Welcome to the World of the “New Normal”, UK Style
Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.
crossposted with New Deal 2.0
Welcome to the World of the “New Normal”, UK Style
Calling high unemployment the “new normal” is a lazy way to cover up poor fiscal policy.
We are now starting to see the economic impact of the ‘new normal’ in practice, as Paul Krugman outlined the other day. Having been bullied into adopting austerity measures apparently thinking they will help their economies grow, it is beginning to dawn on many “Austerian” governments that their embrace of hair shirt economics is beginning to undermine growth.
Exhibit A is the United Kingdom. The NY Times gave an account of British towns “reeling” from the implementation of nationwide expenditure cuts of some $130 billion introduced in last June’s budget. “A mass execution without appeal” is how the Times described it.
Along with this article comes a report from the Financial Times, “Economic Fears Rise as House Prices Dip”, documenting how UK house prices have began to fall for the first time in over a year this past July. The article notes that this setback has come “after a year when the recovery in house prices surprised almost everyone and brought relief to Britain’s stretched banks, [so] the return of a buyers’ market threatens to increase jitters in a fragile economy.”
Well, to us neither today’s news about British municipalities reeling from the impact of the new Tory coalition government’s budget cuts, nor last year’s recovery in UK housing, was at all “surprising”. Beset by the greatest financial crisis in the post World War II period, the last UK Labour Government did what any sensible administration ought to do when there is not enough activity in the economy to maintain employment and labor force growth: they increased public demand via increased net government spending.
For all of the wailing about Britain’s “extraordinary” budget deficit, the policy response by the Brown Administration was in fact a good one. By and large, it stabilized the economy and kept unemployment down to the 7% level. In spite of the criticisms by the head of the Bank of England, the government made a very legitimate case that the rapid increase in government debt was an unavoidable consequence of the financial crisis (in itself the product of a private sector debt binge). Yes, perhaps one could very well criticize the fact that a large number of the benefits accrued towards those experiencing the least disadvantage, but this does not invalidate the notion of deploying a government’s fiscal resources when confronted with a huge output gap and huge labor underutilization.
By the same token, attempts to mindlessly decrease alleged “government waste” (the new justification for the attack on the welfare state) in the context of ongoing high rates of unemployment is bound to lead to further economic weakness AND a higher public debt to GDP ratio, via a shrinking GDP. Undoubtedly, some government expenditure is highly inefficient (although, in light of the plethora of private sector induced debt bubbles, it is hardly credible to argue that all spending from the private sector is invariably more efficient than government).
But the deficit as a whole is nothing more than an accounting expression of a gap between expenditures and receipts. Complaining about this as “unsustainable” is analogous to blaming a football scoreboard, because it shows your team losing a game by 2 touchdowns, rather than focusing on the activity on the field which created the 2 touchdown gap in the first place.
In the UK (as in the USA), consumers are still trying to reduce their debt exposure and the saving ratio has been rising. So there is very little thirst for credit coming from that sector. This is, then, a problem of aggregate demand deficiency, which can only be rectified via fiscal policy. Unfortunately, for political reasons, that is impossible right now. Neither the Federal Reserve, nor the Bank of England (two of the leading practitioners of “quantitative easing” in the past 18 months) can simply wave their magic “QE” wand and improve the economy via monetary policy. Lower interest rates might lower the cost of borrowing (and help service a still large private sector debt overhang), but such a policy also steals income from savers, such as pensioners. And in regard to overall aggregate demand, private businesses have to have positive expectations that they will be able to sell the output they produce. Those expectations remain subdued which is why the commercial banks in the US are still not lending very much, whilst prevailing high debt levels render further borrowing by consumers extremely problematic
Having publicly deprecated the impact of fiscal policy and warned of the long term deleterious effects of climbing public debt, of course, the Federal Reserve and/or the Bank of England cannot now reverse course and credibly back more fiscal stimulus. To cover up the flaccid nature of their respective central banks’ ineffectual monetary policy response, a number of economists present the current high levels of unemployment as “structural”, implying that there is little that can be done about it. It is simply the “new normal”, which in reality represents the ultimate in political failure. Our policy elites don’t dare concede the futility of fiscal austerity. Hence, they resort to invoking theories like the “equilibrium unemployment rate”, or “non-accelerating inflation rate of unemployment “(NAIRU, for short), the implication being that attempts to reduce labor underutilization by expansionary fiscal policy would be inflationary in the absence of “structural reforms” , such as privatization, labor market deregulation, anti-union legislation and harsh welfare measures. But these “supply side” measures in effect reflect the agenda preferences of the late 20th century, which have destroyed incomes and eviscerated the middle class. Our “new normal”, then, represents a collective shrug of our policymakers’ shoulders, ignoring a growing undercurrent of anger and despair.
Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.
(h/t Rebecca Wilder)
Well put, but I still come back to the notion that in the U.S. we only maintained historically low unemployment rates by creating a housing bubble and having consumers max out both their credit cards and use inflated housing values as ATMs. I certainly am Keynesian all the way and think that the Democrats deserve to lose their majorities for following dumb GOP policies, but even with reinflating the economy, I do not think we will see unemployment under 6% again unless there is some “revolution” like the pc in the 90’s.
Terry,
“we only maintained historically low unemployment rates by creating a housing bubble and having consumers max out both their credit cards and use inflated housing values as ATMs.”
I did not know that we had a housing bubble before the 90’s. I think we have maintained historically low employment because after The War, we were the world leader in food production, technology introduction, and manufacturing output. Thru Globalization, the United States has given away it’s advantage.
http://www.aier.org/research/briefs/206-the-decline-of-manufacturing
“lose their majorities for following dumb GOP policies.”
What GOP Policies?
Well my reference to historically low unemployment, was unemployment below 6% which likely reflects my coming of age in the early 70’s. I guess I used policies loosely. I meant the ideas of fighting non existent inflation, cutting spending during a period of recession?weak economic growth, giving tax breaks to the most well off Americans on the theory that then they will create jobs, doing nothing about foreign workers because cheap labor is needed/wanted by their base, pitting Americans against Americans because it energizes their base, etc.
Terry,
“unemployment below 6%”
Unemployment under Bush rose from 4.2% in January 2001 to 6.3% in June 2003, but subsequently dropped to 4.5% as of July 2007.
Were these the GOP polcies pre-2006 you were refering to?
“fighting non existent inflation”
Aren’t we in a deflationary period, which is a signal that an inflationary period is approaching? Also, the neglect of raising the interest rates is to provide as much cover to the massive spending as possible, which is dangerous, and in normal times interest rates would have been raised which would have caused some inflation.
“cutting spending during a period of recession”
Not sure why you think that is happending, I see no evidence of nothing but an increase in spending, spending more than any admistration and congress in history?
“giving tax breaks to the most well off Americans”
The Bush Tax cuts went to every tax bracket, and when those numbers are represented as a percentage of revenue, the largest tax cut went to the middle class brackets. Approximately (80%) of supposed “lost revenue” was due to the “Middle Class” brackets, and (20%) from the “Elite” brackets. That talking point works for the idiot masses, but doesn’t work in reality, especially in a conversation about unemployment.
The Obama Tax cuts, represented in the stimulus package, are pathetic, and nothing more than a political device to provide cover, also most of which, have already expired.
http://moneywatch.bnet.com/economic-news/blog/maximum-utility/who-benefits-the-most-from-extending-middle-class-tax-cuts/755/
Tax cut data
We obviously are never going to see things the same way, but my point on unemployment was that during the Clinton years it fell below 6% and while there was the dot com bubble, I think that was largely possible because of what I would dub the “pc revolution” During Dumbya’s reign we got unemployment below 6% again but at the cost of everyone but the filthy rich leveraging themselves to the point where we are in the deepest hole since the great depression. Presumably, we do not want to repeat that cycle–at least not to that extreme. That lead to my comment that I do not see us getting back below 6% unemployment absent something like what I dubbed the pc revolution.
As to my comments on GOP policy to the extent there is any, IMHO Dumbya’s tax cuts did absolutely nothing to stimulate the economy for the bottom 90% of working and tax paying citizns, but were a major contributing factor in turning budget surpluses into huge deficits. Admittedly the anemic real growth in the economy played a major role, but if trickle down, supply side, voodoo economics worked we would not have had such anemic real growth and the budget deficits would not have materialized. To the extent that the GOP has any policy alternatives to the Obama administration it is to cut government spending–which would assure a double dip recession not to mention adding to the misery of all but the very rich–and cut taxes for the wealthiest Americans in the hopes that they will “invest and employ” although why they would bother when no one has the wherewithall to buy their goods and services is beyond me. Throw in a large dose of trying to exploit divisions between Americans–“productive” vs “unproductive”, hispanic vs everyone else, black vs white, christian vs nonchristian etc and I have very little use for the GOP.