Ignoring an important cautionary tale

We all know the saying ‘if all your friends jumped off a bridge, would you too?’ But when it comes to the US and austerity, the question that needs to be asked is “If your closest friends jumped off a bridge and were visibly crippled, would you jump off the same bridge?

The question needs to be asked, because the UK recently lost its AAA credit rating from Moody’s. This is not a huge surprise – the US also has lost its perfect status. But what’s interesting is the justification Moody’s gave:

“”The main driver underpinning Moody’s decision to downgrade the UK’s government bond rating to AA1 is the increasing clarity that, despite considerable structural economic strengths, the UK’s economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy,”

And the response of the government:

“”a stark reminder of the debt problems facing our country”.”

In other words, in the face of a double dip recession and a credit downgrade, the UK continues down a failed austerity path. Specifically, a path that actually CUT corporate taxes while raising the sales tax and slashing government spending. And yet the same mantra that sold them that failed bill of goods – ‘restore confidence of markets, lower taxes to create jobs’ – is still being repeated here. As we come up against another self-imposed ‘fiscal crisis’, we would be wise to learn from the example of the UK.

36 comments
Ingemar Johansson
Ingemar Johansson

From Bloomberg, Jan 7th. Quote: "The starkest contrasts are Latvia and Greece, two small countries hit the worst by the crisis. They have pursued different policies, Latvia strict austerity, and Greece late and limited austerity. Latvia saw a sharp gross domestic product decline of 24 percent for two years, which was caused by an almost complete liquidity freeze in 2008. This necessitated the austerity that followed. Yet Latvia’s economy grew by 5.5 percent in 2011, and in 2012 it probably expanded by 5.3 percent, the highest growth in Europe, with a budget deficit of only 1.5 percent of GDP. Meanwhile, Greece will suffer from at least seven meager years, having endured five years of recession already. So far, its GDP has fallen by 18 percent. In 2008 and 2009, the financial crisis actually looked far worse in Latvia than Greece, but then they chose opposite policies. The lessons are clear."

JC
JC

Sure, let's model the U.S. or U.K.'s economies after Latvia. NIce analogies.

The Polish Wolf
The Polish Wolf

Latvia has an unemployment rate of 13.8% and rising (up .3% from last quarter). Their economy may, as in, its unsure, reach its 2007 size this year. The US recovered its GDP over a year ago. It's pretty easy to manage a 5% growth rate when you've lost twice that the year before.

Ingemar Johansson
Ingemar Johansson

Other European countries have lost as much. And yet Latvia has the highest growth rate of any European nation.

Steve W
Steve W

Ingy, you may not realize this, but Latvia is part of the European Union and their unemployment rate is going up too, from 13.5% last year up to 13.8% now. http://www.tradingeconomics.com/latvia/unemployment-rate Latvia's Government debt to GDP ratio for 2012 was over 42%. That's. about a 450% increase from 4 years before. http://www.tradingeconomics.com/latvia/government-debt-to-gdp Compare that to our increase in government debt of about 20% over the same time period. Are you suggesting the US should have quadrupled our government debt, like Latvia did? Ingy, that's not even close to conservative, that's spend thrift. Stick with pugilism. An economist and a political scientist you are not. How's Mitt doing these days? Is he big on Latvia too?

JC
JC

Trends? Inflation down, unemployment up in the Eurozone. What's the Beebe have to say about it?: "The [inflation] fall comes as widespread austerity and weakening economies leave consumers with little free cash to spend, depressing retailers' ability to increase prices." What's the WSJ say in the article you point to?: "Italy and the wider euro zone are in recession, according to the most recent official data covering the final three months of 2012." So, I guess if you like a recession with increasing unemployment, well then austerity and low inflation is your solution. Touché, BS.

Ingemar Johansson
Ingemar Johansson

Only you and Comrade Slaters would take positive growth as a negative, no matter what the recovery time may be. Of course when Latvia's starts exceeding 5% annual you'll come up with some other excuse. Maybe their commitment to some green energy scam. Like the Wall Street dig tho. Never miss an opportunity. Bonzi, off the bridge.

