Contrasts Between the US’s and UK’s Post-Recession Policies-Becker

 

 

 Many economists and others in the US are advocating a second fiscal stimulus program, believing that the close to $1 trillion in the Obama stimulus package was too modest. This call for another round of government spending is taking place despite the fact that about one third of the original package has not yet been spent, even though it is more than one and one half years since the package was signed by President Obama. Moreover, skeptics (including myself) about whether the US needs another spending package point out that leading economists in the President’s Council of Economic Advisers were far too optimistic about the effects of a big stimulus on unemployment rates. Instead of a predicted decline in unemployment due to the stimulus of more than 1½ percentage points, the total fall in seasonally adjusted unemployment has been only ½ of a percentage point from its peak of 10.2 percent.

Of course, perhaps other factors, such as the uncertainty about the business environment that Congress and the President created through their rhetoric, and also through their actual and proposed legislation, offset powerful effects of the fiscal stimulus itself in reducing unemployment. The unpleasant fact we economists have to face is that there is not strong evidence on the actual effects of governmental spending on employment and GDP. The usual claimed effects are generally based on predictions from highly imperfect theoretical models of the economy rather than from strong direct and clear evidence on the employment consequences of different fiscal stimuli.

This is why the UK’s experiment in reducing rather than raising government spending while Britain is still coming out of its serious recession is not only daring in the present economic climate, but it is also of great value in determining whether growing government spending is a valuable way to speed an economy out of a serious recession. In order to bring under control the large fiscal deficit of Great Britain that is well over 10% of the UK’s GDP, the Tory (coalition) government of David Cameron has proposed a fiscal tightening that amount to about 1.5 percent of GDP during each of the next four years. This will be accomplished by some increase in taxes, but mainly by cuts in spending on public services, public investments, and various benefits to families.

It is informative to contrast this British approach with that of the US. Federal government spending during the past few years increased to about 25 percent of GDP from a level that had been rather stable for a couple of decades, under both Democratic and Republican administrations, at close to20 percent of GDP. The federal fiscal deficit in 2009 was about 12% of GDP, and is expected (or hoped!) to decline in 2010 to about 8%. These are two of the highest deficit ratios in many decades. Essentially nothing is being done in Washington about these enormous deficits, aside from some proposals to raise taxes on the rich that will bring in very little additional tax revenue. Moreover, these proposals have been opposed by many Democrats in Congress as well as by most Republicans.

So which approach will be more successful: the British one that will sharply reduce government spending and fiscal deficits, or the American one that believes these deficits are necessary, and perhaps even too small, to get this country out of the recession? No one knows for sure about the short run effects on their respective economies of these very different approaches. Perhaps, and this is only a “perhaps” that I am by no means persuaded of, the British approach will cause more short-run harm to employment and GDP than will the American approach.

However, I am convinced that the British way is a far better way to improve the long-term growth prospects of an economy. That is, reductions in the bloated levels of government spending and fiscal deficits will do much more to stimulate the longer-term growth of the British economy, mainly by encouraging private investment and innovation, than will the present American approach. Perhaps in good part due to the gridlock in Washington that Posner discusses, this approach shows little desire to cut back on federal government spending, or on actual and projected fiscal deficits.

Comments

[Brophy]

"fiscal rectitude"

The British seem to have been in search of rectitude for the last century. Rather unfortunately, in the view of the historian Nial Ferguson, they saw it in making a basically German Russian war WWI. Keynes remark 'In the long run we are all dead' might be seen as converging with the results of rectitude in that instance. Later they hung onto the gold standard which Bernanke has shown evidence was a mistake. Perhaps the new British believe that in the long run it will be seen whether or not your country is on a sustainable financial path or not and, if it is the former, then the economy, if open, will not die but grow.

[ffxiv gil]

This will be accomplished by some increase in taxes, but mainly by cuts in spending on public services, public investments, and various benefits to families.

[Joel West]

David Henderson notes that facing a comparable deficit more than a decade ago, Canada balanced its budget by cutting spending and consequently has a strong financial position to weather the current recession. http://econlog.econlib.org/archives/2010/11/me_in_the_econo_1.html

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This will be accomplished by some increase in taxes, but mainly by cuts in spending on public services, public investments, and various benefits to families.

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[Jack]

"However, I am convinced that the British way is a far better way to improve the long-term growth prospects of an economy."

.......... Ha! 'twas our dear Lord Keynes who said "in the long run we're all dead".

"That is, reductions in the bloated levels of government spending and fiscal deficits will do much more to stimulate the longer-term growth of the British economy, mainly by encouraging private investment and innovation, than will the present American approach."

.............Oh? How so? Here we are with a near zero rate of interest, awash in investment capital with our "innovators" largely still employed. We, and the rest of the world, have huge levels of over-capacity in an economy starved by lack of demand.

Then what are the demographics of the unemployed? I've no formal study but it's obvious that housing, having tanked from 2.5 million starts to less than 400,000 is a major source of the unemployed, many of whom will never build another house.

Building a home appears to employ four workers for a year with more jobs created in appliances, furniture and after market upgrades, patios, pools, fences etc.

