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With the Wednesday release of a mediocre gdp report, we are hearing that the United Kingdom austerity program is proving a macroeconomic failure.

Let’s look at the timing of the cuts:

So far, about GBP9 billion of the government’s fiscal tightening has occurred. However, around GBP41 billion of tax increases and spending cuts will begin to take affect from the start of the new fiscal year on April 5.

Some of the particular cuts were announced in October and at that time Ken Rogoff doubted whether half of them would end up taking place.  So the cuts are in their infancy and arguably their credibility is still somewhat in doubt or at the very least has been.

A lot of the weak gdp report is blamed on construction, with some excuses drawn from snowstorms.  There does exist an extreme rational expectations view, in which the last-quarter weakness of construction was based on the expectation that government spending cuts would start arriving later in April and thus new houses should not be built.  Alternatively, it could be that after the greatest real estate bubble in history, the UK market is overbuilt.  Weak UK growth dates to some time back.

Also recall that in many open economy Keynesian models, fiscal policy AD effects are to some extent — or completely — offset by exchange rate movements (pdf).  And the fiscal multiplier is basically zero when the central bank targets inflation.  Furthermore it is not obvious that the UK has been in a liquidity trap.   When it comes to drawing Keynesian conclusions about practical fiscal policy, the theory here is a house of cards.

The UK economy suffers from a more serious technological stagnation than does the United States, in this case more forward looking than backward looking.  Their pharmaceutical innovation seems to be drying up, they are overspecialized in finance, the “residential tax haven” status of the country may not yield continuing growth at high rates, tourism is OK but not enough, and their manufacturing base eroded some time ago, with nothing like a German-style comeback.  The teacup sector aside, why should anyone be optimistic about that economy?

Two other considerations:

1. The case for the cuts is not that they will spur growth, but rather forestall a future disaster.  That’s hard to test.  A second part of the case is that not many political windows for the cuts will be available; that’s hard to test too.  On that basis, it’s fine to call the case for the cuts underestablished, but that’s distinct from claiming that poor gdp performance shows the cuts to be a mistake.

2. Let’s say the cuts lower government consumption and raise private consumption, and that government consumption is wasteful but private consumption isn’t (and long-run growth is given by the Solow-like expansion of the international technological frontier.)  That’s a good case for making the cuts, but they still won’t show up as higher gdp.  The government consumption is valued into gdp figures at cost, so even cuts proponents with a good case don’t have to be predicting higher gdp.

I doubt if the UK fiscal austerity program will much boost their growth rate, which is likely low in any case and for non-Keynesian reasons.  Simply citing a low UK growth rate is not a test of their fiscal policy, for a number of reasons detailed above.

Last post on this topic!  Jerry Brito reports:

The arrow notes the date my column on the virtual currency was published in TIME.com. The day after that piece was published, the Bitcoin exchange rate reached an all time high at $1.19. Yesterday, just over a week later, it was pushing $2.

Via Chris F. Masse, Reuben Grinberg (in a useful paper) reports:

In late April, 2011, one bitcoin is approximately at parity with the US Dollar — a 2000% percent appreciation against the Dollar in less than a year.

Of course, that’s the appreciation you might expect from a highly successful private asset!  Or you can take that as a sign of the dependence of the Bitcoin upon expectations, and a sign of its bubbly nature.  Just think how hard it is for a major country to establish crediblity for its currency, and then ask how much of the Bitcoin value is expectations-dependent and multiple-equilibria dependent.  What will be the rate of Bitcoin appreciation five years from now?  I guess it will be falling.

If you are thinking about holding Bitcoin, here is a Fischer Black paper worth reading.

U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization’s effect on the U.S. economy.

The companies cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, new data from the U.S. Commerce Department show. That’s a big switch from the 1990s, when they added jobs everywhere: 4.4 million in the U.S. and 2.7 million abroad.

From David Wessel, there is more here.  Somewhat heretically, I see at least a fifty percent chance that our next decade will be marked by a) slow technological progress, and b) the Samuelson-Stolper factor price equalization theorem.  Before 2000, trade helped boost real wages in the United States, but it is much less clear that is true post-2000.  If you’re not thinking about these issues seriously, I would say you are asleep at the wheel.

By the way, I have no problem giving these developments a positive cosmopolitan interpretation.  And rather than leading to massive calls for left-wing redistribution (a common prediction), I sooner expect the opposite, more on that soon.

This is on “The People’s Budget“:

Matt Yglesias has a much better solution for progressives; a progressive consumption tax.

This capital gains proposal is especially silly. I’m 99% sure they won’t allow unlimited write-offs of capital losses, which means the effective cap gains rate would be even higher, and risk-taking would be discouraged. And why even have a corporate income tax system? Even from a progressive perspective it makes no sense at all.

This proposal taxes rich guys who live a hedonistic lifestyle at a much lower rates than equally rich guys who are thrifty, and leave something for others. That’s progressive?

A progressive consumption tax system composed of a mixture of modestly progressive VAT and steeply progressive payroll taxes and carbon taxes and land taxes. That’s all you need. K.I.S.S.