JC
JC

Um, no. Via Yglesias at MoneyBox: "Latvia, reports Andrew Higgins, is the land where austerity works: 'Latvia, feted by fans of austerity as the country-that-can... Latvia’s economy, after shriveling by more than 20 percent from its peak, grew by about 5 percent last year, making it the best performer in the 27-nation European Union. Its budget deficit is down sharply and exports are soaring.' It's worth recalling the math on this. You start with $100 and then you drop 20 percent from peak to $80 and then obtain 5 percent growth and you're left with $84. That's not much of a bounceback. If Latvia can continue five percent annual growth for five more years, then by 2018 they should have re-obtained their 2007 peak output level. Which is to say they'll basically have had a lost decade, except instead of 10 years of stagnation it'll have been four years of terrifying collapse followed by six years as not-fast-enough bounceback." So whoopee. A lost decade. Latvia is back where it was at the beginning of the Wall Street initiated world-wide economic debacle. Of course, that's assuming 5% growth over the next 4-5 years, and absence of another major euro recession.

Ingemar Johansson
Ingemar Johansson

Silence is deafening. Especially for entrenched bridge jumpers. On a related note. "Real gross domestic product –the output of goods and services produced by labor and property located in the United States –increased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the “second” estimate released by the Bureau of Economic Analysis."

Ingemar Johansson
Ingemar Johansson

Ok, then maybe we're being premature. Let's say Latvia continues with its belt tightening followed by increases in GDP and employment. After 3 to 4 years of positive growth would you'd be willing to say austerity works?

The Polish Wolf
The Polish Wolf

...The EU average GDP drop was less than half that of Latvia, and their unemployment rate remains several points higher than the EU average.

The Polish Wolf
The Polish Wolf

We'll see, lizard. I'm less certain. I'm sure there will be cuts, but they will not match the depth of those in Britain, not even close. That's my prediction, anyway. If for no other reason than that the wealthy in this country don't want a double dip recession any more than the rest of us. Ultimately I would say that so long as we balance any social spending cuts with defense and security cuts, it'll be almost worth it (though still not economically viable).

Steve W
Steve W

PW, I wonder how you have such a clear view into the minds of the rich people of this country. Do you know a lot of them personally? Or do you just assume that rich people also lose money during a recession? I imagine some do. And I imagine some people make far more money in a recession than during more normal times. Cheap property is great, if you have the capital to be able to buy it. For instance. From somebody who has to sell it cheap, quick. I didn't see a whole lot of rich people decrying and stopping deregulation even though it led us into the worst recession since the great depression. Bill Clinton didn't care about the deregulation, he pushed it, because he was term limited out and instead was looking forward to his future opportunities. So I don't have the faith that you do in the rich. You seem to just go along with what ever the news talking heads tell you to do. Is there any thing any time that would cause you to rebel? Is there a line you absolutely refuse to cross? If there is, what is it? What if the military and security cuts are minimal and the social spending cuts are deep. Would you put your body on the line? Or would it take something else? Where is your line? Do you have a line, or are you constantly moving it backwards? What social cuts would almost be OK? And if it's balanced cutting but not economically viable (which I agree is true, it's not economically viable) then we are supposed to live in a not economically viable society? Why? And why do we stand for it?

The Polish Wolf
The Polish Wolf

Ha no, I do not have any contact with very wealthy people. But the fact is that corporate profits in the US, the stock market is healthy, and all of this is as a result of rising GDP. Austerity will most assuredly cause a fall in GDP, and not even the wealthy want that. Especially because a fall in US demand hurts all markets, so even highly diversified investors will lose money.

lizard19
lizard19

corporate profits are doing splendid and the stock market is booming. does it matter that it's all an illusion, and our economy continues to get hollowed out through corruption, predation, and reckless infusion of liquidity? most Americans are too strapped, tired, and dejected to really grapple with the systemic deceit that keeps this charade going. the wealthy don't need to worry about shooting the US economy in the foot by keeping the true engine--consumer spending--from recovering. there are still emerging markets to exploit, and recessions/depressions definitely come with major economic opportunities if you're properly connected. the shit going on behind the scenes in the housing market is just one example.

