The American Interest
Analysis by Walter Russell Mead & Staff
Austerity Pays Off?

A ray of light may be breaking through the Eurogloom. The Wall Street Journal reports that the U.K. government deficit is smaller than expected. The Krugman catastrophe has not occurred despite the belt-tightening of the Cameron/Clegg coalition.

Public sector net borrowing was negative in January—meaning a surplus—to the tune of £7.8 billion ($12.36 billion), the Office for National Statistics said Tuesday. That was higher than the £6.4 billion economists expected, and marks the biggest surplus since January 2008.

The future is still looking grim as growth is slow and the EU is as sick as ever. But the U.K.’s bet on austerity and reform may just be paying off.

Published on February 21, 2012 11:30 am
  • LarryD

    As expected: http://www.economics.harvard.edu/faculty/alesina/files/Large+changes+in+fiscal+policy_October_2009.pdf

    “As for fiscal adjustments those based upon spending cuts and no tax increases are
    more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions.”

  • Mark

    Ha, you have certainly covered yourself either way. First, “The future is still looking grim”, and then “may just be paying off.” So which is it?

  • Kris

    Mark@2, the author has simply been spending too much time on Krugman. For example, if the US finally recovers from the recession, it will be thanks to the stimulus. If it doesn’t it will be because the stimulus wasn’t big enough.

  • WigWag

    My guess is that Paul Krugman would be willing to give David Cameron credit for one thing; the British Prime Minister, as opposed to the Republican leadership in the United States Congress has been willing to raise taxes significantly. In fact, the top marginal British tax rate is 50 percent which blows the top American rate out of the water.

    And unlike American Republicans, Cameron has been willing to cut British defense expenditures so spectacularly that in the event of a war with Argentina over the Falklands/Malvinas, Great Britain would get its tushy whipped; that is unless Cameron made the decision to nuke Argentina. It’s actually probably worse than that; it’s doubtful that the navy that once dominated the world could even transport their troops to South America to fight the Argentines. More likely, Great Britain would have to buy tickets for its fighting men and women on the Queen Mary 2.

    Professor Mead alludes to British economic weakness but he fails to tell the full story. At the same time that the unemployment problem in the United States is slowly but surely abating, Great Britain experienced its worst unemployment numbers in 16 years just last month. The economic downturn in Great Britain is now longer than the economic downturn during the Great Depression and unlike in the United States, there is no indication that things are getting better.

    Professor Mead can celebrate a small drop in British deficit spending if he wants to, but given the collapse in British GDP, British employment and British fecundity, most Brits would conclude that there is very little to celebrate.

    Obama’s economic policies while far from perfect, are making the American economy stronger; Cameron’s policies are making the British economy worse.

    Krugman’s right and so is Keynes. Mead on the other hand is not.

  • MikeB

    Krugman’s right and so is Keynes? Boy. As someone who’s been following Krugman as early as 1981 or so, he’s been awful. In or around ’81, he recommended not buying stocks or bonds, that rates were going from 21% to 25%. One could not have given worse advice ever. That was the cheapest time in US history(using Tobin’s Q as a measure). How can anyone listen to someone who gives advice which turns out 180 degrees wrong. The Dow was at 800 then. It’s now 13,000. His politics blind his logic, and his craft. He’s dangerous.

  • Jim.

    @WigWag:

    So, if the British GDP is collapsing, does that show that their massive hike of high-end marginal taxes is a good thing, or a bad thing?

    As far as childless Keynes goes, I’m not sure why he’s a role model for the under-fecund. But at least the British are not paying any attention to the idea that they should sell out the future of what few children they have, by borrowing money that they are in no position to repay.

    It’s also heartening to see that they realize that their economy does not have the industrial or commercial dominance to outgrow debts while running deficits.

    On the other hand, it’s a shame to see the once-mighty British Navy brought to its knees because they drank the Beveridge Report. To think what they could have been, if their government hadn’t made the unsustainable promises that are bringing nations across Europe to the brink of bankruptcy.

  • Tom Richards

    It’s certainly true that the Royal Navy could not re-take the Falklands if Argentina occupied them again, but there is essentially no possibility of that. The Typhoons now based in the islands, coupled with the Type 45, are more than capable of shooting down the entire Argentinian airforce. It’s also a pretty fair bet that one of the Trafalgar class boats or Astute is in the South Atlantic, which would be enough to make a pretty mess of any invasion fleet. The Argentines could never get ashore.

    As to the economics, it is far, far too early to judge the success or failure of anyone’s policies (though Iceland seems to be doing quite nicely to me so far). Personally, I suspect that the best answer to the question, “What should one do when a vast credit bubble bursts at a time when one already has substantial debts and huge deficits?” is “Never, ever get in that situation.” Regardless, I think it is fair to say that excessive austerity without commensurate monetary loosening is counterproductive (see Greece) but it should also be acknowledged that the US has a reserve currency to devalue, which the UK does not, and a far lower relative exposure to the ongoing fiasco that is continental Europe.

  • Jacksonian Libertarian

    This is excellent news for Great Britain, I expect their economy to benefit from this surplus.

  • WigWag

    “As far as childless Keynes goes, I’m not sure why he’s a role model for the under-fecund.” (Jim @ February 22, 2012 at 12:22 am)

    Keynes was gay which was probably why he didn’t have children. He was actually married for a time and his wife became pregnant but she miscarried. Most of Keynes’ sexual relationships were with men including the artist Duncan Grant and the author and raconteur, Lytton Strachey. Keynes was also a member of the “Bloomsbury Group;” as you may know, many of the members of this group had avant-garde (for the time) views of human sexuality.

    So I agree with you, Jim, Keynes was hardly a walking advertisement for British fecundity. Of course the biggest challenge to British fecundity turned out to be the Great War followed by World War II; the demise of British fecundity can be traced directly to the consequences of the civil war of Europe. Great Britain has never reacquired either its Empire or its inclination to have children.

    In many third countries around the world, fecundity greatly exceeds that in the more developed West. There are numerous theories about why poor and uneducated people tend to have more children. As Prime Minister Cameron and his Government continue to eschew the advice of Keynes and, as a consequence, Great Britain continues to get poorer and poorer it will be interesting to see if fecundity in Great Britain begins to increase.