Benchmarking the US and UK economies post-2007 Post author By Kevin O’Rourke Post date October 24, 2012 What is it with these economic historians? Schularick and Taylor cast a dim eye on UK economic performance here. HT Paul Krugman. Categories In Banking Crisis, Economic history, Fiscal Policy 26 Comments on Benchmarking the US and UK economies post-2007 ← In which Barry Eichengreen and I are shocked → Statement by the EC, ECB, and IMF on the Review Mission to Ireland 26 replies on “Benchmarking the US and UK economies post-2007” Foodbanks appear to be one of the few growth industries in the UK. I thought this Grauniad editorial was quite good. http://www.guardian.co.uk/commentisfree/2012/oct/21/austerity-debate-editorial What the right posited as remedial action to stop Britain turning into Greece is, it is clear, instead a programme to shrink the state. But even if that were halted at breakfast tomorrow, that still wouldn’t resolve the other underlying issues: an oversized, socially useless and extractive financial sector; runaway inequality; a lopsided economy reliant on shopping and borrowing rather than producing and exporting; and a dearth of private sector jobs outside London providing decent pay, pensions and conditions, of the kind that manufacturing used to provide. The UK recession is beginning to look like a stairs to the basement rather than a L, a V or a W. Creditors want ‘their’ money back, and they are prepared to drive Europe, the UK and anywhere else into recession or depression in order to get that money. Right now the creditors have the whip hand. At least until people decide not to buy their products anymore. That is the only message they will understand clearly. this is Alphaville’s take from earlier http://ftalphaville.ft.com/2012/10/24/1227751/now-about-the-uks-recovery/ This sort of thing permeates the public consciousness only slowly – you will still find ex-radio 1 djs confidently telling the linters that everybody knows there is no alternative to UK government policy because obviously if there’s too much debt then the sooner you get rid of some the better. One historical aspect I find interesting is that in the UK you have a finance minister who because of Liberal Party capitulation haas been effectively given enough roPe to hang his own rhetoric. In the long term, would it actually be useful if this also happened in the US (not to make light of the more immediate consequences)? The trouble with these studies is that they assume that economies are mechanisms with similar characteristics which can be compared over time. Observation suggests, however, that, while this is true up to a point, the political and social aspects differ so much as to make many comparisons a largely theoretical exercise.The UK, for example, is suffering from many of the same ills that impact Ireland, notably a bloated public sector. I would suggest that Ireland is ahead of the curve in resolving some of the issues simply because the Exchequer has run out of road within a monetary union. Perhaps the most interesting official statement in recent times is that made by the Clerk of the Dáil yesterday. http://www.irishtimes.com/newspaper/ireland/2012/1024/1224325626074.html If this is true of allowances, why not the pay and conditions of politicians as well which might bring a halt to the organised permanent raid on the public purse by politicians and public servants alike? Even RTE has plucked up the courage to point out the obvious, David Davenpower commenting that protesting new entrants to the teaching profession – on temporary contracts – were being placed in that situation by the need to pay 60 million euro in increments to serving teachers. The same phenomenon – what we have we hold – applies across the public sector. The UK has not even begun to undertake the necessary changes to restore the productive and competitive sectors of its economy despite the stated intentions of the present government. It has hardly surprising, in the circumstances, that its overall economic performance has been so poor. @DOCM The point of the data presented is that the US and the UK, with economies on similar paths until 2008, have rapidly diverged since the crisis hit in 2008. Both economies have had near zero interest rates, both have engaged in QE, but the clear difference in approach is that the UK, under the Cons have embarked on a reduction of public demand i.e austerity. No amount of structural changes, however necessary, would make a substantial difference in a few years. In Ireland structural changes are absolutely necessary, but the point I am learning from the data being presented, is that demand levels should not be reduced in the economy, unless one wants to deliberately cause pain for the sake of it. Further IMHO, it is possible to reallocate overall government expenditure without reducing demand, or even to reduce government expenditure while increasing demand in the economy. It can be done through taxes on higher levels of income and wealth, that particularly in recession times are being saved and not being spent. There has been little talk of the fact that during one of the greatest periods of economic growth in the US, the 1950s as I understand it, marginal taxes were extremely high. There is logic to this phenomenon. People on lower incomes spend the income because they must it to survive. People on higher incomes save their money and hoard it in uncertain times, the avoidance of loss being the primary motive. Other factors do influence the outcomes, for example QE. Total US QE since 2008 is about $2.8 trillion, The UK £stg 375, the ECB ZERO. Yet, despite the ECB/German fear of inflation, why has there been no serious inflation in the US or the UK? The ECB/Germany need to address that question. People should not accept the rejection of a policy to combat the crisis on the fear of ‘There Be Dragons’, when the evidence contradicts the existence of Dragons and when other dangers are far more real and present. [The fact that the QE money is targeted at the wealthy financial sector is most of the reason that it does not get spent and therefore has