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The Great British Austerity Experiment
With deficit hawks poised in the US, we watch with great interest UK economic policy. It's not looking an enviable example so far
Three months ago, I noted that the United States might benefit from the pain being suffered by the citizens of the United Kingdom. The reason was the new coalition government's commitment to prosperity through austerity. As predicted, this looks very much like a path to pain and stagnation, not healthy growth.
That's bad news for the citizens of the United Kingdom. They will be forced to suffer through years of unnecessarily high unemployment. They will also have to endure cutbacks in support for important public services like healthcare and education.
But the pain for the people in England could provide a useful example for the United States. After failing to see the $8tn housing bubble that wrecked the US economy, the austerity crew in the United States has been newly emboldened by the hugely partisan media that desperately want to eviscerate the country's bedrock social programmes: social security and Medicare.
The elite media and the politicians whom they promote would love to see the United States follow the austerity path of the UK's new government. However, if this path takes the UK into dangerous economic waters, it could provide a powerful warning to the public in the United States before we make the same mistake.
The British economy looks like it is doing its part. The fourth-quarter GDP report showing that the economy went into reverse and shrank at a 2.0% annual rate is exactly the sort of warning that many of us here were expecting. Weather-related factors may have slowed growth some, but you would have to do some serious violence to the data to paint a positive picture. Of course, the austerity in the UK is just beginning. There will likely be much worse pain to come, with a real possibility that the country will experience a double-dip recession, or at least a prolonged period of stagnation.
While the UK seems to be doing its part, the key question is whether anyone in the United States is prepared to take the lesson. Prior to this episode, there was already a solid economic case that large public deficits were necessary to support the economy in the period following the collapse of an asset bubble. The point is simply that the private sector is not prepared to make up the demand gap, at least in the short term. Both short-term and long-term interest rates are pretty much as low as they can be.
Furthermore, even if weaker demand did manage to push interest rates down from current levels, it is unlikely that they would have much effect on private spending. Businesses that didn't want to invest when the 10-year treasury bond rate was 3.4% are unlikely to start expanding if the rate fell to 2.4%, especially if the lower rate is coupled with higher unemployment and weaker demand.
The same story applies to consumers. This sort of drop in interest rates is not about to kick off a consumption binge. Consumers remain heavily indebted as a result of the collapse of the housing bubble. Lower interest rates will change this picture little. Furthermore, a consumption splurge is even less likely if government cutbacks mean that more workers are unemployed or worried about losing their jobs.
There might be more hope from an increase in net exports following a turn to austerity, but this would depend on a decline in the value of the dollar and healthy growth in US trading partners. Neither of these seems like good bets at the moment.
This means that the predictable result of austerity is slower growth and higher unemployment. The UK has volunteered to be our guinea pig and test this proposition. For now, it looks like things are going just as standard economic theory predicts: the economy is slowing and unemployment is likely to rise.
Hopefully, citizens of the UK will tire of the rhetoric of austerity as a way to make politicians feel good about tightening other peoples' belts. Maybe the Liberal Democrats will break away from the coalition and force new elections.
From this side of the pond, though, the goal is simply to encourage people to pay attention. The UK might be home to 60 million people, but from the standpoint of US economic policy, it is simply exhibit A: it is the country that did what our deficit hawks want to do in the US.
The takeaway lesson should be "austerity does not work; don't go there." Unfortunately, in the land of faith-based economics, evidence does not count for much. The UK may pursue a disastrous austerity path and those of us in the United States may still have to follow the same road anyhow. But we opponents of that course all appreciate the willingness of the UK to demonstrate the foolishness of this action.
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18 Comments so far
Show Alland who decided that we should experiment with austerity?
a bunch of millionaires!
hear hear
During the past two years we have seen Obamabots prove that they will assure that the US remains "the land of faith-based economics" and will continue the Dubyabots' disdain for evidence.
Baker has a very limited paradigm for a well-regarded economist. Where is any mention of the Tobin tax on Wall Street speculative trades? Where is any mention of cutting back US military bases overseas? Or any discussion of reasonable taxes on the well-to-do? Nope. He just argues from within the "allowable" parameters, and therefore reinforces the fiscal injustices that have reached critical mass. Indeed, we're seeing the best "democracy" that money can purchase, and the Supreme Court is totally on-board with that inverted premise.
