Slugger O'Toole

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The US versus the UK economy (are we not nearly there yet?)

Tue 13 March 2012, 9:29am

Interesting critique of George Osborne’s economic policy by Ranjit Sidhu on Left Foot Forward who notes:

US GDP growth was revised up for the last quarter of 2011 to +3%, meaning talk of a double-dip recession was receding quickly as the markets now were asking ‘how strong will the US recovery be?’

Despite ongoing concerns about the huge debt mountain that’s being racked up in the US, their figures at first glance look positively healthy compared to the UK’s (and most of Europe’s). A few weeks back TPM put together a breakdown of current US tax and spend figures and ran it against Reagan’s end of first term figures. Both show a wide gap between in what’s being spent and what’s being brought in.

Medicare is the item that’s most visibly expanded. Debt repayment figures take up much less of the country’s potential GDP, presumably because of historically low levels of interest rates. Discretionary spend on Defence is also much lower, reflecting the degree to which Obama has continued to ramp down US commitment to overseas wars.

Back to Sidhu’s UK/US comparison. He also makes the substantial point that not only is the UK Coalition’s plan for getting rid of borrowing not working growth is also getting caned:

There’s some dispute as to what’s causing the lack of growth. Sidhu suggests it is the absence of a substantial fiscal stimulus. The Office of Budget Responsibility suggests it has more to do with poor productivity rates. Neither is a particularly complete or satisfying answer.

The bad news, as Chris Giles in the FT noted last November (£), is that if the UK government is to keep to its original deficit reduction targets it is going to have to cut a great deal more in terms of public sector jobs. From last November:

In today’s FT, Joseph Stiglitz outlines (£) just why the Obama led US recovery is largely happening without a fillip to overall employment levels:

With labour-force growth normally about 1 per cent per year and productivity growth about 2-3 per cent, it takes sustained output growth in excess of 4 per cent to bring unemployment down. No one expects growth at that pace for long enough to return the US economy to full employment any time soon.

In short, whilst the US figures look good, politically it’s going to be tough for the Obama administration to leverage 3% growth rate at the November polls since it is below the figure needed to create enough new jobs to keep up with improving productivity and new entrants to the Labour market.

And one of the reasons a fiscal stimulus can only have a limited effect in the States is because the kind of debt brake proposed for Europe in the Fiscal Compact exists at state and local government level right across the US. Last word to Stiglitz, who enumerates three major threats to the US recovery:

First, a steeper European downturn, as a result of the excessive austerity and the euro crisis. Second, complacency that the economy will recover quickly without government support. Though every downturn comes to an end, that should not be of much comfort. Third, that we accept that an unemployment rate above 7 per cent is inevitable.

If my Cassandra forecast turns out to be wrong, stimulus can be cut. But if it turns out to be right, and we do too little, we will live to regret it.

It remains to be seen what this means for Northern Ireland, which with its huge reliance on the public sector going forward could prove much more vulnerable than the Republic. The budget next week will tell us a lot more about where the UK heads next.

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Comments (6)

  1. Hi, Mick,

    I trust you are smart enough not to believe everything, or even anything, that you read in the press or hear on the news, for a lot of it/most of it/all of it is spun in a certain direction to manage your perception of reality and present in too many cases, a false picture.

    This tale perfectly illustrates the dilemma …….. http://www.zerohedge.com/contributed/2012-11-13/todays-market-can-you-afford-be-misled-fantasy-financial-reporting

    What do you think?
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  2. Indeed, “This has been custom and practice, I have just put it in writing” by Pete Baker, Tue 13 March 2012, 3:14pm would not disagree that it is practised and customary.

    What do you think?
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  3. Greenflag (profile) says:

    ‘There’s some dispute as to what’s causing the lack of growth. Sidhu suggests it is the absence of a substantial fiscal stimulus. The Office of Budget Responsibility suggests it has more to do with poor productivity rates. Neither is a particularly complete or satisfying answer.’

    On which planet do ‘economists ‘ live ? The lack of growth (USA ) is caused by

    a) 25 million unemployed .

    b) A moribund housing and construction sector which still has millions of homes in the foreclosure ‘waiting ‘ room .

    Seven of the last eight US recessions owed their recovery to recovery in the construction sector -the exception was the recovery brought about by World War 2 .

    Theoretically with interest rates so low and expected to remain low for another 2 years the economy should be recovering rapidly . The fact that it has slightly recovered is due entirely to fiscal stimulus by government . And that has been achieved by borrowing more from the future .

    Meanwhile the financial services sector continues to receive favourable treatment by both political parties probably because the politicians and policy makers haven’t a clue about what exactly is going on or how to fix it .(the economy).

    What do you think?
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  4. The analysis by Sidhu is seriously flawed. It cannot be taken seriously. I dont have time to write an essay but the bullet-point criticisms that I make are as follows:

    (1) The analysis examines data over much too short a period
    (2) Comparing the UK and the US is not comparing like with like.
    (3) The analysis is not holistic. It is heavily concentrated on economic policy in relating to public spending cuts.
    (4) The analysis does not answer the Coalition’s argument for not pursuing the policies which Sidhu and Labour politicians have already advocated.

    I am not convinced that US economic policy will be trumpeted for much longer either. It seems that it will soon be hit by a triple whammy of tax hikes, QE not being sustained and a falling World money supply.

    What do you think?
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  5. TheUnicorn (profile) says:

    I heard a piece on radio 4 yesterday, about George Osbourne trying to secure 100year government bonds for the uk, to try and take advantage of historically low yields they are having to pay in the present climate (roughly one percent).

    Apparently this historically low yield is set against inflation of 3-4%, therefore government borrowing is effectively “free money”.

    Why the hell don’t they just borrow now while the money’s cheap (or even better free…) and provide stimulus to the economy in the form of construction of decent transport infrastructure and an end to the public sector pay freeze?

    If the money is free who are they beholden to, to maintain these cuts??

    What do you think?
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  6. TheUnicorn (profile) says:

    I should say “George” Gideon Osbourne.

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