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London Calling

January 31, 2011

Appearing on Fox News Sunday, House Speaker John Boehner insisted, "What we have to understand is cutting spending will in fact help create jobs in America." But across the pond in the UK, Boehner's conservative allies are learning a different lesson. While U.S. gross domestic product jumped by 3.2% in the fourth quarter of 2010, the British economy contracted by half a point. In the long run, the Tories' draconian austerity plan may improve the British balance sheet, but what it won't do any time soon is create jobs.
To be sure, the economic pictures in the UK and the U.S. are not identical. While the depth of the recession was worse here, as a percentage of GDP London has higher taxes, spending and debt. (And as the CBO noted last week, for the federal government in 2011 "revenues would be just under 15 percent of GDP; levels that low have not been seen since 1950.") Compared to the paltry $100 billion in spending cuts demanded by Republicans, Prime Minister David Cameron's austerity budget announced in October seeks to close the budget gap within five years by slashing spending, raising taxes and sacking 490,000 government workers.
But even accounting for the devastating impact of December's frigid weather, the UK's Q4 performance was sobering. The British unemployment rate, while lower than in the U.S., ticked up 0.2%. Given consensus growth estimates of 0.4%, the 0.5% decline was, as the Wall Street Journal described it, "surprise negative hit." Reuters summed up the grim results:

Britain's economy suffered a shock 0.5% contraction in the last three months of 2010 after December's heavy snow took a far harsher toll than economists had forecast, official data showed on Tuesday.
The figures will be bad news for the government which is due to start cutting public spending in earnest early in 2011, and will cast doubt on market expectations that the Bank of England will raise interest rates in the first half of the year...
Economists had only expected growth to slow to 0.5% after 0.7% growth in the third quarter, though uncertainty over the impact of December's snow disruption meant the range of forecasts was wide, ranging from 0.1 to 0.6%.
The figures highlight the dilemma facing the Bank of England which needs to steer inflation back to target but is reluctant to raise interest rates when a sustained recovery is far from assured.

That abysmal outcome came on the same day Republican Paul Ryan warned in his State of the Union response that Greece, Ireland and the United Kingdom "didn't act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody." But as Paul Krugman was quick to point out:

Well, contrary to what Mr. Ryan seemed to imply, Britain has not, in fact, suffered a debt crisis. True, David Cameron, who became prime minister last May, has made a sharp turn toward fiscal austerity. But that was a choice, not a response to market pressure.
And underlying that choice was the new British government's adherence to the same theory offered by Republicans to justify their demand for immediate spending cuts here -- the claim that slashing government spending in the face of a depressed economy will actually help growth rather than hurt it.
So how's that theory looking? Not good. The British economy, which seemed to be recovering earlier in 2010, turned down again in the fourth quarter. Yes, weather was a factor, and, no, you shouldn't read too much into one quarter's numbers. But there's certainly no sign of the surging private-sector confidence that was supposed to offset the direct effects of eliminating half-a-million government jobs. And, as a result, there's no comfort in the British experience for Republican claims that the United States needs spending cuts in the face of mass unemployment.

Meanwhile back in the U.S., the American economy is starting to ramp up. While unemployment remains painfully high, last quarter the $13.38 trillion U.S. economy exceeded its pre-recession peak reached in the final three months of 2007. And as the New York Times noted, "Internationally, the G.D.P. numbers indicate that the United States recovered more rapidly than did Japan or any major member of the European Union." Compare the 0.14% American growth since the start of the Bush recession to the 4.4% drop-off in the UK and the changes from peak GDP elsewhere:

Japan, -3.4 percent
France, -1.9 percent
Germany, -1.8 percent
Italy, -5.4 percent
Netherlands, -2.8 percent
Spain, -4.1 percent
Portugal, -1.5%

Looking at the data, the Times' Floyd Norris concluded:

Each of the two Republican responses to the State of the Union message on Tuesday referred to the "failed stimulus" program enacted by the Democrats. That has become a standard phrase, and it seems to me it is misleading, if not completely wrong.

Of course, it was President Obama and Democrats in Congress who pursued the pro-growth policies that brought the U.S. economy back from the brink and onto a trajectory for recovery.

Over the past year, the U.S. economy added 1.1 million new jobs overall, including 1.3 million in the private sector, which enjoyed 12 straight months of growth. By last June, the nonpartisan Congressional Budget Office (CBO) estimated the Obama stimulus program had saved or created up to 3.3 million jobs, lowered the unemployment rate by as much as 1.8% and boosted GDP by 4.5%. A recent analysis of Census data by the Center on Budget and Policy Priorities (CBPP) revealed that federal programs kept 4.5 million Americans out of poverty in 2009. For his part, former John McCain adviser Mark Zandi in August concluded that the combined federal interventions beginning in the fall of 2008 prevented the Great Recession from becoming Depression 2.0:

We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government's response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.

Looking at future quarterly growth rates now expected to top 3.2%, an upbeat Zandi announced last week:

"This growth is now becoming self-reinforcing. Businesses are going to take their stronger sales and begin to hire more aggressively, generate more income, and we're off and running."

Meanwhile, the UK is running in place. And the full force of the harshest measures of the Tory austerity plan, including deep spending cuts, public workforce reductions and an increase in the nation's value added tax (VAT), is only now starting to kick in. Nevertheless, this weekend Speaker Boehner was undeterred by Britain's example:

The fact is this, is that by running up the spending money we don't have, running up these huge budget deficits, we create more uncertainty in the private sector.
This is where cutting spending will create jobs because it is going to bring greater fiscal responsibility here in Washington, D.C., and some of the uncertainty, and allow jobs to be created in America.

For Boehner and other Republicans insisting on deep spending cuts now while refusing to raise taxes at any time, the future is on the line. It's London calling.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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