The Great Debate UK
from Nicholas Wapshott:
The elaborate gavotte between the American and European economies continues.
While the Federal Reserve has begun to wind down its controversial quantitative easing (QE) program, the European Central Bank (ECB) the federal reserve of the eurozone, has announced it is considering a QE program of its own.
It is a belated acknowledgement, if not an outright admission, from Mario Draghi, president of the ECB, that five years of the European Union’s austerity policy has failed to lift the eurozone nations out of the economic mire. The ECB has presided over a wholly unnecessary triple-dip recession in the eurozone and sparked a bitter rift between the German-dominated European Union bureaucracy and the Mediterranean nations that must endure the rigors imposed from Brussels. All to little avail.
If there are any “austerians” left standing, let them explain this. Ignoring the cries of the unemployed and those pressing for urgent measures to promote growth in Europe, the ECB blithely imposed its punishing creed, arguing that there would be no gain without pain. The result? Little gain, endless pain.
The eurozone economy endured growth at a miserable 0.2 percent year-on-year in the last quarter of 2013 (after an 18-month-long eurozone recession). Unemployment is at a wretched 11.9 percent. The eurozone is suffering from chronic “lowflation,” with inflation at an annual 0.5 percent, heading toward perhaps the most destructive economic condition of all -- deflation.
from Nicholas Wapshott:
There have been a lot of sighs of relief in Europe lately, where countries like Britain and Spain, long in recession, have finally started to grow. Not by much, nor for long. But such is the political imperative to suggest that all the misery of fiscally tight economic policies was worth the pain that there are tentative claims the worst is now over and, ipso facto, austerity worked.
Hold on a minute. Growth is good. Growth is what allows countries to pay down their national debt by increasing economic activity, putting the unemployed to work and making people prosperous enough to pay taxes. But gross domestic product growth alone is not enough to provide adequate sustained prosperity if it does not also lead to significant job growth.
By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The UK government wants austerity to pave the way for bold modernisation of Britain. In reality its cuts don’t reverse the previous explosion in government spending and there isn’t much money for its big infrastructure dreams.
from Nicholas Wapshott:
In the nearly five years since the worst financial crash since the Great Depression, the remedy for the world’s economic doldrums has swung from full-on Keynesianism to unforgiving austerity and back.
from Nicholas Wapshott:
It has been a bad couple of weeks for conservative social scientists. First a doctoral student ran the numbers on the study by Harvard’s Carmen Reinhart and Kenneth Rogoff that underpins austerity and deep public spending cuts as a cure for the Great Recession and found it full of errors. Then a policy analyst, Jason Richwine, who angered Senate Republicans trying to pass immigration reform with a one-sided estimate of the cost of making undocumented workers citizens, was obliged to clear his desk at the Heritage Foundation when it became known his Harvard dissertation suggested Hispanics had lower intelligence than “the white native population.”
It makes you wonder what Friedrich Hayek would have to say about such aberrant research. Hayek has become the patron saint of conservative intellectuals – and with good reason. He went head to head with John Maynard Keynes in 1931 in an effort to stop Keynesianism in its tracks. Hayek failed, but his attempt gave him mythical status among thinkers who deplore big government and central management of the economy.
from Anatole Kaletsky:
Among all the obituaries and encomiums about Margaret Thatcher, very few have drawn the lesson from her legacy that is most relevant for the world today. Lady Thatcher is remembered as the quintessential conviction politician. But judged by her actions rather than her rhetoric, she was actually much more compromising and pragmatic than the politicians who now dominate Europe. And it was Thatcher’s tactical flexibility, as much as her deep convictions, that accounted for her successes in the economic field.
Governments in Europe and Britain today are obsessed with hitting preordained and unconditional targets: Inflation must be kept below 2 percent; deficits must be reduced to 3 percent of gross domestic product; government debt must be set on a declining path; banks must be recapitalized to arbitrary ratios laid down by some committee in Basel. In sacrificing their citizens’ well-being and their own political careers to these numerical totems, modern leaders often claim inspiration from Thatcher. And when voters turn against them, Europe’s leaders keep repeating Thatcher’s most famous slogans, “There is no alternative” and “No U-turn”. But are these the right lessons to draw from Thatcher’s political life? A closer look at her economic achievements suggests otherwise.
from Anatole Kaletsky:
The Age of Austerity is over. This is not a prediction, but a simple statement of fact. No serious policymaker anywhere in the world is trying to reduce deficits or debt any longer, and all major central banks are happy to finance more government borrowing with printed money. After Japan’s election of Prime Minister Shinzo Abe and the undeclared budgetary ceasefire in Washington that followed President Obama’s victory last year, there were just two significant hold-outs against this trend: Britain and the euro-zone. Now, the fiscal “Austerians” and “sado-monetarists” in both these economies have surrendered, albeit for very different reasons.
