Economics

The Cameron Crazies: Why the Left is wrong about UK (and U.S.) austerity

How odd. For more than 30 years, American liberals had little to say about the British economy, other than noting how swell its state-run healthcare system was. They sort of missed the free-market miracle happening there.

In 1980, British GDP per person was 5% smaller than Italy’s, 12% smaller than France’s, 14% smaller than Germany’s, 21% smaller than Sweden’s, and 40% smaller than Switzerland’s. But the pro-market reforms begun under Margaret Thatcher — deregulation, privatization, and lowering marginal tax rates — worked a medical wonder on the sick man of Europe. By 2008, British per capita GDP was 12% bigger than Italy’s, 7% bigger than France’s, and the same as Germany’s. Britain had also narrowed the gap with Sweden and Switzerland.

But American liberals are suddenly very interested in what’s happening in the UK. They point to the mild recession the nation is now experiencing as proof positive that Prime Minister David Cameron’s austerity drive is a massive mistake. Not that they really much care what’s happening in the UK, of course. But those on the American Left want to use the UK example to bolster their argument that a) the U.S. economy would be worse off without President Obama’s stimulus plan, b) the U.S. economy needs heaps more stimulus, and c) Republican austerity ideas would kill the fragile recovery.

1. Recall that American liberals actually liked the Cameron plan when it was first announced because it raised taxes, just like Obama wants to do now. The Cameron formula was 80% spending cuts and 20% tax increases. The tax hikes were the mistake — not the spending cuts — as they have been throughout Europe, a region quite likely at the tippy top of the Laffer Curve. The UK should be cutting tax rates broadly, permanently, efficiently, and immediately. Indeed, the government is scrapping the previous government’s hike in the top marginal rate to 50% from 45% because it didn’t raise any money. Keep it up! Accelerate and deepen those corporate tax cuts! The Cameron government also needs to reverse the slippage in deregulation. The World Economic Forum ranks Britain 83rd out of 142 countries for placing the largest regulatory burden on business.

2. Look at the neighborhood the UK is playing in. Some 50% of its exports go to the rest of Europe, which is in the dumps right now and could also use some pro-growth tax policy along with labor market and pension reforms. Oh, and how is austerity advocate Germany doing? Not bad: “Berlin’s latest economic forecast is seen by analysts as renewed evidence that Germany has largely defied the eurozone debt crisis and generally performed better than its main partners in Europe.”

3. Let’s not forget the UK’s precarious debt situation. There are worse things than a mild recession — such as a full-blown debt crisis. As the UK’s Reform think tank argues, “A major shift in fiscal policy would damage the Coalition’s fiscal credibility and risk increasing interest rates. To show the importance of this, Reform calculated that with current low bond rates the UK will be able to service its debt even with low growth. However, if yields on 10-year bond rates were to rise above 5% (similar to the levels currently in Spain) the government would have to run a surplus in each year of the current Spending Review period or else face a debt spiral.”

4. Do the Obamacrats really think Republicans are offering extreme austerity? Here is Treasury Secretary Tim Geithner yesterday on CNBC: “And it would be a terrible mistake, economically, for the United States, for us to lurch, prematurely, to extreme austerity, to severe austerity.” The Paul Ryan-House Republican budget, assuming CBO’s gloomy economic numbers, would cut debt as a share of GDP by about 10 percentage points to a still historically high 62% by 2022 — a decade from now! — while also sharply cutting taxes. During that span, Washington would add some $3 trillion in new debt. Mitt Romney, as well, would shoot for balancing the budget by 2020. These are rather gentle glide paths, hardly crushing austerity. But, then again, they probably look severe vs. the Obama debt trajectory:

 

5 thoughts on “The Cameron Crazies: Why the Left is wrong about UK (and U.S.) austerity

  1. In My Opinion: Oh my God. Do you really think going after the poor to support the crimes of the rich is morally correct? It’s really a sad state our society when the wrong people are making money, when the smarter people are not. P.S. Your graph is a fiction.

    • I am sure glad that “smarter people” like the author are not deciding who the right and wrong people are to make money.
      Yep the English underclass is poor because of the rich…
      Not understanding economics is common , but alas the chart is not fiction, rather the viewpoint of ” very little esoteric knowledge” certainly is.

  2. Well done. I rarely find myself in agreement with mainstream economists in Europe, but graduated austerity is the only way out of this mess. Once the general population becomes educated on factual economic principles, they will understand that you can never tax and spend your way to prosperity. The poor are not poor because the rich are rich, and we must stop demonizing the concept of wealth. Ask yourself which is better, a society where everyone is rich or everyone is poor. The answer to this rhetorical question will tell you which way your energies should be directed. The old adage regarding Teach a Man to Fish vs. Give a Man a Fish is the truth…universal and eternal.

  3. The Germany/UK comparison is a flawed one: Germany did NOT cut spending nearly as severely as the UK did. It managed to avoid a double-dip recession despite the fact that more than 50% of Germany’s exports go to European countries. Go figure.

  4. i would like to know if in England or anyother developed country the span between the worker and the CEO<S is as great as in the United States. Whatother developed country doesn<t have health insurance. Romney thinks Europe's financial system is old hat.

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