Economic Austerity

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Paul Krugman released a post on his blog about how austerity does not work because spending helps keep jobs, rather, than using a laissez-faire approach that leads to massive unemployment during recessions. Krugman appeals to a National Institute of Economic and Social Research think tank who claims that:

Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

I've been doing alot of reading on the web and found that there's two schools of thought that dominate politics. One is easy to find in the Republican Response to the State of the Union and the other is in the link in this post. It's important to note that Krugman uses U.S Republican philosophy to explain why many countries in Europe are slowly getting out of the recession. Contrary to popular belief, tax cuts on the richest does not promote investment and that's a fallacy that's at the heart of Republican laissez-faire philosophy. What happens with a government-free approach, according to Krugman, is that businesses fail, especially, during recessions when there's high unemployment, therefore, economic stimulus helps to keep jobs. This leads into the other philosophy that promotes government intervention that argues that some "businesses are too big to fail." The example in the United States was General Motors (GM) who, eventually, declared bankruptcy, but President Obama during his State of the Union address said that GM is the number one car maker in the world again. The current economic crisis in the United States is similar to Europe's recession, but the way that politicians are handling their economies differs; although, U.S success in bringing GM back to number one status is statement that stimulus works.

In regard to Britain, politicians are using the same approach that the republican presidential nominees would take, but the results are proving futile because recently the nytimes released an article stating that austerity is not enough in Europe. Krugman in his article says that it's nonsense for David Cameron to say that cutting and balancing budgets is better than stimulating the economy with money because "four years after the Great Recession began, Britain is nowhere close to regaining its lost ground." Moreover, Krugman points out that Italy is doing worse than it did in the 1930's and that Spain is headed into a double-dip recession, so economic austerity may actually slow economic growth because it cuts spending; but, the caveat is that slashing spending in capital does not produce capital in the form of GDP growth.

Krugman ends his post by stating that early in the 20th century students read Economics by Paul Samuelson who writes that "austerity in the face of depression was a very bad idea," but policy makers have decided to opt for political gain and forget their learning.