Under Prime Minister David Cameron and Chancellor George Osborne, the Tory-Liberal coalition in the United Kingdom has taken advantage of that country’s majoritarian political institutions to run an experiment in the theory of of expansionary fiscal contraction. It’s not working. Retail sales are plummeting and reports on regional gaps are about gaps in the rate of the decline (“sales have fallen 6 per cent in the north, but only 3 per cent in London”) rather than differential trajectories.
Landon Thomas reporting from some combination of London and alternate reality for The New York Times has a news analysis in which he suggests that these facts will help inform the political debate in the United States. The reality is that nobody in a position of power in Washington seems to particularly care about the evidence, and we’re debating whether to cut short-term spending a little or else cut short-term spending a lot, even though we should be doing the reverse. But the article is nonetheless informative. For example, note the views of a pro-austerity politician in a country where austerity advocates are at least made to give some kind of explanation of what they’re doing instead of skating by with metaphors about belts:
All of which has challenged the view of Britain’s top economic official, George Osborne, that during a time of high deficits and economic weakness, the best approach is to aggressively attack the deficit first, through rapid-fire cuts aimed at the heart of Britain’s welfare state. Doing so, says Mr. Osborne, the chancellor of the Exchequer, secures the trust of the financial markets, and thereby ensures the low interest rates necessary for long-term economic growth.
That’s the issue. Is the pain of cutbacks worth the gains in lower interest rates. Osborne said yes, the facts seem to say no. But here in the United States interest rates are already low. How low are they supposed to go? And to what end? Creditworthy firms and households can get loans on very favorable terms. If you’re a young person with a good job and no student loans, this is a great time to buy a house. But there are relatively few people in that position. The American middle class is overburdened with debt, and unemployed people are not good loan candidates. On the business side, some firms are expanding. But with unemployment high, wages flat, households paying off old debts, and government cutting back firms know that it will be difficult to sell more in the future. Consequently, even very profitable firms aren’t doing much in the way of expanding operations. What’s needed is for government—both Congress and the Federal Reserve—to step into the breach.