Let's Cut Spending and Follow Britain

Pentagon Staff Officers used to turn to each other after receiving particularly muddleheaded direction from on high and say:"that's dumb - let's do it."

In case we need current evidence that government austerity when a country is in a liquidity trap contracts the economy, just look to Britain.

Since invoking austerity, British GDP has shown no growth for the past nine months. The Tories have a number of excuses: it was the royal wedding of Prince William and Kate Middleton; no - it was the Japanese earthquake and tsunami; no - it was record high temperatures in April; no - it was advance ticket sales for the 2012 Olympics in London.

Really?

Might it be the result of reducing government spending, thus reducing demand when the economy is already weak?

Goldman Sachs seems to think that will happen here, according to a report quoted by economist Jared Bernstein. Goldman Sachs analysis:

“A review of the spending and tax data at the federal, state, and local level suggests that a significant part of the weakness in economic activity in 2011 so far is due to fiscal retrenchment. In the first quarter, the Commerce Department estimates that spending cuts at the federal, state, and local level subtracted 1.2 percentage points from the annualized pace of real GDP growth; moreover, the expiration of the “Making Work Pay” federal tax cut and hikes in state taxes probably offset most, if not all, of the boost to disposable income from the temporary payroll tax cut.

In the second quarter, the fiscal policy impact was probably smaller, but still negative. Indeed, monthly data on defense spending, state and local employment, and state and local construction all show a clear downward trend for 2011 so far.”

So don't be surprised if our next employment report looks bad.

In the meantime, I like this photo: