George Osborne claims that spending cuts will produce a recovery.
From the Guardian:
The main test of a budget at this time is what it does for the recovery and growth of the British economy. George Osborne has repeatedly made clear that he wants to be judged by this test. He believes that deficit reduction is a growth policy which will be vindicated by its results. Growth has been postponed but, he insists, it is about to happen. So is he right?
It doesn’t look like it:
UK GDP has ground to a halt, while the United States has ticked slightly upward.
Now here’s unemployment:
Looks painful.
But at least we’re paying off the debt right? Nope:
Readers are of course advised to ignore the nonsensical future projections — particularly those for the United States — and focus instead on the fact that the UK is still amassing debt in spite of austerity.
So what the hell are we doing? Unemployment is ticking up, GDP is stagnant, and debt is still rising? Is this policy supposed to be working? Does the Cameron government not understand that cutting government outlays during a recession to pay down debt leads to falling tax receipts, which leads to bigger deficits (exactly what has happened!)?
The truth is — as Keynes noted — that the time for austerity at the treasury is the boom, not the bust. The only exception to this is if you can give back enough money to the taxpayer in tax breaks to offset the deleterious effects of spending cuts (as Ron Paul recommends), which itself is a form of spending. That way, government outlays remain roughly the same.
Cutting government waste is always a good idea; but using the savings to pay down debt (which very often in the modern world means sending the money overseas) during a recession seems like a very bad one. And it should be noted that the Cameron government isn’t even really cutting back much on what I consider to be waste. Britain spent billions effecting regime change in Libya.
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The 2012 London Olympics will be hailed as a job creator for months and months. Then 1 year later, a report will come out that saying that the London Olympics actually cost the UK tax payer money. Doh!
The economist Ludwig von Mises showed in 1920 that since a socialist economy destroys price information via government intrusion, the myriad of participants in the economy are unable to make a fully rational calculation about true profit and loss. Any economic activity that operates at a loss cannot be “sustainable”….
The UK and the USA are both on the same road, the UK is just furthur along.
Yes the Olympics will be a “great stimulus”. What the foolish central planners do not understand is that central planning — especially for something as facile and cosmetic as the Olympics — is generally a misallocation of resources and a broken window.
UK athletes will win 12 gold medals, besting France’s 9 gold medals and proving once again, the Anglo’s superiority over the Frogs.
PS The gold medals will not actually contain any gold!
Treasuries do not actually contain any treasure.
I think you mean “Von Mises SAID”, not “Von Mises SHOWED”. No-one, ever, has “showed” anything like that.
Your prescription is based on some high level interpretations of how the economy should behave and seems to imply that in the case of Britain (or even generally) there might always be a non-painful way out of an economic doldrum. That is, we just cut the crap, reduce taxes and the Humpty Dumpty is put back together. A painful way out is one that implies years of economic depression/unemployment/etc. I don’t have enough data to ascertain whether the idea of a-non-painful-way-out is valid for Britain but intuitively I can tell that it’s not valid in the general case. All of what I’m saying does not validate Cameron’s policies but I merely wanted to say that just because it’s painful over a number of years does not imply necessarily that it’s the bad policy.
Economically speaking Obama has been an awful President who has massively increased the per capita national debt. And the data shows very clearly and cleanly that Cameron is making him look good . Cameron’s policies are not working — I would grudgingly accept higher unemployment if we were actually paying off debt, but the debt is actually growing (just as I would predict based on falling tax receipts) and if continued will just lead to a systemic breakdown (which in the long run may be a good thing, but that’s another story).
I think this table is quite illustrative:
I’m personally shocked (no joke) that France is ahead of the USA!
But then I notice that that graph is based on the last 5 years. Yes, now I can believe this graph.
After what I have seen in the USA in the last 5 years, I feel sorry for the honest Brits.
I don’t know if you have read Adam Smiths’ “Wealth of Nations” But this genius understood the British economy better than anybody else.
Perhaps Politicians need to read Smith (British) Instead of Marx (German)
And Keynes (British) if they follow his logic, as John Aziz eluded to. Cut spending in a boom, and spend (EMERGENCY Welfare Transfers, Infrastructure Spending) in a Recession.
Britain is an Island economy with a huge population for its size. The innovation that came out of it 100-250 years ago has been lost. Who is learning from the older Engineers? What does it export? Tell me if you are British, because as an Australian I don’t see a lot of your products on our shelves, roads.
Excellent points, Buddy. We have systematically destroyed our intellectual capital and human infrastructure in the name of “globalisation”. That is “progress”.
“What does it export?”
Not really an export, but still having a great impact on the prosperity of a nation: how about democracy, stability, personal security and the rule of law? Some say they are even more important and scarcer than oil. And they’re probably right. Most countries are either failed states or almost-failed states: http://en.wikipedia.org/wiki/Failed_state#Failed_states_list
We also export a lot of worthless paper, broken promises and bogus analysis.
Also about exports, the mania about having exports is totally incomprehensible. As J. S. Mill said, the benefit from world trade for a country comes from imports not exports. That’s how I can eat chocolate even though I don’t live in Africa. Or tea. The only purpose of exports is so that a country can pay for imports.
It makes me very sad the parties of Keynes (Liberal Democrats) and Hayek (Conservatives) — two great but rather flawed economists — have combined to form a coalition whose policies reflect everything these two economists were wrong about (austerity is a good idea during a depression, war spending is stimulatory). And so the party of Oskar Lange (Labour) — a truly awful economist — will once again gain power to misallocate more resources and break the system some more.
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When you’re getting outperformed by France and the USA — two of the stickiest and most stagnant economies — you know you have a problem.
Speaking as a Brit, tax cuts would be good…and this would probably mean we would spend more elsewhere and boost aggregate demand…and so increase tax revenue for the government. If it is so simple why cant the economic advisers to the government see it? Are they misguided, stupid or just working on a different agenda?
My experience of a British University, is that highly paid managers are employed when they do very little actual work. The management seem to want to increase their own numbers. They spend their time writing huge reports and or shifting policy documents amongst each other and pushing people working on the coal face around for the fun of it. This is de-motivating and working in such a environment saps ones energy making it difficult to see any greater purpose to work other than making more work for ourselves and helping the managers to increase their petty empires and money. If this is the way the public sector operates in microcosm, we are in deep trouble. The big private sector firm also wastes money and resources of course because they are ‘protected’ by the state. The whole organizational form of the firm needs re-thinking, the role of the state needs to diminish only then will we see greater productivity and efficiency.
I think part of it is the madness of our democracy. Humans tend to vote for more leftist governments during expansions, and more rightist governments during depressions.
I think to some degree the Tories believe they have to cut (the stuff they want to cut) now they have the opportunity, because if they don’t it will never get cut. But evidently this is the wrong thing to do.
If I was running the government I would accrue more fixed-rate debt right now (because it’s cheap) to give out tax cuts and spend on infrastructure and technology and trying to make Britain more energy independent. I would start worrying about paying down debt (or defaulting) when there is more of a self-sustaining recovery. The main spending I would consider slashing to reduce waste and give the money back to taxpayers is military spending. I think it’s crazy to throw people off welfare and disability and into a jobless economy. We can concentrate on that later once there is more of a recovery.
Oh and before anyone wants to say the US approach has caused more inflation…
Yep, despite “austerity” Britain has higher inflation too.
That is only if you give a **** about the numbers coming out of the BLS.
Every trick they pull Britain pulls too. Seriously.
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Outstanding post. This is a extremely intriguing blog post. I will come again very soon.
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Aziz, have you seen the decline in UK oil extraction? I think UK problems have barely started… see:
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You are comparing fake, fudged US numbers to probably also fake and manipulated UK numbers.
It is not working.
😀
If the fudging is comparable the UK vs US situation is comparable.
Employment in Britain has nearly reached its 2008 peak whilst the US is still 5 million~ jobs off. The unemployment graph posted is rather misleading and represents the size of workforces changing in the US and UK rather than the number of people actually working. A comparison of the number of people employed would be more useful.
The growth numbers from the UK are also likely heavily distorted due to the UK barely having a functional statistical office currently as someone decided it would be a good idea to move it and turn over 90% off key staff in 2008/9.
A good example of a UK company that has products on sale everywhere would be ARM who design the CPUs that run almost every Smartphone, tablet and portable computing device in existence including the Ipad, Iphone, Samsung Galaxy 1,2,3 etc etc.
Comparing unemployment numbers as opposed to workforce size is relevant. It’s apples and apples. The UK is growing its population without producing a commensurate job growth. Comparing workforce sizes ignores population growth.
The UK is in recession again. I wonder why?
ARM are a success story — good for them. Doesn’t excuse government incompetence trying to deleverage its balance sheet at the same time as the private sector.
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