The approach to the ‘cliff’. As the charts indicate the two economies were progressing smoothly along a stable NGDP growth path, with the UK showing even greater stability. Both fell from the cliff at same time, with the plunge being synchronized, just like the diving pairs from the cliffs in Acapulco! The UK has ended up going deeper and that´s usually (think Krugman) put down to ‘austerity’. As the next charts indicate, ‘austerity’ (measured by the fall in government purchases) has been even greater in the US, but note that real growth in the US has remained stable and quite a bit stronger than in the UK. Why? One possible answer, illustrated below, is that monetary policy has been ‘easier’ in the US than in the UK, where the monetary policy stance is gauged by the growth in nominal spending (NGDP). Hopefully Mark Carney will reverse the spending trend!
Update: Mark Carney hasn´t (yet) lived up to expectations. And the austerity debate rages on.
Update: Scott has a new chapter brought up by Mark Sadowski.