Economic analysis

Stimulus vs Austerity 2.0

Economic arguments are, by their nature, complex and abstract. Few more so than the question of whether massive government spending helps or hurts the economy. That’s why there’s been so much attention paid to the divergent paths the U.S. and U.K. took after the Great Recession. Under Prime Minister David Cameron the U.K. pursued hard-nosed austerity to tackle the country’s deficits, while the U.S. resisted all such moves and instead opted for more stimulus.  Here we had a massive lab experiment pitting two economic theories against each other, playing out in real time on the world stage. Back in January Maclean’s delved into the battle in our story Which Country is Right.

How’s the experiment going? The results so far are inconclusive. Both sides have claimed some measure of victory. Just as critics predicted, cuts to government spending in the U.K. have kept a lid on economic growth, with GDP stagnant for the past six months. Writing on his New York Times blog economist and arch-Keynesian Paul Krugman has hammered away at the notion that spending cuts would awaken the so-called confidence fairy and lead to an investment boom. But at the same time U.S. economic growth slowed dramatically in the first quarter, despite the continued steroid infusion from fiscal stimulus and the Federal Reserve’s quantitative easing strategy. Worse still, rating agency Standard & Poor’s fired a shot across the bow when it downgraded the outlook for Uncle Sam’s debt from stable to negative for the first time in 70 years.

The experiment continues.

In the meantime, EconStories is back with Round 2 of their video battle between economists John Maynard Keynes and F. A. Hayek. In their first video, Fear the Boom and Bust, the two rap battle over their economic theories. Now they’ve been summoned from history again to appear before a Congressional committee. Watch and learn…

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