Tuesday, September 07, 2010

Osborne Cuts as Obama Invests.

Here is the difference between the way the United Kingdom are approaching the economic crisis and the way Obama and the US are approaching it.

In the UK:

Millions of London Underground passengers face disruption throughout the day because of strike action.

The first in a series of 24-hour walkouts began at 1700 BST on Monday with maintenance staff walking out. Drivers, signallers and station staff stopped working four hours later.

They are unhappy about plans to cut 800 jobs in ticket offices and say security could be at risk.

In the US:

President Barack Obama has called for a new comprehensive infrastructure plan as part of efforts to jump-start the spluttering US economy.

The plan will invest about $50bn (£32.5bn) in roads, railways and airports as well as high-speed rail and the creation of an infrastructure bank.

US infrastructure has long been considered underfunded and receives poor grades from government agencies.

The move comes amid signs that the US economy is faltering.
The strike by the underground workers is surely only a sign of what is to come when Osborne attempts to cut public services by between 25% and 40%.

Obama is going the other way and investing in new jobs in the hope of jump starting the US economy.

Over the next six years, we are going to rebuild 150,000 miles of our roads - enough to circle the world six times," Mr Obama told an event in Milwaukee marking the Labor Day holiday in the US.

"We're going to lay and maintain 4,000 miles of our railways - enough to stretch coast-to-coast. We're going to restore 150 miles of runways and advance a next generation air-traffic control system to reduce travel time and delays for American travellers - something I think folks across the political spectrum could agree on."

"All of this will not only create jobs now, but will make our economy run better over the long haul," Mr Obama add.

The difference between the two could not be more stark. Obama seeks to put people to work, whilst Osborne seeks to make people unemployed. How does making people unemployed help in any situation where the main problem is that not enough money is circulating around the system? The more unemployed you have, the less money runs around your system.

Obama is following strict Keynsian economics whilst Osborne is ignoring Keynes and running the risk of what Keynes warned of: the double dip recession.
The message of John Maynard Keynes's General Theory of Employment, Interest and Money (1936) comes in three parts. First, the community's level of income and output is determined by the level of aggregate demand, or purchasing power. Second, consumer demand, especially investment demand, can fall short of the supply of goods, so that the community's available stock of labour and plant can exceed the demand for their services. Third, this situation can continue indefinitely, in the absence of an outside stimulus to replace the missing private sector demand.

Now compare what happened in 1929-1932 (the Great Depression) and what has happened since 2008 (the Great Recession). In both periods the world economy declined at the same rate for five quarters. But whereas the Great Depression economy went on declining for another seven quarters, the Great Recession economy's decline stopped after five quarters, and there has been a very modest recovery. Almost all analysts agree this was because this time, unlike in the earlier period, governments all over the world poured a huge amount of extra money into their shrinking economies. Many allowed their deficits to expand from about 2 per cent of GDP to 10 per cent; and their central banks flooded the banks with new money.

This was good old fashioned Keynesianism.
In a slump, Keynes said, governments should increase, not reduce, their deficits to make up for the fall in private spending. Any attempt by government to balance its budget in a slump would only worsen the slump.

Compare this to the key sentence on the first page of HM Treasury's Budget 2010:
"Reducing the deficit is a necessary precondition for sustained economic growth" – an almost exact reversal of Keynes's theory.
Obama is following Keynes to the letter, whilst Osborne takes reckless chances and ruins people's lives in the process.

The tube workers are only the first to strike because of plans to make swinging cuts of the size Osborne is demanding. One can only imagine that we are heading for a winter of discontent as more and more British workers realise the scale of cuts which Osborne intends to implement.

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