Britain Proves the Folly of GOP Economics

Britain proves the folly of GOP economics
First slash spending. Then watch the economy contract

At the Tory enclave of Eton, the exclusive private school whose graduates now dominate the British Cabinet, they drink tea — and politically and economically, it's not terribly different from the faux-populist American brew. So the Etonian Conservatives came to office last year in coalition with the misnamed Liberal Democrats, and together they set about slashing government spending at a breakneck pace, much like Republicans long to do here.

The economic stimulus, which under the previous Labour government had stayed and reversed the recession, was withdrawn. And the policy course that Republicans insist is the single route to prosperity in the U.S. — massive public spending cuts — was afforded a proof of theory across the Atlantic. Conservatives there enacted exactly what Republicans propose here.

How did that policy fare in the real world?

First, some history. Growth rates in the U.K. bottomed out at the end of 2008. But the British economy began climbing back in 2009. By the time Labor Prime Minister Gordon Brown, who arguably saved not only the British but the world economy when George Bush dithered in 2008, lost last May's election, growth was in solidly positive territory — up 1.1. percent in the last quarter of his administration.

The wrongheadedness of GOP policy is now visible for all to see.
There was always a fear that the Conservatives were "novices" — that they couldn’t be trusted with the economy. This is almost certainly what deprived them of an outright parliamentary majority. But with their coalition partners, they managed to lay claim to Downing Street — and promptly set about chopping budgets and government at a fragile point in the recovery. Growth fell to 0.7 percent — and then in the last quarter of 2010, the economy went negative, shrinking by 0.5 percent. December brought the worst British retail sales in over a decade. A Bloomberg analysis put the situation bluntly: "Confidence plunged."

Raising confidence was a key rationalization for the steep and swift cutting; so was containing inflation. But while growth stalled and then turned negative, inflation climbed by 3.7 percent from a year ago — in contrast to the U.S., where the most important measure of inflation showed an increase of less than 1 percent from November to November.

Britain now faces the threat of stagflation as prices rise along with unemployment — which Labor's stimulus kept at or below 8 percent even in the depths of the downturn. In fact, unemployment was falling when the Conservatives took over. BNP Paribas, the world’s largest banking group, now advises: "Implementation of government austerity measures" in Britain "will reinforc[e] the headwinds to growth." In a tragic irony — indicative of the sheer wrongheadedness of cutting spending in a weak recovery — the British deficit is ultimately likely to be higher due to lower growth.

The Conservative government, unwilling to rethink its mistake, has been rebuked by the retiring head of the Confederation of British Industry: "Politics appear to have trumped economics on too many occasions over the past eight months," he said. Trapped by their own failed dogma, the Conservatives now seek to blame their Labor predecessors for leaving a deficit. But the blame game — amplified by a Murdoch press that propagates similar fables here — was lost when the negative growth figure shocked forecasters and the British public. Chancellor of the Exchequer George Osborne, the chief bungler of the British economy, blamed the downturn on snow.

As it happened, it snowed heavily in the U.S. as well, in unexpected places. But the economy didn’t contract; instead it chalked up 3.2 percent growth. (If the January job numbers are below expectations and someone here cites the snow — just watch the Republicans buy that one.) Consumer spending nationally increased 0.7 percent in December — above the consensus estimate — and for all of 2010 grew at the fastest rate in three years. Americans are spending, not hoarding money, buying products and, finally, creating jobs. The employment index was up from 58.4 in December to 64.1 in January — and new manufacturing orders soared from 68.7 to 75.7.

Labor's Shadow Chancellor Ed Balls, the most gifted economist in frontline politics today, has written: "The contrast with the U.S. economy is instructive." He praised the Obama administration for "combining sustained and sensible stimulus for an economy still in recovery with a measured and steady pace of deficit reduction." Those who would abandon that course here should find the British counterexample equally instructive. Republicans won’t, of course. The serious Right will expand elaborate theories, or revise history, or blame snow. The comical Right — Jim DeMint, Michele Bachmann, and their ilk — aren't sophisticated enough to offer a logical rationale, so they'll simply make up facts to fit the dogma.

For self-proclaimed Tea Party patriots, they sound strangely Tory.