The New Yorker’s John Cassidy argues the United Kingdom has provided a natural experiment disproving the “efficacy of austerity economics.” His proof: Last week, George Osborne, the chancellor of the Exchequer, conceded that growth has been slower and debt higher than what it forecasted back in June 2010. Cassidy also points out that the US economy has grown far faster than Britain’s. And then he concludes:
Let’s go over that one more time. Having adopted the policies of Keynes in response to a calamitous recession, the United States has grown more than twice as fast during the past three years as Britain, which adopted the economics of Hoover (and Paul Ryan). Meanwhile, the gaping hole in the two countries’ budgets has declined at roughly the same rate, and next year the U.S. will be in better fiscal shape than its old ally.
I think Cassidy is too dismissive of the impact of the eurozone debt crisis on the British economy. As one London-based asset management firm put it recently:
Many Keynesian economists are suggesting that this has been caused by “fiscal austerity”, notably the larger tightening in the UK fiscal stance which has occurred under the coalition government since 2010. Important implications are being drawn from this observation for the future of fiscal policy in all of the developed economies. Although our results offer partial support for this line of argument, we estimate that “fiscal austerity” since 2010 has accounted for less than half of the shortfall in UK GDP relative to the US since 2007. An equally important factor has been the sluggish performance of UK export markets, which stems from the UK’s under-exposure to the fast-growing markets in the emerging world, and its over-exposure to the recession in the Euro Area markets. This is the result of long-lasting structural problems in the economy – problems which cannot be readily solved by easier fiscal policy in the immediate future.
Indeed, the study posits a multifactor reason for why UK growth has been slower than US growth, as seen in the above chart. One can quibble with how blame is apportioned, of course. But at the very least, the report suggests one should not be so quick to make an ideological point. It should also be noted that the Cameron government has raised taxes, something the Ryan Republicans have not advocated. And does Cassidy actually think the austerity of Herbert Hoover caused the Great Depression? He seems to imply as much. Pretty sure the Fed played a big role. And I am not sure the economic record of austerity is so straightforward.