Also out of work are the lower echelon "financiers" realtors, title companies etc. Some may well be very creative but really? are they going to go out and borrow money, no matter how cheap the price, and "innovate?" or build a new company in their area of expertise? Nope.

Our unemployed tradesmen need to be re-employed in infrastructure or even new energy projects; those who once built housing foundations can easily adapt to building windmill or solar foundations. Tools are tools, plumbing is plumbing and electrical work is electrical work.

Deficits starving out private investment capital? Hmm, perhaps capital is being eroded more by losses in residential R/E, then commercial R/E, then yet another round of bank implosions. And the route of cutting and laying of people will do little to reduce deficits anyway.

If we pick the right projects our investment capital will grow. For example new alternative energy projects keep dollars in our economy both from the domestic jobs and rather than being exported to chase ever more costly fossil fuels.

Even in the realm of traditional fuels, for a decade or more Alaska has wanted to build a 52" pressurized NGasline down to the midwest. It's a $40 billion, private investment project that would employ 10's of thousands in NAmerica. But it's having a tough time getting started. Meanwhile we are paying high prices to ship LNG across oceans and export yet more petrodollars. (For some reason the Bushies liked LNG and there are more of the billion plus projects on the books.)

Lastly, while typical recessions are over too fast to respond to nearly "shovel ready" projects but this one is a doozy and likely fraught with structural rather than cyclical problems that will take a LONG time to correct. Projects will have time to help.

The question here is a matter of American courage to go forward and build our way out as compared to curling up like a fearful sowbug while our people languish on unemployment and in poverty. A trillion in Keynesian stimulus and investment in OUR country? Ha! If it were a trillion for a nation building war halfway around the globe the amount would hardly be discussed.

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[Christopher Graves]

I am hoping that as people come to their senses in America and in England, we are in the process of witnessing the death of the democratic left and Keynesianism. We must realize that the democratic cover for the left in the West is as vacuous as taking a vote at a lynching. The state has no legitimate power to have taken on as many responsibilities as it has along with the power to coercively impose the will of those in power. Legal positivists on the left and the right have nihilistically overlooked or denied the claims of individual rights and what people have actually contracted for with the state justifying their blindness with appeals to majoritarianism, social utility, or security.

The time has come to re-establish the preeminence of rights as understood by Locke and others in his time as the bedrock of our system of limited government and individual liberty. Only then can we justly consider the practical role of subsidiary procedures and policy that have become political fetishes.

[Jack]

Ahh Chris! Good to see you well and energetically flogging "legal positivism" rather than muddying your boots down here in the deep ditch the economic pragmatism that WILL be necessary to repair the bus that was derailed by shoddy governance and haul it back up on the road.

BTW what would all of your ivory tower ideology have to say about whacking 25% or so out of a military "budget" equal to that of all other nations combined?

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we are in the process of witnessing the death of the democratic left and Keynesianism. We must realize that the democratic cover for the left in the West is as vacuous as taking a vote at a lynching.

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[Joss Wood]

FWIW the UK is not reducing Government spending. Govt spending is planned to increase every year over the forecast period. It is reducing the growth in spending, but it will still spend more every year for the next 4 years. Not exactly rigorous austerity.

[Christopher Graves]

Thanks for your comments on my post, Jack. How would one evaluate the results of a particular policy course if normative considerations were not taken into account? Humanitarian or egalitarian principles that you frequently seem to work from are examples of such normative concerns.

Furthermore, how would one know what was working if one were not able to discern the facts of the world? Such observations are intrinsically theory-laden as philosophers of science Karl Popper and Thomas Kuhn argue. The conceptual schemes that structure the world differently for different observers are fraught with metaphysical assumptions.

Finally, be careful about confusing 'ideology' with philosophy. There is no escaping philosophy even as we guard against ideological blinders that are immune from reasonable challenge.

[Meradj Aghdam]

Well, it is a very nice description of what is going on between these two countries, but however to my eyes it misses a point. That UK is obliged to reduce its deficit for the sake of Europe while there are no obligations for the United States. Europe would fall apart if UK runs into deficit like Greece. It was possible to save Greece but it would be impossible to save UK, or France or Germany, any of these countries if they run into huge deficit, it just means the “end” of Europe. Since there are no constraints for the US, that is why the politicians are embracing the Keynesian ideologies there, while his prescriptions are no longer appealing in his very homeland.

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any of these countries if they run into huge deficit, it just means the “end” of Europe. Since there are no constraints for the US,

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[ffxiv gill]

The usual claimed effects are generally based on predictions from highly imperfect theoretical models of the economy rather than from strong direct and clear evidence on the employment consequences of different fiscal stimuli.

[ffxiv gil]

This will be accomplished by some increase in taxes, but mainly by cuts in spending on public services, public investments, and various benefits to families.

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[philosopher.stoned]

you overlook a very important fact. Debts are denominated in US dollars (correct me if i'm wrong here about UK debt).

By increased spending & so called dollar printing, US is in a rare position to devalue its debt over a period of time.
If British govt. did this, their debt load would increase in proportion to currency devaluation. Doesn't sound like a kool incentive does it?

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