Much attention has been focused this week on the chaos in Cyprus. Coming after the Italian election and subsequent easing of Italy’s fiscal conditions, the overriding necessity to keep Cyprus within the euro -- and its military bases and gas supplies outside Russian control -- will almost surely mean another retreat by Germany and the European Central Bank from their excessive austerity demands. But an even more remarkable shift has occurred in Britain. The Cameron government, which embraced fiscal austerity as its main raison d’etre, was suddenly converted to the joys of debt and borrowing in this week’s budget.
from Reihan Salam:
The dog’s breakfast of a deal that “resolved” the fiscal cliff fell far short of expectations. In the hours after it passed, deficit hawks at the Committee for a Responsible Federal Budget and the tag team of former Senator Alan Simpson and former Clinton White House chief of Staff Erskine Bowles all expressed disappointment in a bargain that was anything but grand. Senate Republicans gritted their teeth to accept a small increase in taxes on America’s highest-earning households while Senate Democrats made permanent the bulk of the Bush-era tax cuts. A number of tax provisions that hark back to the 2009 fiscal stimulus law were extended, as were unemployment benefits, thus delivering a modest income boost to a large number of low-income households. But the Social Security payroll tax cut, a Republican-backed replacement for the more narrowly targeted Making Work Pay tax credit that was part of the stimulus law, which benefited a wide range of affluent households as well as families of more modest means, was allowed to lapse. Long-term spending levels, meanwhile, were left largely untouched, which is why rebellious House Republicans came close to scuttling the delicately constructed compromise.
One group that offered at least two cheers for the deal were deficit doves, who believe that premature fiscal consolidation poses a grave threat to America’s sluggish economic recovery. Paul Krugman, the prominent economist and popular left-of-center New York Times columnist who never shrinks from apocalyptic pronouncements, was almost pleased to see that the deal avoided any serious spending cuts and that it entailed relatively modest near-term tax increases.
from Lawrence Summers:
It is the mark of science and perhaps rational thought more generally to operate with a falsifiable understanding of how the world operates. And so it is fair to ask of the economists a fundamental question: What could happen going forward that would cause you to substantially revise your views of how the economy operates and to acknowledge that the model you had been using was substantially flawed? As a vigorous advocate of fiscal expansion as an appropriate response to a major economic slump in an economy with zero or near-zero interest rates, I have for the last several years suggested that if the British economy – with its major attempts at fiscal consolidation – were to enjoy a rapid recovery, it would force me to substantially revise my views about fiscal policy and the workings of the macroeconomy more generally.
Unfortunately for the British economy, nothing in the record of the last several years compels me to revise my views. British economic growth post-crisis has lagged substantially behind U.S. growth, and the gap is growing. British GDP has not yet returned to its pre-crisis level and is more than 10 percent below what would have been predicted on the basis of the pre-crisis trend. The cumulative output loss from this British downturn in its first five years exceeds even that experienced during the Depression of the 1930s. And forecasts continue to be revised downward, with a decade or more of Japan-style stagnation now emerging as a real possibility on the current course.
The government’s latest plan to boost growth by relaxing planning permission rules has attracted a mixed reaction. In fairness, allowing homeowners who have detached houses to build an 8 metre long-extension is never going to get the UK economy out of the bolt hole it has found itself in. Likewise, the perceived U-turn on the plan to build another runway at Heathrow is unlikely to happen in time for Cameron and Osborne to take credit for the growth boost.
But all is not lost for the government. All it needs to do is to continue its policy of gently loosening the Treasury’s purse strings. “But we are going through a period of fiscal austerity,” I hear you cry. Indeed that is what the government wants us to think, but the economic data just doesn’t support that assertion. The latest GDP data reported that government spending was flat in the second quarter. That is down from the large 1.9% increase in the first quarter. However the UK’s fiscal consolidation effort looks fairly meagre when you consider that government spending has only fallen once in the last six quarters.