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Daniel Gross is economics editor and columnist at Yahoo! Finance.
In the long-running competition between the U.S. and England, the former colonists have long held the upper hand. The U.S. won military defeats in the Revolutionary War and the War of 1812, and took over global financial leadership during World War I. Last summer, when the underdog U.S. soccer team tied England 1-1- at the World Cup in South Africa, it was a humiliation to the highly paid English footballers. And now it seems the Yanks are having it over their cousins across the pond in another realm: recovery from the Great Recession of 2008-2009.
The U.S. and British political responses to slow growth and rising debt mark a sort of case study in divergent responses. The Obama administration and its Congressional allies (first Democrats, and then Republicans) borrowed a chapter from the English economist John Maynard Keynes, and are engaging in repeated amounts of stimulus "â? tax cuts, higher spending "â? at the price of higher short-term deficits. The English are taking the opposite take, with Prime Minister David Cameron gambling that an old-fashioned dose of austerity "â? tax increases, budget cuts "â? will lead to an expansionary fiscal contraction.
Who is winning? Based on their appearances at Davos, the English are making the more convincing case. I attended a press briefing with Nicholas Clegg, the youthful deputy prime minister, and watched a session in which Cameron prowled the stage like an infomercial pitchman. Both made aggressive, articulate cases for their economic policies. By contrast, the U.S. was represented by Treasury Secretary Timothy Geithner, who seems to delight in saying not much of anything at venues such as the World Economic Forum. But the numbers tell a different story.
Obama and his team concluded early on that stimulus is needed to boost demand, with the government essentially funding consumption until the private sector recovers fully. Republicans have generally agreed, so long as the stimulus consisted largely of tax cuts. The bipartisan consensus: Don't raise taxes during a downturn, and talk a tough game on the deficit but don't do much about it. The theory, or hope, is that restored balance sheets and global growth would lead to a cycle in which more spending leads to more production, which leads to more hiring and more spending. And there are signs that this dynamic is happening. Look at the recent data on industrial production, retail sales, car sales and jobs.
The U.S. is now in its seventh quarter of growth. And after a lull this summer, the pace of growth has picked up. In the fourth quarter, the U.S. economy grew at a 3.2 percent annual rate. There are signs that the private sector is taking over from government as the driver of growth. In the fourth quarter, federal and state government spending fell in real terms, and was a drag on GDP. Between December 2009 and December 2010, according to the Bureau of Labor Statistics, the private sector added 1.124 million jobs while government cut 222,000 jobs. Meanwhile, contrary to the warnings of many bond-market bears, the expanded money supply and rising deficits haven't ignited inflation. In the past 12 months, the consumer price index has risen just 1.5 percent. Long-term interest rates remain low.
The U.K. suffered a similar banking crisis and financial meltdown. But its response was nowhere near as aggressive as the American response. And the government elected last spring, spooked at the crises enveloping neighbors like Greece and Ireland, signaled that it would focus on deficit reduction, even if that meant raising taxes and cutting spending. For Obama in 2009, the crisis was an opportunity to promote favored spending programs in health care and infrastructure. For David Cameron in the spring of 2010, the crisis became an opportunity to cut the size and scope of government. In October, the new government unveiled its austerity measures, which called for cutting 500,000 public-sector jobs, slashing the deficit, hacking aid to local governments and eliminating middle-class entitlements. It also signaled that the Value Added Tax would rise from 17.5 percent to 20 percent come January 2011. The theory: Consumers and businesses would carry on with a stiff upper lip, and the global boom would boost demand for exports.
So how is that austerity thing working for the Brits? Not so great.
The U.K.'s economy didn't come out of recession until the fourth quarter of 2009, and grew only 1.7 percent between the fourth quarter of 2009 and the fourth quarter of 2010. Worse, the U.K. reported last week that its GDP fell .5 percent in the fourth quarter. The government blamed the decline on bad weather. But even if England had been atypically sunny in the quarter, the economy would "be showing a flattish picture."
While the U.S. economy has been adding jobs slowly, the British economy lost jobs in the third quarter of 2010. Retail sales fell in December from November. Meanwhile, inflation, which ran above 3 percent in 2010, accelerated toward the end of 2010. In December 2010, prices were 3.7 percent higher than they were in December 2009. The rise in the V.A.T. is likely to aggravate that problem.
So here's the situation in England: The economy is shrinking, the government just imposed a tax on consumption, the central bank is facing pressure to raise rates, and most of the promised austerity measures, including large government job cuts, have yet to bite. Does this look like an improving economy to you?
While the U.S. has an edge in growth and inflation, the U.K. can take pride in the fact that it is moving more proactively to address its government deficits. But here, too, the U.S. may have the advantage. It is likely that the combination of growth and the changed political dynamic in Washington will bring some improvement in the U.S. deficit picture in 2011 (though not as much as has been promised) -- without the imposition of regressive consumption taxes. But as the U.S. comes to grips with its fiscal issues, as it contemplates its own austerity measures, it will do so in the context of an economy that is expanding and is no longer reliant on government spending for jobs growth.
It's easy to ascribe the differing approaches to the cultural gulf separating the countries. Exuberant, optimistic Americans don't cotton to austerity, while the British seem to embrace it. But in the end, it has more to do with politics than culture. The newly elected coalition of Conservative and Liberal Democrats wants a smaller government, and the budget crisis offers a convenient excuse for cutting. And today's Washington, regardless of the impact of the Tea Party, prefers higher spending and lower taxes to lower deficits.
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