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It’s Official: Confirmation Bias Rules at The New Yorker

December 11, 2012

John Cassidy has a new post up at The New Yorker. His conclusion’s clear from the title “IT’S OFFICIAL: AUSTERITY ECONOMICS DOESN’T WORK”.  Unfortunately there’s some space between the data and his conclusions so let’s take a look.

First, a definition of Confirmation Bias from the You Are Not So Smart website.

The Misconception: Your opinions are the result of years of rational, objective analysis.

The Truth: Your opinions are the result of years of paying attention to information which confirmed what you believed while ignoring information which challenged your preconceived notions.

His piece starts with the preferred conclusion; that cutting government spending, especially during a slowdown, will shrink the economy (reduce GDP) leading to lower tax revenues and increased benefits.  According to Cassidy, “Austerity Economics” will make deficits larger, not smaller.

Here’s Wikipedia’s definition of Austerity:

In economics, austerity refers to a policy of deficit-cutting by lowering spending via a reduction in the amount of benefits and public services provided.[1] Austerity policies are often used by governments to try to reduce their deficit spending[2] and are sometimes coupled with increases in taxes to demonstrate long-term fiscal solvency to creditors.

Let’s look at actual Revenues & Spending (in Billions of British Pounds, data supplied by the UK government):

UK Budgets 2007-12

The UK budget is fine on 4/5/2008 (prior to the financial crisis). A year later, revenues drop and spending grows as does the deficit. In FY 2010 revenues drop again and spending increases by £37.5 billion. FY 2011 (which began in April 2010) shows the reality of the government’s. Tax receipts increased by £37.3 billion! Spending also continued to increase, though at a slower rate.

So how do these numbers fit with Cassidy’s story? When revenues fell, the UK government responded with tax increases. There were no draconian spending cuts, spending increased every year and the economy shrank. Perhaps a conclusion more connected to the data is that when “austerity” consists of higher spending and tax increases it’s likely to tip the economy back into recession. A more accurate headline would be “It’s Official: Taxing and Spending Doesn’t Work!”

Should someone tell President Obama?

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