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BERKELEY "“ Neville Chamberlain is remembered today as the British prime minister who, as an avatar of appeasement of Nazi Germany in the late 1930's, helped to usher Europe into World War II. But, earlier in that fateful decade, relatively soon after the start of the Great Depression, the British economy was rapidly returning to its previous level of output, thanks to Chancellor of the Exchequer Neville Chamberlain's reliance on fiscal stimulus to restore the price level to its pre-depression trajectory.
Compare that approach to the expansion-through-austerity policy being pursued nowadays by British Prime Minister David Cameron's government (with Chancellor of the Exchequer George Osborne leading the cheering squad). The country's real GDP has flat-lined, and the odds are high that British real GDP is headed down again.
Indeed, in less than a year, if current forecasts are correct, Britain's Cameron-Osborne Depression will not merely be the worst depression in Britain since the Great Depression, but probably the worst depression in Britain"¦ever.
That is quite an accomplishment. As Phillip Inman of The Guardian recently put it: "[T]he UK's plan for recovery from the financial crisis was based on a full-throttle recovery in 2012....[C]onsumer confidence, business investment, and general spending would converge to send the economy on a trajectory of above-average growth."
It did not work: government ministers "have done what the right-wing economists told them to do and moved out of the way "“ the theory being that public-sector spending and investment was "?crowding out' the private sector." Instead, as Inman says, "Spain is showing the way with its austerity-driven recession. Where the weak tread, we [in Britain] look keen to follow..."
The failure of expansionary austerity in Britain should give all of its advocates around the world reason to reflect on and rethink their policy calculations. Britain is a highly open economy with a flexible exchange rate and some room for further monetary easing. There is no risk or default premium baked into British interest rates to indicate that fear of political-economic chaos down the road is discouraging investment.
There is an argument "“ not necessarily true, but an argument nonetheless "“ that, while in office from 1997 to May 2010, the Labour governments of Tony Blair and Gordon Brown overshot long-term sustainable government spending as a share of GDP. Their actions stand in contrast to countries that reduced their debt-to-GDP levels in the 2000's, and to the United States, where the problem was not excessive spending but insufficient taxation under the Bush administration.
Yet, if one takes this view seriously, Britain, with a ten-year nominal interest rate of less than 2.1% per year, should already be in a boom. If there was ever a place where expansionary austerity should work well "“ where private investment and exports should stand up as government purchases stood down, confirming its advocates' view of the world "“ it is Britain today.
But Britain today is not that place. And if expansionary austerity is not working in Britain, how well can it possibly work in countries that are less open, that can't use the exchange-rate channel to boost exports, and that lack the long-term confidence that investors and businesses have in Britain?
Nick Clegg, Britain's deputy prime minister and the leader of Cameron's coalition partner, the Liberal Democrats, should end this farce today. He ought to tell Queen Elizabeth II that his party has no confidence in Her Majesty's government, and humbly suggest that she ask Labour Party leader Ed Miliband to form a new one.
To be sure, if Clegg did this, his political career would probably be finished, and his party's electoral prospects would be damaged for a long time to come. But Clegg's political career and his party's fortunes will be shaky for a long time to come in any case, given the economic hardship that Britain is enduring (and will continue to endure). At least defection from the ill-advised Conservative-Liberal coalition now would benefit his country.
Policymakers elsewhere in the world take note: starving yourself is not the road to health, and pushing unemployment higher is not a formula for market confidence.
J. Bradford DeLong, a former assistant secretary of the US Treasury, is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau for Economic Research.
Copyright: Project Syndicate, 2012. www.project-syndicate.org
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Username Password New registration Forgotten password Zsolt 10:36 30 Jan 12I am surprised that today when most people from politicians to economical and financial leaders are talking about global economy, interconnected network, interdependence, we can still talk about independent nations..well independently, as if we could examine them separately from the big picture.
In truth what we see today is that regardless of what economical system we look at, what government or banking policies we examine, everybody is struggling and heading for depression from the US to the UK, from Europe to China and India, from South America to Africa, we are all sitting on the same boat.
It is even bigger mistake comparing methods and correction from decades ago with the situation today, when this global integral system and its day to day effects were nowhere to be seen even 5-10 years ago. We received the first real signs and shocks in 2008.
Today the world is in a completely new situation in this interdependent closed system. basically we can throw away all our previous methods, tricks, books and solutions.
First we have to understand all the implications of this new mutual network and then build new political and economical structures that adapt to it. The system is not going to change, globalization, the global world is not a choice we can make, but it is the reality we exist in today. Only we can change.
AUTHOR INFO J. Bradford DeLong J. Bradford DeLong, a former assistant secretary of the US Treasury, is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau for Economic Research. MOST READ MOST RECOMMENDED MOST COMMENTED The Perils of 2012 Joseph E. Stiglitz Rethinking the Growth Imperative Kenneth Rogoff The Straits of America Nouriel Roubini How to Create a Depression Martin Feldstein Does Austerity Promote Economic Growth? Robert J. Shiller A New World Architecture George Soros America's Political Class Struggle Jeffrey D. Sachs Did the Poor Cause the Crisis? Simon Johnson The Risky Rich Nouriel Roubini The Second Great Contraction Kenneth Rogoff The Perils of 2012 Joseph E. Stiglitz Does Debt Matter? Robert Skidelsky Africa's Stolen History Juliet Torome Does Austerity Promote Economic Growth? Robert J. Shiller How to Create a Depression Martin Feldstein ADVERTISEMENT PROJECT SYNDICATEProject Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
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I am surprised that today when most people from politicians to economical and financial leaders are talking about global economy, interconnected network, interdependence, we can still talk about independent nations..well independently, as if we could examine them separately from the big picture.
In truth what we see today is that regardless of what economical system we look at, what government or banking policies we examine, everybody is struggling and heading for depression from the US to the UK, from Europe to China and India, from South America to Africa, we are all sitting on the same boat.
It is even bigger mistake comparing methods and correction from decades ago with the situation today, when this global integral system and its day to day effects were nowhere to be seen even 5-10 years ago. We received the first real signs and shocks in 2008.
Today the world is in a completely new situation in this interdependent closed system. basically we can throw away all our previous methods, tricks, books and solutions.
First we have to understand all the implications of this new mutual network and then build new political and economical structures that adapt to it. The system is not going to change, globalization, the global world is not a choice we can make, but it is the reality we exist in today. Only we can change.
Project Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
Project Syndicate provides the world's foremost newspapers with exclusive commentaries by prominent leaders and opinion makers. It currently offers 58 monthly series and one weekly series of columns on topics ranging from economics to international affairs to science and philosophy.
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