Friday, June 25, 2010

Let the Double Dip Begin and The Costs of Austerity

From the WSJ:

Spooked by concern about deficits, the Senate shelved a spending bill that included an extension of unemployment benefits, suddenly cutting off a federal cash spigot opened by President Barack Obama when he took office 18 months ago.

The collapse of the wide-ranging legislation means that a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week. It will also leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid costs.

This is perhaps one of the dumbest, most short-sighted things I have ever seen Congress do.

So -- what will this lead to? From the Financial Times:

Much like Spain, Ireland and the UK, the Baltic states were badly hit by the bursting of a credit bubble in 2008 that sent their economies into freefall and their budget deficits soaring.

While others cushioned the impact with stimulus spending, the Baltic trio plunged straight into austerity. As a result, they suffered the deepest recessions in the European Union last year, with Latvia’s economy shrinking by 18 per cent.

The region has since stabilised but, for many ordinary people it still feels like a depression. Wages have plummeted while unemployment has rocketed, with more than a fifth of the Latvian labour force out of work.

Again, let's look at the GDP equation, shall we?

C+I+(x-i)+G= GDP

C=Consumer spending


x-i= net exports

G=government spending

In other words, government spending is part of he equation, and always has been part of the equation.