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Stronger GDP Than Expected?

01/28/2011

Last week, the British government announced their preliminary estimate of their GDP growth in the fourth quarter was a negative 0.5%, instead of the positive 0.7% they were expecting. They blamed it on the weather.

The morning, the U.S. government announced their preliminary estimate of Q4 growth in GDP was a surprisingly strong 3.2%, up from 2.6% in the previous quarter. The Democrats will take credit that this is proof their policies are working, while the Republicans will claim Q4 performance would have been better without those policies.

My first thought is that this is only the preliminary estimate and will undoubtedly change when the final estimate is released next month. So, don’t jump to any conclusions!

My second thought is that, if these numbers are good, it makes an interesting comparison between the British and U.S. approaches to ending the recession. In Britain, they adopted the Austrian model of draconian cuts in spending. In the U.S., we used the Keynesian model of high deficit spending.

Yet, there is no surprise in this and shows why there is a time and a place for most all economic models. Keynesian economics works well in the short run, to get the economy out of the ditch but not in the long run. The question is whether we have the political institutions to stop the Keynesian approach.

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