Sunday, September 24th, 2017

Chapin: Government penny-pinching hinders economic recovery

British pounds
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British pounds

Posted on May 02, 2012 in Perspectives
By USM Free Press

By Justin Chapin

At this very moment, there’s a spectacular experiment going on in our backyard. It’s an experiment that pitches government stimulus against government austerity.

Great Britain, our sister country across the pond, went through the same rigmarole that we did here in the United States less than five years ago. Our circumstances were and are very similar, but the outcomes have been drastically different.

In the United States, as we all know, government spending has not been cut since the economic debacle unfolded. Indeed, the right has been so deafening about it that it would surprise me if there is a soul in this country who doesn’t know.

However, as I’ve mentioned previously in my columns, one of the most common reasons for prolonged recessions is a lack of demand for goods and services. If everyone is uptight about spending their money, which they tend to be in a recession, who else but the government can effectively boost aggregate incomes to increase demand and get the economy on track again?

In fact, cutting government spending is completely counter intuitive in our current economic woes. In a recession money ceases to sufficiently circulate.

How do you get money circulating again? Spending!

I know, I know. We have huge deficits right now and spending is out of control. It is however, largely due to recessionary factors, such as a fall in tax revenues that the deficit is so large. And no, cutting taxes for the rich does not increase revenue — just ask your nine year old, they’ll explain.

So here in the U.S. we’ve kept spending levels relatively constant. Have we slid back into a recession? No. Have we had increases in unemployment? No. Has the dollar collapsed? No. Have interest rates on government debt skyrocketed? No. And our credit rating was only downgraded because Boehner and his back up band‘s obstructionism … what a fiasco that was.

In Britain, however, they have drastically cut spending. And you may not have guessed, but yeah — they’re back in a recession. Prime Minister David Cameron has been trying to blame the recession on the larger crisis plaguing Europe, whose countries are Britain’s main trading partners.

But Europe is also a large trading partner of the US, and the European countries in recession are merely implementing similar belt-tightening strategies.

Britain, a recent guest to the double-dippers list, is trying to cut spending and decrease government deficits to increase confidence in their financial markets. How’s that working out for them? Not so well. For two consecutive quarters there economy has been shrinking, and the outlook isn’t particularly promising.

The country, whom Americans have regarded as a generally more liberal one than our own, has thrown the baby out with the bathwater and embraced a free-market approach. Its government is shrinking its role and effectively passing the controls to the private sector. Again, how’s that working out for them? Not so well.

 By no means is it perfect here in the U.S., but I wouldn’t suggest moving to Britain.

Justin Chapin is a member of the Students of Economic Interest, an economics club at USM.