News of the unexpected fourth quarter contraction of the British economy, thanks to the Herbert Hoover strategery of its ruling conservatives, should be a cautionary tale for American conservatives who want to emulate the economic strategy of “austerity.” The question is, will caution win the day …
From the Global Post:
LONDON, United Kingdom — Britain’s coalition government continued to be the canary in the coal mine for the indebted world’s economies (formerly known as the first-world economies) — and the bird is starting to choke. The Conservative-led coalition has imposed a strict austerity regime on government spending in the hope of eliminating Britain’s structural deficit by 2015.
But preliminary figures released yesterday showed Britain’s economy contracted in the last quarter of 2010. That puts Britain halfway toward a double-dip recession. The Office of National Statistics, which provided the numbers, put some of the decline down to unusually bad winter weather in December, but even factoring that into account there was no growth.
The opposition Labour Party and Keynesians everywhere had predicted that cutting government spending as fast and furious as Chancellor of the Exchequer George Osborne is doing would lead to a decline in economic activity. Britain emerged from recession last year, while Labour was still in government and modestly stimulating the economy, rather than cutting the deficit.
What is worrisome is that the cuts haven’t really even begun to bite. Lay-off notices are only just going out in national and local government departments. Things will get much worse before they get better — if they get better. Even with the economy contracting inflation is heading up toward an annual rate of between 4 and 5 percent.
Yesterday, Mervyn King, governor of the Bank of England, told a business audience in the northern city Newcastle, “Given the rise in VAT and other price rises this year, real wages are likely to fall again. As a result, in 2011 real wages are likely to be no higher than they were in 2005. One has to go back to the 1920s to find a time when real wages fell over a period of six years.”
Despite the hardship, King endorsed the government’s austerity program. As he earns £290,000 a year (about $460,000) perhaps he feels he can be sanguine about his salary being worth what it was six years ago.
The crisis in the world’s sixth largest economy is not, interestingly enough, being replicated in Germany, which is also running deficits but not resorting to the right wing panacea of “austerity,” which always seems to involve slashing services and benefits to employees, while leaving corporate profits and corporate CEO salaries intact.
Already, the excuse making has begun, with conservatives blaming the downturn on bad weather in december along with a contraction in construction and services. But one thing is clear: the U.S. economy — where the federal government has primed the pump rather than tossing out the engines — is growing. U.S. GDP grew by a reported 3.2 percent in the fourth quarter of 2010. It grew by an even more robust 5.7% in the fourth quarter of 2009, while the British “austerity” economy is shrinking.
In fact, the graphic below pinpoints just how quickly, and how sharply, the U.S. economy began to turn around after the stimulus was passed in February 2009, and began working its way through the economy in the second and third quarters of that year:
As in the U.S., Britain’s conservatives trained their austerity guns on the poor and the elderly — just what American conservatives want to do here. But the result hasn’t been to unleash the gods of capitalism, it has been to unbound the dogs of double-dip recession.
Likewise, Greece’s bailout-mandated austerity program and Ireland’s major bank bailout have not only failed to yield the advertised economic results, they have created political crises, even near-riots.
American conservatives are demagoguing the austerity issue, despite the fact that basic economics says you don’t cut government spending during an economic downturn. Simple logic suggests that if you follow the economic philosophy of the Hoover adminnistration, you will get Hooverian results.
Britain has now proved that simple logic yet again. So we can’t say we haven’t been warned.