Does confidence matter?
Like Paul Krugman, I think Britain's decision to pair a sharp economic contraction that's outside its control with a sharp contraction in the part of the economy that's in its control (the public sector) will be a disaster. But it'll at least be an interesting experiment.
For one thing, it's a good test of whether austerity economics works amid a weak economy and low interest rates. Seems unlikely, and I think a lot of British people will suffer while the government tries to figure it out, but we'll know soon enough. But it'll also be interesting to see whether the fact that the government has a decisive plan creates some of the "confidence" that people are always saying we need.
If I were trying to make the argument for a plan like this, I'd say something like: "Business and consumers are wrong about the short-term danger posed by the deficit, but that concern, though mistaken, has consequences for their spending and investment decisions, and if they feel like it's being allayed, they'll begin spending and investing more. The fact that a market isn't rational doesn't mean you can ignore its demands." I'm skeptical that any confidence effect will last for very long, as hundreds of thousands of people will lose the jobs and benefits that let them participate in the economy, but I guess we'll see.
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