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FT.com / Comment / Opinion - Britain's austerity apostles duck the debate
What macroeconomic theory do the budget hawks have to subscribe to, to believe that taking £100bn out of the economy in the next four years will produce recovery? And what do the budget doves need to believe to claim the cutters are wrong?

David Cameron, Mr Osborne, and Nick Clegg appear to believe in something called "crowding out". This is the view that for every extra pound the government spends, the private sector spends one pound less. Jobs created by stimulus spending are jobs lost by the decline of private spending. Any stimulus to revive the economy is doubly damned: not only does it fail to stimulate, but, because government spending is less efficient than private, it reduces the economy's longer term recovery potential.
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A refinement of this argument is "psychological crowding out". In this version it is not a shortage of saving, but a shortage of confidence in the government's creditworthiness - due to a fear of default - which causes interest rates to rise. Either way the deficit "crowds out" private investment. Net stimulus: zero.
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Keynesians do not deny the possibility of "psychological crowding out": markets are subject to all kinds of irrational hopes and fears. But what the cutters mean by "crowding out" can normally only happen at full employment. At full employment, extra public spending obviously subtracts from private spending. But this is not the position we are in today.



"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu Oct 14th, 2010 at 02:22:41 PM EST
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