David Frum

04.27.12

Is Austerity to Blame for the UK's Recession?

It is possible that you have recently seen this chart in blog posts arguing that more economic stimulus is needed:

UK recession chart

The graphic originally came from Scott Barber, a Reuters reporter who included the chart as part of a bigger report about why the UK has fallen back into a recession.

The Cameron government of the UK is being cited by some as an example of the real-world consequences for strong austerity measures. The argument is simple: Cameron practiced austerity, Obama did not. As a result, the UK is back in recession, while the US is not.

Here is a short round up of how the blogosphere, left and right, is reacting to the news:

James Pethokoukis, AEI:

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.”

Paul Krugman, New York Times:

When David Cameron became PM, and announced his austerity plans — buying completely into both the confidence fairy and the invisible bond vigilantes — many were the hosannas, from both sides of the Atlantic. Pundits here urged Obama to “do a Cameron”; Cameron and Osborne were the toast of Very Serious People everywhere.

Now Britain is officially in double-dip recession, and has achieved the remarkable feat of doing worse this time around than it did in the 1930s.

Joe Weisenthal, Business Insider:

The Euro is badly flawed, and that's created all kinds of sovereign debt problems not befitting developed economies. That's turned its banking system into shambles, further exacerbating the problem.

The U.K. doesn't have this problem.

It controls its currency, and the market is not at all worried about its debt position.

And yet! And yet David Cameron has — for no reason — pushed the same austere ideas that are leading to ruin in Greece and Spain.

That's bad, but whatever, leaders make bad moves, cutting spending at the wrong time. It happens.

But here's where David Cameron sounds like a moron.

During Prime Ministers' Questions today, this is what he said, according to Bloomberg:

CAMERON SAYS LOW RATES DEMONSTRATE BRITAIN HAS CREDIBILITY

OMG! Your economy is going into a double dip recession! That's why your government borrowing rates are plunging. It's got nothing to do with "credibility." It's the fact that when your economy is going down the tubes, there's nothing appealing to invest in, and so they just park their cash in risk-free government debt.

Low rates in the U.S., U.K., Germany, and Japan, are the surest signals of long-term decline. What on earth are you bragging about?

This is the contagion channel that nobody thinks about. Everyone talks about how the crisis in the Eurozone could topple world banks, but here's an example of how the Eurozone crisis has rotted the minds of leaders (and it's not just in the U.K., but also in the U.S. where 'Greece' is used as a warning of what happens if we don't use austerity).

Matthew O'Brien, The Atlantic:

That's the mistake Cameron's government made. They thought deficits mattered more than growth. They don't. That's not to say that Britain's budget cuts haven't reduced borrowing costs. They have. But not for the reason Cameron hoped for. Rather than "restoring confidence" in Britain's finances, austerity has destroyed confidence in Britain's growth. And, again, that's good news for borrowing costs. But it just shows how unnecessary austerity has been. Britain probably wouldn't be paying much, if any, more to borrow even if they hadn't narrowed their deficit. Consider that since Cameron was elected, British yields have fallen 181 basis points while American yields have fallen ... 170 basis points. But even if Britain did pay more, that would be good news! It would mean that their economy is growing enough that investors are more worried about inflation than low-growth.

I'm not saying that deficits never matter. I'm saying they don't matter now. If deficits are structural, markets eventually will lose confidence in a government. For us, that means we need to rein in healthcare spending, which is the big driver of our long-term debt problems. But we have to get to the long-term first. We shouldn't worry about deficits in the short-term. Doing so is unnecessary and self-defeating. Just ask David Cameron.