Yet more on the UK
Steve Waldman (of the indispensable Interfluidity blog) has answered my plea for an explanation of the UK’s economic woes, offering a ‘Post-Keynesian’ description of the crisis. I highly recommend you go and read the whole thing before reading the rest of this post.
I am not convinced by the Post-Keynesian story. Waldman discussed the fact that the UK has not stabilised the path of nominal income, and this is true. However, here is a comparison of Nominal GDP for the UK and the USA:
Now, it is true that debt levels are much higher here, but (at least according to the recent ‘Debt and Deleveraging’ report from the McKinsey Global Institute) the country currently undergoing deleveraging is the US:
I grant that if the Post-Keynesian story is correct, it seems plausible we should expect the country with the higher debt to have larger (real) problems given equal deviation from the trend in nominal income. The flip side of this (as we are holding NGDP constant) is that inflation must be higher. But I’m not sure how to tie this whole story together with the fact that the US is deleveraging and we, apparently, have not even started (as of Q2 2011). So, you can colour me confused on this one.
I really hope Waldman is wrong, because I put the probability of nominal income returning to trend as basically zero. NGDP-level targeting may make for economic equilibrium, but I seriously doubt that it is a political one too.