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The austerity myth

21 October 2011

11:41 AM

21 October 2011

11:41 AM

CoffeeHousers may remember an odd New York Times editorial recently where they tried to blame the evaporation of British economic growth on
austerity. Perhaps the newspapers’s famed fact-checkers had taken the day off, because the slightest piece of research would have exposed the premises of the piece as bunkum. This morning,
the ONS has produced monthly public finance figures, showing current spending is still rising in Britain. But first, let’s get to
the New York Times editorial:

"Greece, which has been forced into induced recession by misguided European Union creditors, Britain has inflicted this harmful quack cure on itself… Austerity was a deliberate
ideological choice by Prime Minister David Cameron’s ruling coalition of Conservatives and Liberal Democrats, elected 17 months ago. It has failed and can be expected to keep
failing"

Had the New York Times consulted the actual data, it would find out that austerity has barely been tried. Yes, some government departments are making cuts – albeit two years later
than most households and companies did. But the below chart shows central government current spending, divided by months:
  
So in the last 12 months, the UK government current spending totaled £613.5bn – the highest figure in British history. If this is austerity, I’d hate to see profligacy. So where are
the “drastic public spending cuts” which have apparently pushed new employment? In the imagination of the New York Times oped writers.
 
And while we’re at it, here’s another NYT assertion:

“The government has kept its promise to slash public-sector jobs — more than 100,000 have been lost in recent months. But its deficit-reduction policies have failed to revive the
business confidence that was supposed to spur private-sector hiring.”

Is that so? The below chart shows the change in private sector jobs, public sector jobs – and the black line shows the net change in jobs:

So extra private jobs have offset public sector job losses. Given the trajectory of earlier British recession recoveries, there is every reason to believe private sector will take up the slack. It
just can’t be dismissed as ideology. Future growth is evaporating, but confidence has been hit by the return of inflation – a factor seldom mentioned by the deficit deniers.
 
What news of the two Eurozone countries that have genuinely applied austerity: Ireland and Estonia? Ireland’s economy is now growing at twice the pace of Britain, and its borrowing rates have
returned to pre-crisis levels. Estonia, which slashed governent jobs and pay and pensions, is celebrating second quarter GDP growth of 8 per cent.
 
The only sentence of that NYT editorial that I’d agree with is that “The real world is a lot more complicated” than the world of political and economic dogma. Economics is never
straightforward. You can’t predict the future, there are too many variables. Recoveries come in zig zags, never linear, and Ireland outpacing us is not difficult – the Bonsai tree in my kitchen
is growing faster than the British economy. I’m not saying that austerity is always good, nor that debt-financed state-spending is always bad. Both can play their part.
 
But the British experience certainly does not fit the ideological simplicity of the New York Times editorial. The paper, of course, has an agenda: its columnist, Paul Krugman, is an ally of Gordon
Brown and believed that Labour would have enacted his neo-Keynsian agenda over here. But Krugman should take heart. George Osborne’s bark is much worse than his bite. Total spending cuts are
just 1 percentage point a year more than Alistair Darling’s published plans.

We are all learning from the trajectory of this recession and the recovery. But I have a hunch that, when Cameron comes to fight the next election, he’ll find the countries which bit the bullet
 and frontloaded the pain – Ireland, Iceland, Estonia – in far better shape than a Britain which decided to adopt the language of austerity but not really enact it.

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