Thursday, October 27, 2011

"Life Without Stimulus" — A US/UK comparison (Martin Sullivan)

What would have been the consequences for the US economy if Obama and the Democrats had not managed to pass the 2009 economic "stimulus," imperfect as it was, against ferocious and almost monolithic Republican obstructionism? As I have already noted on a few occasions, it's pretty clear that the results would have been disastrous, and we would now be in much worse shape than we actually are. In short, the "stimulus" worked—not as well as it might have if it had been bigger and better designed, perhaps, but a lot better than the alternative option of not passing it at all. (For some details and elaboration, see here & here & here & here.)

In case you remain unconvinced, Brad DeLong just re-posted a very useful and illuminating graph by Martin Sullivan (at that throws some instructive light on this question. The experiment of responding to the current recession with belt-tightening austerity rather than with Keynesian counter-cyclical deficit spending has actually been tried, in Britain. (That followed an initial set of Keynesian stimulus measures by Gordon Brown's Labour government, which did pull the British economy out of free fall; but then Brown was voted out of office and replaced by David Cameron's Conservative/Liberal Democratic coalition government, which switched to a Hooverite approach.) How has that worked out?

—Jeff Weintraub

October 24, 2011
Life Without Stimulus
By Martin A. Sullivan

Republicans constantly remind us that the Obama stimulus--the American Recovery and Reinvestment Act of 2009--did not work. They voted against it. In the United Kingdom the government is led by Conservative Prime Minister David Cameron. His government did not adopt stimulus. Instead it boldly enacted an economic program that cut spending and raised taxes. The chart below shows the results and compares it to the U.S. experience. After three and a half years, U.S. GDP is just about returning to the pre-recession peak. That's awful. But it s far better than the U.K. where GDP is still five percent ($750 billion in US terms) below its pre-recession peak.