Wednesday about news of the so-called technical recession, but Britain’s economy was already depressed and it’ll keep floundering for a long time to come.

2 Comments leave one →
  1. April 27, 2012 12:12 pm

    I wonder what growth looks like if you strip out the income gains at the top.

    • April 27, 2012 12:20 pm

      Yeah, it’d be interesting to see. Evidence obviously points to a shift in wealth toward the wealthy.

      I’m always a bit wary of making such a big deal out of GDP, for all the well-worn reasons — because it’s aggregationist, it adds negative externalities, it ignores wellbeing, but it has the merit of at least allowing you to tackle its proponents on their own terms.

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