Should Obama mimic David Cameron’s austerity?
By Nicholas Wapshott
The opinions expressed are his own.
In medieval times, a key member of a monarch’s retinue was the food taster, a hapless fellow who ate what his master was about to eat. If the taster survived, the food was deemed safe for the king’s consumption. President Obama has a taster of sorts in David Cameron, the British prime minister, who has embarked upon an economic experiment that echoes the recipe of wholesale public spending cuts and tax hikes needed if both sides in Congress are to agree to raising the federal government debt ceiling. How the British economy is faring offers Obama an idea of what a similarly radical policy of cutting and taxing here would mean to the American economy.
Cameron’s election in May 2010 coincided with the start of the Greek debt crisis. The Bank of England governor Mervyn King warned him that the public debt in the UK was so large that Britain, too, might see its lending become impossibly expensive, so Cameron decided that there was no time to lose in putting the fiscal books in order. He decided to slash public spending by 25 per cent over four years and immediately raise value added tax on goods and services from 17.5 to 20 per cent. Such a radical remedy found favor with the rump of British Conservatives who felt that Margaret Thatcher’s free-market, small government, “sound money” policies of the Eighties had not been pressed to their limit. In turn, Thatcher’s prescription to reduce the size of the state derived from her favorite thinker Friedrich Hayek, the author of “The Road to Serfdom,” who believed like many Tea Party supporters that government intervention inevitably leads to tyranny.
Cameron’s experiment in applying a radical cure to the British economy caught the attention of a number of conservatives here, among them George W. Bush’s speechwriter Michael Gerson, who wrote in the Washington Post, “If Cameron’s approach works — dramatically cutting deficits without stalling economic growth — it will be an obvious, powerful example for America.” “If only the Obama administration and the U.S. Congress had been so courageous. Instead, they are choosing to put off these big decisions,” moaned Matthew Bishop, New York bureau chief of the Economist, in a piece co-authored with Michael Green in the Wall Street Journal. Even Treasury Secretary Tim Geithner thought the British experiment worth trying. “I am very impressed, as one man’s view looking from a distance, at the basic strategy [Cameron] has adopted,” Geithner told the BBC.
So, how is the British economy doing? Under Cameron’s Labour predecessor, Gordon Brown, Britain fell into depression, with the economy shrinking during the worldwide banking meltdown to minus 2.1 per cent in the last quarter of 2008 and the first quarter of 2009. By the time of the general election in May 2010, however, growth had slowly climbed to 1.1 per cent per quarter. With Cameron taking the reins and announcing his radical economic plan, the economy slumped back to minus 0.5 per cent in the fourth quarter of last year, before returning to growth of 0.5 per cent in the first quarter of this. But the latest economic growth figures, released this week, show a slowdown in economic activity, to a miserable 0.2 per cent growth between April and June. Cameron’s chancellor George Osborne has blamed the poor figure on widespread partying that accompanied the wedding of Prince William and the effects of the Japanese tsunami. The double-dip recession that Cameron’s critics predicted has not yet taken place, but the figures are clearly headed in the wrong direction.
What exactly is causing the slowdown in Britain is not clear. The cuts have only just begun. The total spending reduction over four years will amount to no more than 1 per cent of government expenditure, though even that Osborne believes will put 1.3 million public sector workers out of work by 2015, though he hopes private companies will create 2.5 million new jobs to make up. The faltering economic recovery suggests he is being optimistic. The independent Office of Budget Responsibility estimates that the decision to raise VAT will cause economic growth to fall by 0.3 per cent in the fiscal year 2011/12. The tax hike has already dampened consumer confidence, leading in turn to a wave of retail store bankruptcies.
In his address on Monday, Obama suggested cutting government spending “to the lowest level it’s been since Dwight Eisenhower” coupled with new taxes on “millionaires and billionaires.” He assured Americans “the cuts wouldn’t happen so abruptly that they’d be a drag on our economy,” though that is plainly wishful thinking. Looking across the Atlantic, it seems that he, like Cameron, may be too optimistic about the true cost of slashing government spending and raising taxes at a time when the economy is still recovering from the Great Recession.
Nicholas Wapshott’s “Keynes Hayek: The Clash That Defined Modern Economics” is published by W.W.Norton in October. To read an extract, access https://sites.google.com/site/wapshottkeyneshayek/.
PHOTO: Britain’s Prime Minister David Cameron plays with a volleyball at the beach volleyball site for the 2012 Olympic Games, at Horse Guards Parade in London July 27, 2011. REUTERS/Stefan Wermuth.