Friday, February 8, 2013

Unintended Consequences

How did this happen?  You should have a model in mind to help you understand why this happened.


  1. This article covers a topic we've recently discussed in class and confirms that contractionary fiscal policy (cuts to government spending) will not help lift us out of recession. Individuals and firms will be hesitant to spend due to the bad economic forecast and therefore, it is the government's role to spend and create sources of employment.

    I was particularly interested in the point that government spending cuts led to an overall increase in government spending. BY 2014, the UK will have "slashed more than ten percent from the overall spending." Despite these large cuts, government spending has continued to grow and no significant changes have been made to the budget. The causes of this are lower tax revenues and increased spending on unemployment benefits. We see this contractionary fiscal policy digging the UK deeper into recession rather helping to bring them out. The US needs to be aware of what has happened in the UK, as we decide our fiscal policy.

  2. The current state of the U.K. economy should influence how the United States government commences its damage control from the recent recession. The Daily Telegraph's Jeremy Warner wrote in his column that: "This is a truly desperate state of affairs that demands swift and decisive action." To me, this brings up the question what time of swift actions should we make? Should we cut spending to try to balance the budget? Should we spend more to create more jobs? To answer these questions, we can look at the U.K. and its current economic standing (arguably significantly worse than the USA). In response to their recession, the British government has cut government programs and raised taxes in an attempt to make up for the money lost. If the U.K. government had spent more to create jobs and fuel the economy before cutting government spending, then the result could have been different. However, this is a different time in the world because economies do not seem to be growing. Rather than spending, a lot of people are just saving their money, providing little economic growth unless other people are willing to borrow from the savings and invest/spend. This hasn't happened, and as a result the British government thought it was best to cut spending as soon as possible. The result, Chancellor George Osborne will have to borrow 65 billion more pounds than expected to cover the lack of economic growth.

  3. I agree with the analysis provided by both of the previous comments. The U.K. government’s decision to cut funding to several programs in an attempt to decrease government spending is one of the causes of the recession. Since government spending is directly linked to GDP, a decrease in government spending has a negative effect on GDP. This effect ends up being even greater than the initial cut in government spending due to the multiplier effect which accounts for the additional decrease in GDP partially due to the country’s marginal propensity to consume. Unfortunately for the U.K., this cut to government spending on top of their already struggling economy has left them in a situation without many options. Looking at fiscal policy alone, their best hope appears to be to increase spending to create jobs and hopefully spark increases in both consumption and investment within the private sector.

  4. I think the previous three comments bring up good points about the article. I too agree with Cassidy, however I feel like he does a lot of stating the obvious. I would be interested in hearing more about his opinion on how the U.K. can fix their problems? Would it just be to increase Government spending? On what specific parts of the economy and why?

    He does explain the U.K.'s situation very clearly and presents the facts in an easy to understand manner. Although, the way the article is written he makes it sound like the economics of austerity are completely wrong and stupid. Well there must be some sort of benefit to the U.K.'s current fiscal plan. I would like to see George Osborne make a comment on this article, I feel like he could bring up a few good points.

  5. As Robert pointed out, this article covers a few concepts we have recently discussed in class. First is the paradox of thrift: as more people fear rough times, more people hesitate to spend and pump money into the economy. Second we see a real life example of the multiplier effect making itself known. As the British Gov. reduced spending, the effects were far worse than the nominal amount of budget cuts, and these cuts couldn't be balanced out because of tax revenue due to the paradox mentioned above. On a side note I noticed there were no cuts applied to education budgets, which is a positive for Britain's human capital in the future.

    I would like to hear Professor Casey's explanation on how a tax hike has not slowed the increase in the budget deficit, even though taxes are known as automatic stabilizers. Perhaps because they were implemented too late, when the economy was already in rough shape?