Thursday 2 February 2012

Spending cuts are economically illiterate during a downturn

It's not me or the Green Party saying it - although it's exactly what we think. The new economics foundation, nef, has just produced a report saying that spending cuts are economically illiterate during a recession.

Spending cuts during a recession wreck weak economies, locking them into a cycle explained over 80 years ago by John Maynard Keynes (above). Cuts mean job losses and falling demand for goods and services. Falling demand means firms sell less. Firms selling less cause wages to fall and unemployment to rise even more. Demand for goods and services falls further.

This is the vicious circle we have entered into. As demand collapses and economies shrink, our debts become unpayable. Both the Tory-Lib Dem government and the Labour opposition are proposing more of the same, namely economic disaster. In the words of nef, "we need a macroeconomic reboot, to end our chronic dependence on debt and carbon."

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