What we can learn from Britain about the disastrous effects of premature fiscal austerity

Economists have been watching Britain carefully because, after prime minister David Cameron took charge in 2010, he promptly slashed government spending in an attempt, he then claimed, to instill “confidence” in everyone. That is, he imposed austerity while the British economy was in the dumps. This is precisely the wrong thing to do during a downturn. It doesn’t help the deficit. And it makes the economy worse. Both of these things began happening in Britain, long before violence broke out in one of the poorest parts of London.

Economists like Krugman called this in advance, warning on October 23, 2010:

Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost 3 million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

Why is the British government doing this? The real reason has a lot to do with ideology: The Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative.

Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks — a shift from hope to fear. In his speech announcing the budget plan, George Osborne, the chancellor of the exchequer, seemed to have given up on the confidence fairy — that is, on claims that the plan would have positive effects on employment and growth.

Instead, it was all about the apocalypse looming if Britain failed to go down this route. Never mind that British debt as a percentage of national income is actually below its historical average; never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control. Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it. [Emphasis added.]

Now, 10 months later and as predicted, the British economy is significantly worse, social welfare programs have been slashed in the name of belt-tightening, and a poor section of London is being burned to the ground by angry youth who cannot find work, whose college loan programs have been reduced, and who are losing hope for a bright future.

In Salon.com yesterday, Murtaza Hussain argues that there is a causal relationship between the violence in Britain and the Government’s premature budget cuts:

“There’s going to be riots, there’ll be riots.” Less than a week before a police shooting in the North London neighbourhood of Tottenham triggered the worst social unrest to hit Britain in decades, these were the words of a young man predicting the effect of youth club closures on his community. While the wanton violence and destruction still occurring in London and other places within Britain has shocked the world, it has not been as much of a surprise to many UK residents who have been warning of growing anger and alienation within British society, especially among youth.

 While the rioters have come from backgrounds which cut across lines of race and social status, in the broadest sense what most of them have in common is that they are young men from economically deprived parts of the country. While many individuals have rightly pointed out that much of the violence appears borne of opportunistic criminality, this does not address the observable correlation between lack of economic opportunity, cuts to social services and the attraction of engaging in these types of destructive behaviours. Not only does Britain have one of the highest violent crime rates in the European Union, its unemployment rate for those between the ages of 16-24 currently stands at 18%. As Matthew Goodwin, a politics professor at the University of Nottingham, explained to Forbes:

“There’s income inequality, extremely high levels of unemployment between 16 and 24-year-olds and huge parts of this population not in education or training…there’s a general malaise amongst a particular generation.”

The idea that we must not earnestly try to understand these actions is not only counterproductive but potentially suicidal in the long term. . . .

I do not wish to be misunderstood as making excuses for rioters or looters. There is no excuse for that, no matter how rough the road. But the lesson for policymakers could not be clearer: fiscal austerity should wait. Delaying is not only the best way to sustainably rein in the budget deficit, it is the best way to hold our society together.

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About Guy N. Texas

Guy N. Texas is the pen name of a lawyer living in Dallas, who is now a liberal. He was once conservative, but this word has so morphed in meaning that he can no longer call himself that in good conscience. Guy has no political aspirations. He speaks only for himself.
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