Actually we have the worst democracy money can buy when considering the value received for money spent.
its not about saving the economy
its about a bunch of people who don't want to share
hear hear!
What a great article, that I am eager to share. The author has captured what I was thinking and feeling in an eloquent and measured essay, striking a note deep within. Bravo.
As much as I respect Dean Baker's criticism of the banksters
and commitment to equality, I am afraid like most Keynesians
he still doesn't get it - we can no longer just "grow" our
way out of this crisis as we did the Great Depression.
We are running out of resources - the most pivotal as the
"lifeblood" of the economic "circulatory system" ie transportation, at the moment is oil.
But oil is only one resource which is running out.
We are also running out of arable fertile soil, fisheries,
copper, rare earth elements.
Desperate attempts to maintain "Business As Usual" like drilling for oil 1 mile below the ocean, mountaintop coal removal, Canadian tar sands, 'Defracking" for natural gas
just make our situation worse as seen in the BP oil spill,
the coal sludge disaster, and incredible pollution and greenhouse emissions from tar sands.
We need serious change towards Green transit (NOT electric cars!), windmills, solar energy, small hydro, geothermal,
super-insulated buildings and this is not really happening
at the levels required.
There are too many vested interests in oil, coal gas, auto addiction, highway repaving, military guaranteed profits for
serious change yet.
I would suggest all CDers check out the Nation's series
on Peak Oil and Climate Change this week featuring
Dmitri Orlov:
http://www.thenation.com/article/157434/peak-oil-and-changing-climate
The Banks will have it all! They must have it all or they will die. $700 billion from the US Treasury in 2008 is not enough. Borrowing billions at 0% interest at the FED's Discount Window and investing it in Treasury Bonds and other interest bearing instruments at pure profit is not enough. Trillions more infused directly into the banks by the Federal Reserve is not enough.
The Banks must have the public employee pension money of workers in New York City. It will not be enough. The Banks must have all the pension money from New Jersey to Florida to California.
The Banks must have the money directed to stave off destitution among elderly Americans. The Banks must have the people's Social Security payments. It will not be enough.
The Banks must have the money directed to working people's health care. The Banks must have American's Medicare and Medicaid benefits. It will not be enough.
The Banks must have the funds directed to public education in the States. Schools must be shut down. Teachers must be layed-off, starting with the most senior, the teacher's with the highest salaries and benefits. The idea of universal public education must be discredited so the whole system can be shut down. It will not be enough.
The Banks must have the proceeds of the international drug trade. The Banks must have the funds generated by the payday loan business, the sub-prime auto and home loan businesses, the student loan money generated by the for-profit colleges.
The Banks must have it all! They must have it all or they will die. They will die anyway. The only question is, will we die with them?
Wall Street pay rises to a record $135 billion in 2010.
http://online.wsj.com/article/SB10001424052748704124504576118421859347048.html?mod=WSJ_hp_LEFTWhatsNewsCollection
Bloomberg proposes to cut public employee pensions.
http://www.nytimes.com/2011/02/03/nyregion/03pension.html?hp
To summarize malcolm, the Democratic and Republican Parties on behalf of the banksters that own them are orchestrating a massive wealth transfer scheme that transfers 100% of the nation's (and eventually the world's) wealth from 98% of the people to 2% of the people.
And 98% of US voters still vote for the Democratic Party and Republican Party candidates that are robbing them.
You sum it up pretty well raydelcamino. But most Americans don't participate in the electoral charade. The vast majority realize, even if they can't explain it in any other terms but apathy, that the game is rigged. The banker's man, Obama for example, always wins.
I love our little GOPers in charge of Congress.
I love them because they obviously have not studied the Great Depression. The downturn in spending in the mid-30s prolonged the Depression until the start of WWII forced the economy to 'wake up' to fight of the threat of Nazi Socialism and Imperial Japan.
Why pay attention to history...there is nothing you can learn from the Congressional austerity in the midsts of the Great Depression.
Nothing is going to stop the austerity express, because now there is a Republican House and a President who apparently doesn't want to win reelection in 2012. The Republicans are going to push for deficit trimming, perhaps even budget balancing, for the next two years so the economy will contract like it is in Britain. Then they will blame it all on Obama, win in 2012 and start the kind of deficit spending we saw during Bush. Of course, the Republicans are always fiscal conservatives who are for smaller government.
