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Tuesday, January 25, 2011

Facing Austerity Measures, British Economy Contracts

At a time when Americans are debating how best to reduce the deficit, we would do well to take a look at how Britain is grappling with the same problem of cutting mounting deficits. It was reported today that the British economy contracted by 0.5% in the fourth quarter of 2010, after projections showed the GDP would grow by 0.5%. The figures coming out should raise a lot of questions about how effective drastic spending cuts are for a sluggish economy. But, the British are only experiencing the onset of the austerity measures, as more of the cuts are being implemented this year.

I can’t help thinking this is one of those, ‘I told you so’ moments. Some government officials are actually attempting to find scapegoats for the shrinking economic numbers, the most popular one being the weather. Wait, what? So the economy would have been booming if it hadn’t been for that darned weather? To be fair, freezing temperatures in Britain forced some workers to stay home, but can’t these ‘brilliant’ economists account for probably the single most predictable event – the changing of seasons? Apparently not.

Americans should be looking for reactions from House Republicans, as they proposed very similar cuts to our own government last week. The thinking goes that as public expenditures are cut, the private sector will fill in the vacuum. But the private sector has shown extreme weariness in filling in that vacuum, even though GDP figures have been inching up since 2009. Today’s report should leave us even more skeptical of the belief that the private sector will save the day.

Some economists, like Paul Krugman and Joseph Stiglitz, have warned us that if we don’t invest enough money in growth-oriented government services (transportation, construction, manufacturing, utilities, research, etc) then we could very well see a double-dip recession. If the sluggish figures being churned out of the Britain are in fact not due to the weather, and are the beginnings of another recession, then they will likely be far worse off at the end of the next quarter as more cuts are to be implemented.

Other economists are skeptical about the new numbers coming out, though. Andrew Goodwin, an economic advisor at Ernst & Young, told the NY Times today “We really do find it difficult to believe that the economy is really weak as these figures suggest.” Ernst & Young is currently being sued by the state of New York for helping Lehman Brothers cover up its demise before it collapsed in 2008.

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