July 26, 2012

Public forum

Choosing between austerity, stimulus

I read an interesting article the other day by Robert Skidelsky, member of the British House of Lords.

At the beginning of the recession, economic indicators were broadly similar in the U.S. and England: Government deficits around 2.7 percent of GDP, 2.5 percent inflation and unemployment at 5 percent. The only major differences were Britain’s GDP growth was slightly higher, and its debt-to-GDP ratio was 10 percentage points lower. By the second quarter of 2009, U.S. GDP had fallen 5 percent and Britain 5.9 percent and unemployment rose sharply in both countries.

The Bush and Obama administrations, and Parliament interpreted the crisis on an excessive “savings-glut” in East Asia. Cheap money and an expansionary fiscal policy were the necessary response. The asset bubbles were created by the banks speculating with this windfall instead of investing. When the bubble burst, savings rose and demand collapsed.

In 2009, the Obama administration and Parliament signed into law stimulus packages of $787 billion and $41 billion, respectively, to increase demand, and expanding the supply of credit by forcing lending rates down. A year later, GDP was picking up in both countries, but deficits increased.

Once the stimulus removed the threat of depression, fiscal conservatism raised its head. The British panicked at becoming another Greece, and austerity became the road to recovery. They cut public spending by 99 billion pounds a year and raised taxes by 29 billion pounds. Meanwhile, Obama signed the Recovery and Reinvestment Act of 2009.

Since the policies diverged, the U.S. economy has slowly grown.

Employment here has risen 1.4 percent, while British employment has fallen .2 percent. Our government has managed to reduce our deficit by 2.5 percent; Britain’s has fallen only 1.9 percent, and the recession is deepening for England and her European allies. By cutting spending, governments also reduce their income.

I’m a long way from understanding economics, but these numbers are an indication the more we infringe on the flow of wealth, the more the economy must stagnate. The overdrawn accounts are scary, but maybe we should have considered austerity when Bush came into office with a budget surplus. Instead we gave tax cuts to the rich, rebate checks to the populace, plunged into two wars simultaneously and witnessed the major banks speculate us into an economic disaster.

Funny, deficits weren’t an issue then.

Jeffery W. Wiseley, Star City