Stimulus, it turns out, is for wussies. But will the bond markets and tea partiers, united in their abhorrence of government (except when it's on their side), be pleased with the results? Not if the British or European economies are any harbinger of things to come here in the states.
After Cameron took office last year, a by now familiar pattern ensued. Financial markets beseeched the new regime to cut spending. Credit rating agencies hinted at dark repercussions if the U.K. failed to act "boldly" in shedding debt. Taking up the banner, Tory leaders ordered an unprecedented package of cuts, while patting themselves on the back for laying the foundation for a "new society." And for a time, investors cheered.
The austerity delusion
But not for long. A year into the experiment, the U.K. economy is expected to grow a meager 1.3 percent in 2011 and 2.2 percent in 2012. Manufacturing activity, until recently a bright spot in Britain, is shrinking for the first time in two years. Expecting slower growth at home, HSBC and other British companies are slashing payrolls. Even the IMF, which supported the country's tilt toward thrift, is now warning that Cameron may have to change course. As one small-business advocate in Britian recently said regarding the dimming hopes for a strong recovery:
With minimal growth over the last nine months, the economy is well and truly stagnant. Until consumer confidence is restored, growth will remain subdued.Although the dynamics are different on the continent, a similar pattern is playing out, with similar results. As the eurozone cuts and fiscal policy tightens, growth is beginning to slow (as it is globally, in fact). This is roughly as surprising as sunrise. Keynes (and a century or so of economic history) showed that when demand slackens and spending falls, growth wanes.
That's nothing new. What is noteworthy, say the FT's Robert Skidelsky and Felix Martin, is that the same global investors who demanded austerity in the U.K. and in Europe are beginning to have second thoughts. They write:
In the early days of the eurozone sovereign debt crisis the markets did indeed identify fiscal profligacy as the problem. Investors demanded an austerity plan in Greece, and were delivered one in May 2010. The results have disappointed, however â€"- with the continued shrinkage of the Greek economy leading to missed fiscal targets, despite aggressive cuts. Last month, the original bail-out programme had to be extended, as investors continued to flee Greek bonds.Yet even with the the U.S. economy belching smoke, "cuts alone" is exactly what Congress and the White House have chosen. Election season is upon us. As usual, that precludes any talk of raising taxes on corporations, as their profits gush, or on the richest Americans, as their share of national income climbs, or even of taking commonsense measures, such as reducing the payroll tax. Instead, we shall join our European brethren for a bowl of lumpy porridge. John Maynard who?
When, in July, the crisis spread to Italy, many analysts were puzzled. Why should the only eurozone country scheduled to run a primary fiscal surplus in 2011 be under attack? The message from the bond markets is clear: Investors have begun to realise that austerity alone is proving a false trail. The royal road to creditworthiness runs not via cuts alone, but via growth.
If U.S. lawmakers approve the deficit-reduction measure, financial markets will applaud, or at least breathe a sigh of relief. But if recent history is any guide (and it is), it won't be for long.
Thumbnail and David Cameron image from Wikimedia Commons, CC 2.0
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