little economic effect. The QE money is simply stuck in the banks /insurances]. The fact that Ireland has insufficient exchequer revenues at present need not prevent us from restructuring in a way that does not reduces demand. It is a question of priorities. @grumpy This sort of thing permeates the public consciousness only slowly In fairness to the public this particular thing is taking a long time to permeate the consciousness of the policy elite in Europe and as you know yourself persuading people that things are complicated in potentially non-intuitive ways can be hard. Swabian housewife macro just will not die – true zombie economics. Less generously George Osborne is an upper class twit running on misplaced self confidence and dated conservative doctrine who should never have been put in the position he is in. Cameron has to take his share of the blame for promoting and then protecting the damn fool. Old Gordo Brown looks like a giant now. Lastly, for those who apparently failed to read the very short piece Kevin O’Rourke linked to or the even shorter precis that Grumpy did it was only about those evil communist fiscal multipliers (which do not apply in the UK anyway, because of the public service apparently. <Sighs>) in an indirect way. It is more about the failure of the Frankfurt consensus. Also the original column to which this one is an addendum is confusingly underneath the references. Unpalatable reading for the “structuralists” and yet more analysis pinning the blame for the depth of the recession in the west on the financial crisis. Reality based community stuff. @ Joseph Ryan “Further IMHO, it is possible to reallocate overall government expenditure without reducing demand, or even to reduce government expenditure while increasing demand in the economy. It can be done through taxes on higher levels of income and wealth, that particularly in recession times are being saved and not being spent.” I could not agree more provided the proviso is added that taxes are not raised simply to continue funding bubble era incomes based on e.g. egregious rent-seeking as in the case of teachers already in employment! It is my hope that, after sitting on its hands since coming to power, effectively implementing the actions – insufficient – taken by the late Brian Lenihan, the government will do exactly that in the upcoming budget i.e. stick to an appropriate balance between tax increases and expenditure reductions. It may be that the entire Continent of Europe is on a mistaken path in the context of the broader theoretical debate. Time will tell. Regling, for example, is quoted recently as saying that it would take two or three years for the steps taken by Monti to have an impact! The fact that the UK is on it as well cannot, at least, be blamed on membership of the euro. @ Joseph Ryan Incidentally, it is also my hope that we may be seeing, courtesy of the PAC, and the intrinsic contradictions in the efforts to date to maintain the status quo, the beginning of the end of the rigid system of salary scales and “relativities” across a public service assumed to be homogeneous when it is blindingly obvious that it is not. The question also needs to be raised as to why the vast bulk of those employed in it it enjoy such a status in the first place. The crisis with regard to pension funding must inevitably lead to a recognition that the largely artificial divide between public and private sector must be abolished. It would also be useful to see an examination of the basic question of why the medical profession in Ireland is divided, as in the UK, between “consultants” and the rest. The UK confronts many of the same problems. We inherited much of our thinking from it. @ All FYI http://www.irishtimes.com/newspaper/world/2012/1025/1224325681025.html Poor England. I suppose every cloud has a silver lining and the Tories will inherit Labour’s mantle of being useless economy wise. @Seafoid That silver lining could be illusory. The Tories may have to accept the mantle of being useless on the economy, but as long as they keep taxes low for their own supporters, it may not be all that harmful to them. As in Mitt Romney’s calculations, its all about the 53%. The graph linked to at the top is a shocker for the UK. Apparently Georgie was working with a multiplier of 0.6. Not a snowball’s chance of the economy recovering in time for the 2015 election and a Tory majority. The chart “price of a mews house” is like a graph of Thatcherism. http://www.ft.com/intl/cms/s/2/b8d1b686-e51b-11e0-9aa8-00144feabdc0.html#axzz2AIgtCjHj @ JR They are a bit like the Republicans in that their base is a good way short of 50% so they have to temper their economic nihilism with something to attract the people in the middle. Cameron couldn’t even get a majority in 2011 , remember. Wonder could they do similar for the EZ? @The UK Irish emigrants and migrants are concerned at the state of your labour market; it is, as you know, inter-connected with the present dismal Irish labour market. Time to build another tunnel … Never let the facts interfere with a myth. The Uk has simply raised taxes and trimmed government capital spending. There is no austerity. Planned expenditure will rise from 696 bn in 2011/12 to 734 bn in 2014/15. In the first five months of this year, government expenditure was 264 bn, up from 256bn the previous year. A lot of the rise in public expenditure came despite a fall of 628,000 in public sector employees. Guess what? Most of the remaining 6.3 m employees got……increments. Sound familiar? Austerity is a complete myth both here and in the UK. Press Release: Statement by the EC, ECB, and IMF on the Review Mission to Ireland http://www.imf.org/external/np/sec/pr/2012/pr12398.htm @Simpleton “Never let the facts interfere with a myth. The Uk has simply raised taxes and trimmed government capital spending. There is no austerity.” UK Govt Exp since 2008 is as follows: 2008 £582B 2009 £629B 2010 £670B 2011 £689B 2012 £695B 2013 £684B The Conservative/ Lib govt came to power in May 2010, having been raised by the previous government. Govt exp in real terms has fallen since