rePost::UK, Not OK – NYTimes.com

April 27, 2011, 9:18 AM
UK, Not OK
The bad GDP number for the UK isn’t a surprise — in fact, judging from market response, investors seem to have expected something even worse. Still, if you step back and look at what has been happening, it’s doubleplusungood: zero growth over the past 6 months, with every reason to be worried on the downside looking forward, as Cameron’s austerity bites deeper.
Jonathan Portes gets to the nub of it:
On fiscal policy, the message is that we should listen to economists, not credit rating agencies. Most mainstream economists argued that the impact of the government’s fiscal consolidation on confidence and consumer demand would be negative; so it has proved.
…
Meanwhile, the argument that fiscal overkill was necessary to appease the credit rating agencies has again been disproved by market reaction – or the lack of it – to the Standard & Poor’s outlook warning last week in America, where US Treasury yields hardly budged.
In short, there is no confidence fairy; and S&P can call invisible bond vigilantes from the vasty deep, but they won’t actually come when called.
Portes hits, in particular, on a point I’ve tried to make a number of times, here and more recently here: right now, we’re living in a world in which basic economics points to conclusions utterly at odds with what Very Serious People are supposed to believe, in which radical outsiders base their views on standard economics while orthodox types turn to heterodox, highly dubious speculations.
Econ 101, buttressed if you like by fancier New Keynesian models, says that contractionary fiscal policy is, well, contractionary. Yet much of the world of movers and shakers bought into the exotic notion that expectational effects — the confidence fairy — would make contractionary policy expansionary. And they clung to this belief even as the supposed historical evidence in favor of expansionary austerity was thoroughly debunked.
via UK, Not OK – NYTimes.com.