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Britain, "Austerity," and the Lessons of Economic History

Written By: Kyle Latham  |  Posted: Wednesday, September 26th, 2012

            Economists and pundits alike are going wild over the United Kingdom's recent "double dip" recession. The 2008-09 recession prompted the election of a conservative coalition led by Prime Minister David Cameron. Cameron decided the best path for economic recovery was "austerity," a program of reduced government spending and smaller government debt. The new coalition-with the aid of Chancellor of the Exchequer George Osborne-sought to drastically slash the government budget. With the addition of increased taxes, the plan was dubbed "Tax and Axe."

            Two years later, the United Kingdom is back in recession. Keynesian economists are enjoying a savory "I told you so" moment, as many pointed out the dangers of austerity during troubled times. The logic runs as follows: when businesses, households, and governments all try to pay back their debts at the same time, they spend less. As they spend less, national income falls, leading to even less spending. This sets off a cycle of decreased spending and economic collapse.

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