The Usual Suspects

In his Observer debut, new political and business correspondent Jim O’ Brien discusses the problems facing the British and American economies

The latest calculations by the guys who make fortune tellers look professional outlined the fragile state both the British and American economies face. Economists have warned that the threat of a double dip recession is more probable than ever. When the US sneezes the rest of the world gets a cold, and one Scottish comedian added, ’and Scotland takes a stroke’. Why all of a sudden, the US economy which was predicted to grow this year by 4%, looks set to only grow by 1.8%, at least half what is needed to achieve a net employment surplus. The British economy also remains stagnate too. The question that many people ask is why such countries, especially Britain, whose unemployment rate has remained around 8% is in such a position? Why is it that the US government has committed itself to $4 trillion of cuts over the next decade? This time we cannot blame the financial markets, but the usual suspects, the politicians.

Let’s start with the US because it is not only the worst example of political manipulation and ideological fluff, but quite comical in a way, whereby a cute bunny has been demolished by a pack of wolves. You could say President Obama is the bunny, yet a real bunny would not simply lie down and take it, it would try to run away.

Tea Party protests, in all their glory

Chief Economists from the biggest investment banks have urged governments to invest and try growing their economies. The Republicans and the Tea Party movement, who many believe are the same thing, but the majority I believe, stick by them because of their massive support argue to cut the deficit by cutting taxes, something the Bush administration implemented twice which resulted in what will happen again, add to the budget deficit. They want to make the millionaires and billionaires earn more money which is left in a savings account or somewhere overseas like Switzerland and the Caribbean. If they actually do their jobs as politicians, in actually listening to their so-called supporters, predominantly business people, then they would urge for investment in the economy, such as America’s infrastructure. I read recently that it is cheaper for companies to transport their goods by road however the poor state of many of the highways has made journeys longer and expensive. Commentators such as Paul Krugman and Kenneth Rogoff of Princeton and Harvard have argued for more stimulus, because the first round was too small, and debt forgiveness and deleveraging, as we are trapped in a vicious circle. Such initiatives will make America more competitive, the economy to grow and unemployment fall, but why so much inaction? As always, the usual suspects, politicians intervene and never agree or implement what experienced and competent professionals say they should.

They say we should go back to the Reagan policies, where government increased in size, household and business debt sky rocketed and income inequality widened, really? The conservative ideology in America has dominated since FDR’s New Deal, even during the Clinton administration (more to write about inequality when I read more of Krugman’s book) Staying with Krugman, he describes capitalism as socialism without the justice, whereby a few dominant the economy and obtain all the gains, a meritocracy instead of democracy.

To Britain now. This time last year, the British economy grew more in the third quarter than any other quarter in a decade, during a time of full employment and the longest period without contraction. Why? Fiscal stimulus implemented under the Brown government helped ease the shock of the Great Recession. This worked in tandem with the Bank of England’s intervention through quantitative easing, i.e. printing money to drive down long-term interest rates, easing the debt serving costs of the government. Such efforts were implemented by the Federal Reserve, the US central bank, but both countries’ growth rates won’t be helped by further monetary expansion, known as the liquidity trap, a Keynesian concept.

The British government through the deficit hawk, Chancellor George Osborne, will implement the largest budget cuts in the Post-WWII period, asking students to pay up to £9,000 per annum, 40% cuts in teaching budgets for the third level sector and the abolition of labour programmes that put to work youths from the poorest areas in Britain. As I already stated, the Bank of England’s intervention drove down long-term interest rates, meaning the cuts will do nothing to ease their debt burden further as such costs will remain historically low for some time. Also, not even the markets have expressed concerns about the country’s debt burden, which if you exclude money pumped into the banking system, their debt to GDP ratio is only 60%. Actions taken have been purely driven by ideology. Households’ real incomes have declined for the first time since the 1980s, no coincidence that it was during another Conservative government, led by that woman. This means individuals and families can’t save for a rainy day, invest in their pension or pay their mortgages and children’s tuition fees. Further evidence to suggest a failure in ideology is that the Chancellor announced this year that the national debt will increase due to growth predictions declining. (Debt falls quicker with growth)

Now, there are arguments that say the previous government spent too much and cut taxes too much, something we Irish can relate to, yet those commentators who argue against the pro-cyclical policies of the previous decade, believe such policies are needed to fix the current problems. Basically, pro-cyclical means adding more investment to an economy when it is growing, and diminish investment when investment is declining. Such an ideology also believes stimulus is inflationary and that efforts pursued would increase interest rates. Where they right? NO, AGAIN. Can you spot the trend???

Jim O’ Brien

[Jim holds a B.A. in History and Economics, and a B.Sc in Business and Management from NUIM]

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