To no one's surprise (at least it shouldn't be) the things we teach in Econ 101 at most universities turns out to be correct. "Contractionary economic policy is contractionary."
The recent experience in the UK, the first of the major world economies to explicitly and straightforwardly say that contractionary policy would be expansionary, is proving that nonsense remains nonsense. The ratings agencies scared the Brits into slashing government in order to "increase confidence in the government's ability to manage the economy." But the confidence fairies didn't show up. UK growth has been zero over the past six months--no bump from austerity. Appeasing the ratings gods doesn't seem to have helped the UK economy.
Further, the lack of any market response to the agencies' threats to lower the US Government's credit rating shows that confidence faires remain in Never-Never Land where they belong.
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