they came to power. Adding to that the increased taxes, it is clear that the UK Govt policy is designed to reduce overall demand in the economy, at a time when that is the last thing the economy needs. Whatever else the UK govt figures mean, they are not Keynesian in real terms or in intent. http://www.ukpublicspending.co.uk/total_2013UKbt_12bc5n @simpleton Austerity is a complete mythdisaster both here and in the UK. Fixed that for you. For those with a moment to spare: OECD report Employment in general government and public corporations Economic basket cases Finland, Sweden and Canada all had numbers employed in the public services and government expenditure as a proportion of GDP at or above the UK levels as of 2009. The UK levels have subsequently fallen in real terms as pointed out by Joseph Ryan. Ireland was very slightly above the OECD 29 average for numbers in public employment but if you adjusted for population density/efficiencies of scale I am sure we would come out below it. If you look at government spending as proportion of GDP (I know, I know, we should be using some measure that averages GDP/GNP in Ireland really) Ireland was slightly above the OECD average in 2009 before the hare brained Frankfurt Consensus really started to take its toll on us (once austerity starts destroying your national economy of course government spending is going to rise as a proportion of it) http://www.oecd-ilibrary.org/sites/gov_glance-2011-en/03/04/giii-4-01.html?contentType=&itemId=/content/chapter/gov_glance-2011-10-en&containerItemId=/content/serial/22214399&accessItemIds=/content/book/gov_glance-2011-en&mimeType=text/html“>OECD 2011 General government expenditures It seems that the Austerian Imprisonment Front are now dismissing both historical economic comparisons and modern research as basically inapplicable and contemporary figures as somehow irrelevant. They are running on pure neoliberal zeal and these dangerous political fanatics still have a stranglehold on European and Irish economic policy. @ Joseph Ryan Your numbers are the same as mine. I suggested that rising public expenditure is hardly consistent with austerity. I did not invoke Keyenes, or any other long dead author. Perhaps you have a different definition to mine? I merely seek to call it the way it is. Fiscal expansion it ain’t. But neither is it the gut wrenching austerity that is often moaned about on these pages. Certainly, it looks austere when compared to a fairy story that comprises fiscal stimulus. But that is not the correct conterfactual, no matter how much Keynes may or may not have advocated such a policy. Maybe your invocation of Keynes gives the agenda away? You think there should now be aggressive expansion? That is certainly a point of view but it is not served by frenzied mislabelling of current policies, anywhere in these Islands, as being austere. @ simpleton: “Austerity is a complete myth both here and in the UK.” ??? Each person (irrespective of age or physical capacity) needs some optimal level of income (Smith, Jevons, Mill and Veblen use somewhat different definitions of this income) irrespective of the actual source of that income. Now if the majority of folk are experiencing a steady reduction in their individual incomes, that spells real trouble for an economy which mandates a steady increase in demand in order to prevent it ‘sinking’. Mind you there is a minimal level (subsistence) of income, below which you cannot go. But we seem to be making some excellent progress toward this unwelcome goal. Soup kitchens and food parcel depots are hardly indicators of a robust economy? This economic Regression has finally moved up a gear but the true extent of the societal damage is not likely to be clear for a year or so. @Shay, You might well adjust for population density, you might also, with similar logic, adjust for how close each country is to the South Pole. A more relevant adjustment would take into account large numbers employed in armed services in the countries you mention. An even better comparison would be of hourly pay rates for equivalent jobs. Mr Woods, I have worked in soup kitchens in both the UK and US. Recently in the case of the latter. But I see no connection between their existence and the austerity myth. Facts, unlike fairy tales, do not support either the austerity myth or it’s connection with soup kitchens. The reason why people use such facilities are varied and complex. People rarely turn up at such places just because they didn’t get their last increment. The individual human tragedies that you witness at such places can rarely be explained by simplistic stories that actually insult the people in dire need. @Simpleton You might well adjust for population density, you might also, with similar logic, adjust for how close each country is to the South Pole. Seriously? IANAE but it did not take long to find this: http://www.researchgate.net/publication/228548463_Distribution_of_Population_Density_and_the_Cost_of_Local_Public_Services_The_Case_of_Japanese_Municipalities There are economies of scale and costs of distribution. These are pretty basic concepts. I agree that PPP adjusted hourly rates for equivalent jobs are interesting. @ simpleton: If austerity be a myth, it may be ‘disproved’. I am not convinced either way at the moment. But some economic ‘fundamentals’ are not in good shape. I acknowledge your charitable efforts. They are to be heartily commended and I hope will be rewarded – I’m sure you will be. There are some basic economic (Political Economy) principles which seem to be either neglected or glossed over. There is a strong temptation to focus on the salient outcomes (pretty awful) rather than the causal process (pretty complex and confounding). Yet it is within the latter that the solution to our developing economic predicament should be found (I hope). I am a member of the economic school that Thorstein Veblen never founded. Former TARP regulator tells Moyers: Another banking crash is ‘inevitable’ http://www.rawstory.com/rs/2012/10/26/former-tarp-regulator-tells-moyers-another-banking-crash-is-inevitable/ Comments are closed.