The economic situation in the United Kingdom is going from bad to worse. Not only is the economy back in recession, inflation is heating up. This raises the specter of the dreaded "stagflation" that crippled the US economy in the 1970s.
Why is the UK so much worse off than the US?
Yahoo's economics editor, Daniel Gross, thinks it's because the UK has pursued the wrong strategy as it struggles to rein in budget deficits and recover from the global economic crisis.
Unlike the US, where rampant "stimulus" spending and deficits continue apace, the UK opted for "austerity." The country sharply cut its spending and raised taxes, in an attempt to get its fiscal house in order. Unfortunately, this immediately plunged the economy back into recession.
The US, meanwhile, kept its foot on the gas, racking up massive deficits and debts but also stimulating solid if unspectacular economic growth. The US economy, therefore, continues to grow. And at least for now, inflation is under control.
Does this mean that John Maynard Keynes and Paul Krugman, two "Keynesians" who advocate vast government stimulus as a way out of recessions, were right? And that "austerians" like Niall Ferguson, who warn of the impending collapse of the United States under a mountain of debt, were wrong?
According to Dan, it's too soon to tell. But if the UK-USA comparison suggests that the Keynesian approach is looking pretty good right now.
See Also: Niall Ferguson: The US Is Screwed