Why liberals are wrong about UK (and U.S.) austerity
Oh, now liberals are super interested in the British economy (or at least interested in something besides its state-run healthcare system). For 30 years, they've ignored the success of the Thatcherite tax cuts, privatizations and deregulation that allowed the formerly sick man of Europe to surpass many of its neighbors. In 1980, for instance, British GDP per person was 5% smaller than Italy’s, 12% smaller than France’s, and 14% smaller than Germany’s. But by 2008, British per capita GDP was 12% bigger than Italy’s, 7% bigger than France’s, and the same as Germany’s. No applause from the left for the historic turnaround.
But liberals are positively riveted on what’s happening in the UK these days. Pundits like Paul Krugman point -- look, look, look! -- to the mild recession the nation is now experiencing as proof positive that Prime Minister David Cameron’s austerity drive is a massive mistake. Not that they really much care what’s happening in the UK, of course. They're just looking for domestic ammo as they argue a) Obama's stimulus was a success and we need more of it, and b) Republican budget-cutting plans would kill the "recovery" if implemented. Fear the Romney-Ryan plan!
A few observations:
1. Hey, liberals here actually liked the Cameron plan when it was first announced because it raised taxes, just like Obama wants to do now. The Cameron formula was 80% spending cuts and 20% tax increases. The tax hikes were the mistake — not the spending cuts — as they have been throughout Europe, a region quite likely at the tippy top of the Laffer Curve. Indeed, the government is scrapping the previous government’s hike in the top marginal rate to 50% from 45% because it didn’t raise any money.
2. Blame the austerity if you will, but the UK is playing in a pretty dodgy neighborhood these days. About half its exports go to the rest of Europe, which is in the dumps right now and could also use some pro-growth tax policy along with labor market and pension reforms. (Austerity Alert: Unemployment continues to fall in austerity-loving Germany.)
3. The point of the Cameron austerity plan is to avoid a debt crisis, not boost growth. And plans that focus on spending cuts rather than tax increases have been shown to be less damaging to growth than the reverse.
4. And there are worse things than a mild recession — such as a full-blown debt crisis. As the UK’s Reform think tank argues, “A major shift in fiscal policy would damage the Coalition’s fiscal credibility and risk increasing interest rates. ... Reform calculated that with current low bond rates the UK will be able to service its debt even with low growth. However, if yields on 10-year bond rates were to rise above 5% (similar to the levels currently in Spain) the government would have to run a surplus ... or else face a debt spiral.”
5. Neither Romney nor Ryan are proposing what Treasury Secretary Tim Geithner laughably warns would be a "lurch, prematurely, to extreme austerity, to severe austerity.” The Paul Ryan-House Republican budget, assuming CBO’s gloomy economic numbers, would cut debt as a share of GDP by about 10 percentage points to a still historically high 62% by 2022 — a decade from now! — while also sharply cutting taxes. Mitt Romney, as well, would shoot for balancing the budget by 2020. These are rather gentle glide paths, hardly crushing austerity.
If the Obamacrats wish to put forward the argument that what America needs is more temporary stimulus and more debt, they are welcome to it. Conservatives should argue what America needs is long-term tax reform that rewards investment and innovation, and spending restraint that puts the budget on a sustainable path and erases fears of massive tax hikes down the road.