Craig Moore
Craig Moore

The bubble of ideology pops when encountering the thorns of reality. The UK economy is sluggish with no light at the end of the tunnel. One of the drivers that is affecting people in general and business recovery is the cost of power. The UK has been moving away from coal and nuclear and has not replaced that power with similar cost alternatives. http://www.bbc.co.uk/news/business-21501878 The "failure" didn't start with austerity measures. The problem was growing for decades with spending outstripping revenues. There has never been a payback that has arrested that trend. When people and business have less available income after paying power bills those thorns are painful.

The Polish Wolf
The Polish Wolf

The US gets more power from renewable energy than Britain does. Germany gets over twice as much power from renewable sources. The bubble of ideologically convenient excuses pops when encountering the thorns of reality.

Craig Moore
Craig Moore

I could have sworn that your post is about the economic doldrums the UK finds itself experiencing. Since you brought up Germany, they have been pushing to close their nuke power plants. They went on a solar wind building binge and have discovered that the power is just too unreliable and expensive and doesn't begin to make up for the volume loss by closing the nuke plants. Just last August the Germans brought on-line a new coal power plant near Cologne. And as I write this, they are building 23 other coal plant because they see a bleak future without a reliable affordable power source. The Brits should be studying this situation closely as a healthy economy relies on a plentiful, reliable supply of electricity at an affordable price.

Eric
Eric

JC - you do realize that energy in Montana has already been de-regulated since May 25, 1999, don't you?

Steve W
Steve W

Craig, The piece is about the failure of austerity everywhere it's been tried, and why the US shouldn't follow the British proven failure of going over the austerity cliff. England petroleum production is falling rapidly, not because of green measures but because once it's all been pumped, that's what happens. Production falls. If they switched to green years ago they would be better off now. http://www.resilience.org/stories/2012-03-26/uk-oil-plummeting-production-vs-media-inattention. If the Brits hadn't spent so much money on failed war and bailing out failed banks they would be doing fine. Just as we would. But the conservative ideologues screwed the pooch for everyone else, starting with deregulation and continuing right along with austerity. Iceland proved knuckling under to the banks is stupid and unnecessary. They have to import all of their oil, but their economy is humming right along. Proving that austerity is for suckers. And for right-wing ideologues. This video explains it even better. If I were you Craig, I'd sell your oil stocks and oil futures because they are going to drop in value. There is a revolution happening just over the horizon and it will result in a massive petroleum glut. http://www.youtube.com/watch?feature=player_embedded&v=JAsRFVbcyUY

JC
JC

"We can’t keeping mortgaging the future" Isn't that what we're doing by pouring carbon dioxide into the atmosphere?

JC
JC

" My point is that without addressing their power crisis they stand very little chance of making real gains to come out of the doldrums. " Nothing a little central planning wouldn't cure.

JC
JC

"The UK is not going to get out of the economic doldrums without addressing power so that their businesses and citizens have affordable, stable, and plentiful supplies" You're just painting a bogeyman to point to when the UK's economy doesn't improve. Here, I can do it, too: "The UK is not going to get out of the economic doldrums without redistribution policies that return wealth to the workers that created it." And you refuse to acknowledge my point that your demands will result in reliance on carbon-based fuels, and the inevitable catastrophic changes to global climate. Where's the water going to come from to turn the BPA's turbines when long-term drought plagues the Inland Empire? Or are you prescient -- denialist -- and grandiose enough to say that the rains will always fall and the water will always flow...

