Learning From The UK

The U.S. economy isn’t the only one struggling.  That means there are things to learn from other countries.  Take the United Kingdom, for example. 

The United Kingdom faces many of the same problems we do.  And the British government has decided to respond to these problems with many of the same policies promoted by our own conservative political leaders: slash public spending and cut public sector jobs and wages.  In fact,  the British plan calls for six consecutive years of spending cuts.  As Paul Krugman explains:

Britain, like America, is suffering from the aftermath of a housing and debt bubble. Its problems are compounded by London’s role as an international financial center: Britain came to rely too much on profits from wheeling and dealing to drive its economy — and on financial-industry tax payments to pay for government programs.

Over-reliance on the financial industry largely explains why Britain, which came into the crisis with relatively low public debt, has seen its budget deficit soar to 11 percent of G.D.P. — slightly worse than the U.S. deficit. And there’s no question that Britain will eventually need to balance its books with spending cuts and tax increases.

The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

But trendy fashion, almost by definition, isn’t sensible — and the British government seems determined to ignore the lessons of history.

Both the new British budget announced on Wednesday [October 20, 2010] and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative. . . .

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.

Well, not surprisingly, the outcome of this austerity plan has been further economic decline.   As the chart below shows, the UK economy actually fell back into recession the last three months of 2010, suffering a 0.5% contraction. 

Despite that outcome, the government, according to the BBC, remains committed to its austerity policy: 

The Chancellor, George Osborne, said the numbers were disappointing.

But he added the government would not be “blown off course” from its austerity program.

The figures are set to raise concerns over prospects for the economy, with large public spending cuts expected to come in this year.

The BBC’s economics editor Stephanie Flanders said people were right to worry about where the UK’s growth would come from in 2011, especially as higher-than-expected inflation had dealt a further blow to household budgets.

Michael Roberts provides the following update and summary of economic trends:

The UK economy is struggling to recover from the Great Recession of 2008-9.  While profitability has recovered, British big business is still refusing to invest.  In Q1’11, UK gross fixed investment slumped by 4.4% compared with Q4’10, while household consumption fell 0.6%.  Most significant, business investment excluding property fell 7.1%  (manufacturing investment fell 1.1%).  It prefers to heap up the cash, invest abroad or speculate in stock markets rather than invest in expanding production or employment in the UK.   And while that continues British households on average will continue to suffer significant losses in living standards.

Household spending  is set to experience the slowest pick-up of any post-recession period since 1830, according to a survey of economists.  British consumers will spending barely more by 2015 than they were before the financial crisis in 2008.  In the UK’s 18 major recessions since records began in 1830, Bank of England data show consumer spending on average recovered to 12% above its previous peak within seven years.  But forecasts by the UK’s Office for Budget Responsibility put spending in 2015 at just 5.4% above the 2008 peak, making it the slowest recovery of any comparable post-recession period.  After recessions in the early 1980s and 1990s, spending was 20% and 15% higher respectively.

That household spending will be so laboured is not surprising as the average British household faces the biggest drop in income for 30 years.   Average income could fall 3% this year, the steepest drop since 1981 and taking households back to 2004-5 levels.  The Institute for Fiscal Studies said average take-home incomes actually rose during recent recession due to low inflation and higher social benefits.  But IFS analysis suggests the long-term effects of the recession and higher inflation will soon squeeze incomes.  Lower wage increases and the corrosive effect of rising inflation mean that it is “entirely possible” that income this year will return to levels of six years ago.   Even the Bank of England warned that UK households faced a significant cut in their spending power as inflation heads towards a 5% annual rate.

So, one thing we can learn from studying the UK is not to adopt conservative budget policies.  Another is that there are alternatives to the other established policy option, which is to just keep spending and hoping for a magical revival of economic fortunes. 

For example, UK climate activists and several national trade unions are promoting a straightforward, effective campaign to create one million green climate jobs.  As the alliance says:

To find solutions to the climate crisis and the recession, we need more public spending, the opposite of current government policy. We have people who need jobs and work that needs to be done. A million climate jobs in the UK will not solve all the economy’s problems. But it will take a million human beings off the dole and put them to work saving the future.

Their plan is careful to distinguish between climate jobs (which reduce greenhouse gases) and green jobs (which can mean almost anything).  More specifically it calls for the creation of a million, new public sector jobs and a National Climate Service to employ them, highlights the kind of work that should be done, and presents a plan for financing it that does not rely on increasing the federal deficit.

In the words of the alliance:

We mean a million new jobs, not ones people are already doing. We don’t want to add up existing and new jobs and say that now we have a million climate jobs. We don’t mean jobs with a climate label, or a climate aspect. We don’t want old jobs with new names, or ones with ‘sustainable’ inserted into the job title. And we don’t mean ‘carbon finance’ jobs.

We mean new jobs now. We want the government to start employing 83,300 workers a month in climate jobs. Then, within twelve months, we will have created a million jobs.

We mean government jobs. This is a new idea. Up to now government policy under both Labour and Conservatives has been to use subsidies and tax breaks to encourage private industry to invest in renewable energy. The traditional approach is to encourage the market. That’s much too slow and inefficient. We want something more like the way the government used to run the National Health Service. In effect, the government sets up a National Climate Service (NCS) and employs staff to do the work that needs to be done. Government policy has also been to give people grants and loans to insulate and refit their houses. Instead, we want to send teams of construction workers to renovate everyone’s home, street by street. And we want the government to construct wind farms, build railways, and put buses on the streets.

Direct government employment means secure, flexible, permanent jobs. Workers with new climate jobs won’t always keep doing the same thing, but they will be retrained as new kinds of work are needed.

I strongly recommend reading their plan.