Dean Baker, one of the few lefty economists I have much time for (no, really, some of his stuff is excellent. Like pointing out that the collapse of the housing boom in the US would have led to recession whatever happened to the banks, $7, $8 trillion of wealth disappearing will have that effect) I\’m afraid hasn\’t quite realised that the UK is actually rather different than the US.
This drive to austerity comes at a time when the short-term rate set by the Bank of England is 0.5% and the rate on 10-year bonds is just 3.0%. The timing is also perfectly wrong in that most of the UK\’s major trading partners are also suffering from weak economies and therefore unlikely to provide strong export markets. Nor are they likely to tolerate a substantial devaluation of the pound against their currency.
For example, we\’ve already had a substantial devaluation of the pound. Some 25% if memory serves me right.
It is really difficult to come up with an economic theory as to how the UK austerity drive even could work in principle. The UK, like the US, had enormous overbuilding of residential housing as a result of its housing bubble.
No, we didn\’t. We had a price bubble, certainly, but that didn\’t, probably as a result of our planning system, lead to a huge overbuild. Now I\’m willing to be corrected on these figures but I\’m pretty sure that new housing starts and completions is still below new household formation, as it has been for most of the last couple of decades.
The only part of the housing market that was overbuilt was flats, again as a result of that very planning system.
There are not many instances of countries adopting the sort of polices that the British government is now embracing, but the examples we have are not encouraging. For example, we have Herbert Hoover\’s efforts to balance the budget in 1932 and Franklin Roosevelt\’s drive in 1937. Both resulted in a considerable worsening of the economy. Of course, the UK had its own experiments with austerity in the middle of the Great Depression, which also did not turn out well for fans of economic growth and full employment.
And another difference about the US and UK experiences. The UK had a very different indeed experience of the 1920s and 30s. As can be seen here. (You might have to fiddle a bit to get the relevant years.)
The UK, like the US, had a big and bad recession after the end of WWI. Then growth resumed and UK had another stutter in 1925. We went back on the gold standard at the pre-war rate (bad, bad, Winston Churchill). Then we had a horror in 1931….and then we came off the gold standard and devalued. About 25% I think it was. As you can see from the GDP figures the UK economy then grew through the rest of the 1930s.
The sort of policies the UK is adopting….cut the deficit, devalue the currency, ….are exactly and precisely what did help the UK out of the Great Depression. It worked last time, why not this time?
I don\’t say it will mind, I\’m not a macro-economist. But when using the UK as a model, as a little brother for the likely course of the US economy, it\’s worth looking back into history and seeing what did in fact happen last time around. And the thing is, the UK experience of the Great Depression was very different indeed than the US one. UK real GDP in 1934 was above that in 1929. We may be similar but we\’re still different.