You talk about circular logic and self-fulfilling failure! The more the austerity project of the Prime Minister and his Treasury Exchequer fails, the more they argue this shows the need to deal with the deficit and the coming "debt bomb" is even more urgent.
As it is, the austerity plan was supposed to conclude by 2015. They now are arguing to take it to as far as 2017. Sure, up the dosage of leeches and laying on of hands. That will make it better.
The sicker the patient gets, the more you argue that you are proven right. The drop in second quarter GDP for Britain is being called "stunning." There is now seen as virtually no chance for the British economy to grow at all for 2012 now. The second quarter drop of 0.7% is far worse than Spain.
Here in America there are the Obama haters who want to argue that he and he alone has 1000% culpability for the economy not growing as fast as we would like. Yet we have had growth and 36 consecutive months of expansion of private sector jobs.
In Britain, the length of Cameron's Administration has seen a truly ugly performance. And no matter how poor it gets, he claims vindication.
"George Osborne describes the latest UK growth figures as "disappointing", an adjective that does scant justice to the economic car crash over which he has presided for the past two years. Following a recession in 2008-9 that was the deepest in the postwar era, the subsequent recovery has been slower and weaker than that after the Great Depression."
"There have been only two double-dip recessions since modern quarterly records for growth were available, and the one Britain is now suffering is not only officially longer than the second leg of the stagflation downturn of the mid-1970s but is getting worse."
"International comparisons also make grisly reading. In the G8, only Italy has performed worse than Britain since the great recession began five years ago. The US and Germany have seen output rise above previous peaks; GDP in the UK is still 4.5% below where it was when the economy began to nosedive in 2008."
"Britain's economic performance has been similar to that of the eurozone crisis countries Spain and Portugal, even though the Bank of England has the luxury of being able to set bank rates and the pound has the freedom to fall."
http://www.guardian.co.uk/business/2012/jul/25/economy-george-osborne-growth-figures
This great Guardion editorial by Larry Elliot is entitled "If the Economy was a Sick Patient, George Osborne Would Be Struck Off."
I'm waiting for Scott Sumner to again tell us you can't blame austerity in the U.K. as there hasn't been any yet. That's an Urban Legend. In fact, they have already done 30% of the proposed cuts. Another canard of his is he simply reasons from the deficit-if austerity had been started there would be no deficit. The whole point is that austerity exacerbates deficits by further bringing down tax revenues.
This sentence in particular "Britain's economic performance has been similar to that of the euro zone crisis countries Spain and Portugal, even though the Bank of England has the luxury of being able to set bank rates and the pound has the freedom to fall." is particularly damning for the Market Monetarists.
"Osborne says the economy has deep-rooted problems and he is right. But it was he who announced the toughest austerity programme since the 1970s, stoked inflation by putting up VAT and refused to change his remedy even when it was clear the economy was not responding. A doctor that treated a sick patient this way would be struck off."
"His hardline approach to tax and government spending has sucked demand out of the economy, forcing the Bank of England to keep borrowing costs at 0.5% for the past three and a half years, the lowest since it opened for business in 1694."
The irony is that this is totally self-inflicted. The U.K. has no threat of rising borrowing costs. Indeed, Britain should be Exhibit A as to why we should re-elect President Obama. But for him we would be Britain. If the GOP had the Presidency and the Senate we would already be Britain.
Mike - Just to be clear, when you refer to austerity, what exactly do you mean? I ask because the term encompasses wide-ranging actions and measurements throughout the econ blogosphere. a couple months back I did a post on this issue, http://bubblesandbusts.blogspot.com/2012/04/what-is-austerity.html.
ReplyDeleteWhen Sumner and others (myself included) refer to a lack of austerity, I think we are generally acknowledging that govt spending and/or deficits have not actually declined. I recognize that due to automatic stabilizers, attempts to cut the deficit or spending can be self-defeating and result in the opposite outcome. Is that the type of failure you are describing?
My definition of austerity probably isn't any thing exact-"it means literally X."
ReplyDeleteI'm using it in I think the common way most people do. Basically fiscal tightening.
When Paul Ryan, David Cameron, or the Germans say the deficit is too high we have to start cutting government spending-the actual cuts are austerity.
Arguably you can also speak of monetary austerity. Like Volcker in the early 80s. Or the ECB last year raising rates during contraction in a misplaced concern with rising commodity prices
Basically taking money out of the economy is austerity.
Austerity is not a decline in a budget deficit but rather policies put forward which are supposed to cut the deficit.
The idea of doing what Cameron is doing in Britian during a recession is madness.
I maintain, if it weren't for Obama we would be Britain right now. That's where President Romney would take us.
To say the failure to close the deficit proves there's been no austerity is to confuse end and means. That the deficit doesn't close shows that it's the wrong policy.
You note: "Basically taking money out of the economy is austerity."
DeleteI'm confused by this statement. Given my understanding of sectoral balances, a govt deficit generally adds NFAs to the private sector. Any size deficit is therefore adding money to the private economy, although in differing sizes. The only way to remove money is through a govt surplus, which was the problem in the late 90's. I assume I'm missing something, so maybe you could clarify that point.
Separately, you say: "Austerity is not a decline in a budget deficit but rather policies put forward which are supposed to cut the deficit."
This is they type of austerity I mentioned previously which I tend to agree is a failure and poorly contrived. The trouble with this definition (IMO) is that it is largely subjective. How do we differentiate between proposed and actual deficit-cutting actions? When multiple actions are done in concert, with some offsetting effects, how do we know which had a greater impact (if not by the end result)?
I don't disagree that actions aimed at cutting deficits are poor policy when the private sector is deleveraging. However, many countries have put forward policies that have not been enacted or been countered by other measures to boost spending (e.g. extending unemployment insurance in the US). Obama's ability to talk like a deficit-hawk while maintaining massive deficits is a primary reason why growth has remained positive for so long in the US. The question is, if he wins a second term, does he follow through on his talk of moving towards a balanced budget or prove through actions that those words were simply political rhetoric?
"I'm confused by this statement. Given my understanding of sectoral balances, a govt deficit generally adds NFAs to the private sector. Any size deficit is therefore adding money to the private economy, although in differing sizes. The only way to remove money is through a govt surplus, which was the problem in the late 90's. I assume I'm missing something, so maybe you could clarify that point."
ReplyDeleteRight deficits add money to the private economy while austerity is meant to cut the deficit hence...
As to Obama look at least he has the right rhethoric-unlike Romney who says the Ryan budget is a model for our nation
However, I don't think Obama is going to go austerity again. He talked like a deficit hawk last Summner, 2011. He hasn't since if you notice.
I would reccommend David Corn's "Showdown" which detailed that the President played a pretty cool hand of three card monte last Summer.
At the time he had to talk like a hawk-ie, support austerity-because there was some political groundswell for it after the 2010 "shellacking"
However he won the skirmish with the GOP, the showdown ie.
The only way to avoid austerity-here it's pretty clear what I mean by the usage I hope, it is deep budget cuts in all nondefense spending-is to give him a second term.