Craig Moore
Craig Moore

It's also possible to run gasoline in a diesel engine until it burns out. We can't keeping mortgaging the future to fund an unsustainable debt trend without burning up the economic engine that can't keep up with satiating a voracious appetite. The piper must be paid when the music stops. As to the self-imposed 'fiscal crisis' Politico has the story: http://www.politico.com/news/stories/1012/82772.html

The Polish Wolf
The Polish Wolf

Craig- again, international comparisons do not support your hypothesis. Germany is generally considered to have a relatively healthy post-recession economy, and yet their electricity its MUCH more expensive than Britain. No one is saying that electricity prices aren't important for the economy, but available evidence indicates that's not the lesson to take away from the British case. Rather, it is clear that their austerity program crippled their economic recovery, and we would be foolish to consider a comparable strategy.

Craig Moore
Craig Moore

You obviously don't understand or just flatly refuse to understand my point. The UK is not going to get out of the economic doldrums without addressing power so that their businesses and citizens have affordable, stable, and plentiful supplies. Their present energy policy is only exacerbating the problem when their economy is in the dumpster. BTW, ever hear of ASEAN? Those nations see the value of energy being the lynchpin to their economic future. http://talkenergy.wordpress.com/2011/09/16/asean-economic-community-2015-integration-of-energy-infrastructure/ Energy is crucial to the transformation of ASEAN into a stable, secure, prosperous, rules-based, competitive, resilient and integrated economic community by 2015...

JC
JC

lets try that link again: Apple's datacenter

JC
JC

Talkin about having to get your panties in a twist to justify your talking points. As to Google being out west because of hydro, then why has Ma href-"http://www.apple.com/environment/renewable-energy/">Apple built a state of art data center in NOrth Carolina, utilizing 124kWh of renewable energy (enough for 10,000 homes)? Anyways, amazing how fast you can shift the topic away from austerity. What's going to happen to electricity prices when austerity dries up the U.S. economy, and sequestration puts a hamper on the ability of the gov to fund the BPA? Privatize the dams? Say sayonara to cheap power. Face it Craig, you can jump up and down all you want about traditional energy sources, but the Columbia river will only provide so much power before a post-climatic shift (read drought) makes it's energy much more expensive.

The Polish Wolf
The Polish Wolf

No, but we can easily compare the UK to the US, and see that our policy of continuing counter-cyclical spending is working better than their policy of compounding low consumer demand with lower government demand. Predictably so.

Craig Moore
Craig Moore

No, I am not blaming it solely on that. It is complex without a single factor. But continuing the downward deficit path is a driving factor. My point is that without addressing their power crisis they stand very little chance of making real gains to come out of the doldrums. Comparing the UK to other failing countries like Greece doesn't lend much to the discussion other than there are competitors racing to the bottom.

Craig Moore
Craig Moore

Define denier. As to your claim of talking points, are you serious????? Visit North Korea some time. Energy is a commodity business with very little product differentiation. If the economical commodity doesn't come to the user, then the user moves to access the commodity, provide the user is mobile. Businesses are mobile, not so much for people wedded to their homes and country. Do you understand why the Google server farms congregate out west near hydo? Without that affordable, dependable supply no internet for example.

The Polish Wolf
The Polish Wolf

If you are going to blame Britain's double-dip recession on renewable power, then we should find that the UK relies more on renewable power than countries that have not experienced such a recession. The opposite is true. However, the UK does compare quite well to other countries that have undergone austerity (Ireland, Greece, Latvia), and therefore it seems scientifically quite valid to assign responsibility to austerity, not renewable energy.

JC
JC

"a healthy economy relies on a plentiful, reliable supply of electricity at an affordable price" We'll put this statement on the back burner and see how well it stacks up after our republican-led PSC terrorizes the populace deregulates electric markets in Montana. Craig, you got any evidence that the price of electricity is more a more important factor than austerity for the world's economic doldrums? Or is it just talking point time again? And really, what difference does any talk about austerity or world economy make when the economy is going to be at the mercy of the climate for the rest of century. I know you deniers don't want to talk about it, but the 1,000 new coal plants slated to, or already under construction world-wide pretty much cements global warming as the single-most driver of economic instability in the future.

lizard19
lizard19

the washington consensus is for austerity. the people will pay for the global corruption of the ruling class. President Obama and congressional Democrats will go along with it, because their political lives depend on it.