If you have lingering doubts that economic growth--and not deficit reduction--should be the highest priority during the debate over the so-called "fiscal cliff," the Congressional Budget Office should put them to rest. The CBO forecast that the triple witching hour of expiring Bush tax cuts, the ending payroll tax holiday and the falling axe of the draconian budget sequester set to arrive with 2013 will dramatically reduce U.S. deficits over the next decade. But, the agency warned, the price of that accidental austerity would be a steep recession; by the end of 2013, unemployment would jump to 9.1 percent while the economy would shrink by 2.9 percent.
But if (like many Republicans) you don't want to believe the nonpartisan CBO's dire forecast, just take a look at not-so-jolly old England. There, the harsh austerity program of David Cameron's Tory Party launched two and a half years ago has already produced a double-dip recession in the UK, with a third trough still a possibility.
In the United States, the GOP is threatening to bring down the economy just as it is picking up steam. In November, consumption and durable goods orders enjoyed health growth. More importantly, fueled by growing wages and salaries, inflation adjusted personal income increased by a stronger-than-expected 0.8 percent. And while unemployment rates fell in 45 states, the Bureau of Labor Statistics revised its third quarter GDP growth number to 3.1 (from 2.7) percent.
But in the UK, the picture is bleak. This week, the government reduced its estimate of growth for the July through September quarter from 1.0 to 0.9 percent. Sluggish retail sales may push fourth quarter GDP into negative territory. Meanwhile, government borrowing actually increased, with revenue dropping from the sputtering British economy failed. Despite its twin goals of slashing the deficit and preserving his nation's credit rating, Prime Minister David Cameron now faces the prospect of a downgrade from Standard & Poor's, Fitch and Moody's.
As the New York Times' Adam Davison explained this week in "God Save the British Economy," policy choices account for much of the divergence in economic performance between the two Atlantic allies. While President Obama responded to the 2008 economic crisis with the $800 stimulus program and later the two-year reduction in payrolls taxes, in London the Conservatives took a much different path. In the spring of 2010, Cameron and his Treasury Chief George Osborne sought to balance the budget by 2015 by resorting to the steepest budget cuts in 60 years and sacking nearly 500,000 public employees. The result?
Today these two approaches offer a crucial case study and perhaps a breakthrough in an age-old economic argument of austerity versus stimulus. In the past few years, the United States has experienced a steep downturn followed by a steady (though horrendously slow) upturn. The U.S. unemployment rate, which shot up to 10 percent at the end of 2009 from 4.4 percent in mid-2007, has now dropped steadily to 7.7 percent. It might be a frustrating pace, but it's enough to persuade most economists that a recovery is under way.It's not just that the United States is outperforming the UK. An October 2012 analysis by Moritz Schularick and Alan Taylor of post-crisis economic performance showed that while the United States is doing a bit better than one might have expected from the historical record, "the UK is doing significantly worse."
The British economy, however, is profoundly stuck. Between fall 2007 and summer 2009, its unemployment rate jumped to 7.9 percent, from 5.2 percent. Yet in the three and a half years since -- even despite the stimulus provided by this summer's Olympic Games -- the number has hovered around 7.9. The overall level of economic activity, real G.D.P., is still below where it was five years ago, too. Historically, it's almost unimaginable for a major economy to be poorer than it was half a decade ago. (By comparison, the United States has a real G.D.P. that is around a half-trillion dollars more than it was in 2007.)
The pink range indicates the expected recovery path. As we noted in our original column, the US exceeds expectations here. The US growth path manages to emerge from and stay above the predicted range by years 3-4-5 (i.e. 2010-12). In contrast, the UK path is disappointing, and can't really be called a recovery yet.To be sure, the dark economic landscape across Europe has hurt British (and, for that matter, American) growth. But much the pain was self-inflicted from 10 Downing Street. In April, Paul Krugman put that pain into historical context:
Even using the maximal measure of excess credit based on bank and shadow bank data to bias the forecast path down as far possible, it is still not possible to account for the UK's dismal performance. The UK was on a similar path to the US in years 1-2 (2008-09), but falls well behind the US in years 3-4 (2010-2011), only to drop below the forecast range in year 5 (2012).
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.
The hardship is far from over. As the New York Times reported earlier this month, Chancellor of the Exchequer Osborne Informed Parliament that "the government had missed one of its self-imposed debt-cutting goals and would have to extend the belt-tightening into 2018, a year longer than previously promised."
The Office for Budget Responsibility, a nonpartisan body that is monitoring the economy, said it now expected full-year data to show that the economy shrank 0.1 percent this year, instead of growing 0.8 percent, as the office had previously forecast.That's a far cry from the prediction when Cameron and Osborne launched their austerity experiment in June 2010:
At that time, the independent Office for Budget Responsibility predicted that the U.K. economy would be growing by nearly 3 percent a year by now. Instead, it sank into a second recession in the fourth quarter of 2011, and didn't return to growth until the third quarter of this year. Analysts expect the economy to shrink again in the last three months of the year."It's a hard road but we are getting there," Mr. Osborne amazingly told Parliament two weeks ago. "Britain is on the right track. Turning back now would be a disaster."
What would be truly disastrous would be for the United States to follow Cameron's crippling course. Ironically, as The Guardian reported, the Tory coalition has acknowledged as much:
George Osborne is just one of the finance ministers keen to see the impasse ended...Officials in Washington have calculated that the budget tightening involved would wipe out all the expected growth in the US economy next year and result in a 0.5% contraction instead.That doesn't mean the world will end if the U.S. goes over the cliff on January 1st. After all, Congress and the Obama administration can take action any time before or after December 31, 2012 to avoid the new recession inaction would likely produce. But whatever agreement President Obama reaches with Congressional Republicans cannot slash the debt too fast too soon. Economic growth and job creation, not deficit reduction, must be the top priority for the United States.
Despite the rapid growth of China, the US is still the world's biggest economy and accounts for one fifth of global output. A recession there in 2013 would lead to much slower growth in China, intensify the downturns in Japan and the Eurozone, and make a triple dip in Britain a nailed-on certainty.