It is only a question of asking the right question. We have over spent. Now what? Print new money from thin air or start cutting back on expenditure, or redirect old money to the right places? Even a fifth grader can answer that question.
Printing fake money for deficit spending is crazy. Cutting back on social services for the poor is inhuman. What is left is clear. The only viable alternative is to redirect the real OLD money now in the hand of the rich. It has to be austerity imposed on the rich. But the rich won't have it. They are screaming their heads off that if they are hurt, in other words their capital is diminished, hell will break loose. Is this true? Ask Mr. Baker, ask Mr. Geithner, ask Mr. Greenspan, ask Paulson, ask all the geniuses on Wall Street, and the answer will all be identical. Yes, hell will break loose. So the geniuses' solution can only be PRINT MORE FAKE MONEY or AUSTERITY for the poor.
Mr. Dean Baker, it seems, is against austerity for the poor, cutting back on governmental spending. He didn't say one word about redirecting the old money from the rich. So it is clear that he is in favour of resorting to the magic formula of PRINTING MORE FAKE MONEY to tie us over the crisis. Damn the consequences for the rest of the world or for future generations at home or abroad
In Egypt some of the 60% who are employed and know they would be on the outs if there were a change of government are throwing rocks at the 40% who are unemployed or wish to have a better life than what is allowed for them now. Here in the USA, and the UK it's really not so different.
Was going to post this yesterday but the comments were down all day.
'This sort of drop in interest rates is not about to kick off a consumption binge. Consumers remain heavily indebted as a result of the collapse of the housing bubble. Lower interest rates will change this picture little. Furthermore, a consumption splurge is even less likely if government cutbacks mean that more workers are unemployed or worried about losing their jobs."
While it is undeniably true that those who are unemployed are not spending and that the drop in housing prices has meant that people can no longer use their homes as a "cash cow", the real factor in the drop in consumer spending is that real wages for the majority of workers has been flat or declining for decades and that this "recession" has given corporations the excuse to cut wages and benefits even further. Couple that with rising costs of everything from housing, fuel, education, groceries, health care, and utilities and you have a ready made recipe for disaster.
In the 1970's, women started entering the workforce in massive numbers thus giving families two income earners which helped to raise family living standards. In the 1980's when wages for blue collar workers started to become stagnant, and in some cases even fall, families had the buffer of two wage earners and even turned to credit cards to prop up their standard of living. The housing bubble of the late 1990's and early 2000's just added fuel to the fire waiting to happen as many working people in order to buy a home were forced to overextend in order to pay for greatly inflated home prices. Added to this were the millions of homeowners who now saw their homes rapidly increasing value as a way to draw the money they needed to either maintain or extend their lifestyles. By the time the housing market collapsed working families were already way overextended with debt - housing debt, credit card debt, student loan debt. Working families simply can no longer fuel the consumer driven economy with what few dollars are left over after paying their recurring bills.
What we are seeing is the predictable result of the policies that have been pursued since at least 1980. Reducing tax rates so that government can no longer finance infrastructure or social programs that working families rely on. The pursuit of corporate profits by reducing the costs of workers wages and benefits. The continual underfunding of higher education which translate into greater cash outlays and debt for working families and students. The off-shoring of manufacturing jobs aided and abetted by government tax breaks and trade policies. The fiscal policies that government has pursued which have translated into non-existent interest on savings and a massively lowered value of the dollar which has resulted in increasing prices.
The BIG elephant in the room is the enactment of policies by both government and corporations which had as their primary purpose the deliberate lowering of wages, benefits, and manufacturing jobs for blue collar workers in order to benefit the wealthiest 5% of the population all the while using terms like "new economy" (Early 1980's), and "service ecomony" (early 1990's) to whitewash what they were doing.
As far interest rates go, while there may have been a drop in interest rates, this has not translated to a drop in interest rates or all the myriad of fees that the average working person sees. Credit cards still have astronomical predatory interest rates compared to what the banks pay in interest to the Federal Reserve or pay out to depositors. As always, the working person gets screwed while the wealthy get richer.
And for the record, we should quit calling these insane government polices "austerity policies". They are not by any definition of the word as every one of these policies being pursued across the world are only aimed only at the blue collar working people - they are "impoverishment policies"
I get tired of repeating this, but KrazyKatz is right...
It's not "austerity", it's "theft".
Using their obfuscatory language doesn't help to make your message clear.