- The Washington Times - Tuesday, October 19, 2010


American liberals are big fans of the European welfare state. They point to European models of national health care, rich pensions and generous unemployment benefits as worthy of emulation in the United States. Europeans may not make as much money as Americans, the liberals say, but they have created a more humane way of life.

What you don’t hear from the American left these days is much acknowledgment that the Europeans are backpedaling as fast as they can. There is a reason that transportation and oil-refinery unions have been striking in France and government workers are rioting again in Greece. When Greece nearly defaulted on its national debt last year, governments got a glimpse of what would happen when the money ran out, and they began enacting some of the toughest austerity measures of the post-World War II era.

While France and Greece have grabbed the headlines - protesters setting things on fire makes a visual the media can’t resist - the most important case study in austerity economics may be the United Kingdom. Taking out the carving knife, the newly elected Conservative Party government is dissecting government with a vigor not seen since Margaret Thatcher’s heyday.

The secret to restoring the United Kingdom’s economic vitality, says Prime Minister David Cameron, is to slash public spending and reinvigorate the private sector. The Conservative Party plan calls for a combination of spending cuts, tax increases and targeted tax cuts for business that would reduce Britain’s borrowing by $180 billion a year by 2015 - a fiscal consolidation equivalent to 6.2 percent- of that year’s expected gross domestic product (GDP).

The draconian measures defy the Keynesian doctrine that the best way to jump-start the economy during an economic downturn is to increase deficit spending. While deficit spending may give the economy a short-term jolt, evidence is accumulating that large ongoing deficits cause serious long-term damage, especially when the national debt is already high. Carmen M. Reinhart and Kenneth S. Rogoff have argued famously that when the national debt of advanced nations exceeds 90 percent of GDP, economic growth tends to slow considerably. A more recent study published by the World Bank identified a tipping point at a 77 percent debt-to-GDP ratio.

With a 2010 debt-GDP ratio of 72.7 percent, the United Kingdom is near that tipping point. (The United States is well past it.) Preaching that the nation faces an “age of austerity,” Mr. Cameron has called upon Britons to show restraint (no riots, please) and adopt the spirit of self-sacrifice their forebears displayed during the two world wars. Expecting to slash more than 600,000 government jobs, Conservatives are gambling that whacking state spending in a weak economy will restore market confidence and encourage private businesses to step up their investment and hiring.

Because government spending accounts for such a large share of the economy in some depressed regions of the United Kingdom, Conservatives hope to prime the pump of private investment by pumping funds into regional industry clusters. The track record of such industrial policy is not encouraging, but politically, it may be necessary to prop up the economy beyond the confines of the prosperous London metropolitan area. With the exception of the regional stimulus spending, however, the United Kingdom is hewing to a budget discipline that U.S. conservatives can only dream about.

No political figure of Mr. Cameron’s stature has spoken as honestly to Americans, nor has anyone prominent - outside of Wisconsin’s Republican Rep. Paul Ryan - offered a cost-cutting program as far-reaching. The House Republicans’ Pledge to America would roll back spending by roughly $100 billion a year, to pre-stimulus, pre-TARP levels. But to achieve budget balance over the course of an economic cycle would require spending cuts on the order of $1 trillion yearly. Meanwhile, the U.S. political class and its intellectual enablers remain in steadfast denial. Progressives such as Robert Reich and Paul Krugman argue that the United States needs more government spending, not less.

Americans should watch the outcome of the English experiment closely. Republicans likely will spend the next two years crossing swords with President Obama, a dogged defender of the leviathan state. The key electoral test will come in the presidential election of 2012. By then, the results of the English experiment should be in. Either it will be a model worth emulating or it will prove to be an economic and political failure. I’m betting austerity will pay off for the United Kingdom. I can only pray that the United States can embrace serious cost-cutting before the gravitational tug of our massive debt pulls the economy into oblivion.

James A. Bacon is author of “Boomergeddon” (Oaklea Press, 2010) and publisher of the blog of the same name.



Click to Read More

Click to Hide