The question of 'austerity' represents a fundamental schism in worldview among economists.
The high-level principle behind austerity is fairly straightforward: During times of economic strife, the most effective means to promote economic stability, and to create an environment suitable for growth, is to reassure the markets about the long-term stability of your economy—by dramatically slashing spending.
In England, that's the policy tack that Tory Prime Minister David Cameron, and his Chancellor of the Exchequer, George Osborne, have taken.
Their worldview is hotly contested by the Keynesians.
Keynesians—like Paul Krugman and Nouriel Roubini—have long advocated the opposite position. The Keynesian belief is that in times of recession the government must compensate when consumers are unwilling to spend.
Keynesians believe that when monetary policy alone is unable to stimulate the economy fiscal policy must be implemented.
That's a fancy way of saying that if you have interest rates at or near zero, and the economic situation remains grim, the only solution left is to have government spend money directly—on public works, on infrastructure, on just about anything at all.
So the austerity approach and Keynesian approach don't merely differ: They clash rather directly.
It's like finding out you have a terrible disease and going to a specialist for advice.
The doctor tells you that you're lucky to be alive—and that if you want to survive much longer you must absolutely avoid the cold in New York for the remainder of the winter. You think this solution sounds a little extreme, so you seek out a second opinion. The second specialist – equally well regarded in his field—tells you that he concurs with the first. You absolutely must leave New York before February; in fact, he recommends you a book a flight tonight. The only difference is this: The second specialist insists that you take up permanent residence in Barrow, Alaska—several hundred miles north of the Arctic Circle.
The climatologic metaphor may be a fitting one—since debate in England may turn on how much significance is attributed to cold weather to account for the economic downturn.
But, while weather may present an easy out to paper over short-term differences, the long term debate will remain. And—quite likely—deepen.
Postscript: On a related note, after completing this blog post I noticed the following tweet— from Nouriel Roubini: "UK already double dipping while inflation is rising: a whiff of stagflation with fiscal and monetary policies not helping growth recovery"
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