Wednesday, November 26, 2014

Neville Chamberlain was Right

BERKELEY – Neville Chamberlain is remembered today as the British prime minister who, as an avatar of appeasement of Nazi Germany in the late 1930’s, helped to usher Europe into World War II. But, earlier in that fateful decade, relatively soon after the start of the Great Depression, the British economy was rapidly returning to its previous level of output, thanks to Chancellor of the Exchequer Neville Chamberlain’s reliance on fiscal stimulus to restore the price level to its pre-depression trajectory.

Compare that approach to the expansion-through-austerity policy being pursued nowadays by British Prime Minister David Cameron’s government (with Chancellor of the Exchequer George Osborne leading the cheering squad). The country’s real GDP has flat-lined, and the odds are high that British real GDP is headed down again.

Indeed, in less than a year, if current forecasts are correct, Britain’s Cameron-Osborne Depression will not merely be the worst depression in Britain since the Great Depression, but probably the worst depression in Britain…ever.

That is quite an accomplishment. As Phillip Inman of The Guardian recently put it: “[T]he UK’s plan for recovery from the financial crisis was based on a full-throttle recovery in 2012....[C]onsumer confidence, business investment, and general spending would converge to send the economy on a trajectory of above-average growth.”

It did not work: government ministers “have done what the right-wing economists told them to do and moved out of the way – the theory being that public-sector spending and investment was ‘crowding out’ the private sector.” Instead, as Inman says, “Spain is showing the way with its austerity-driven recession. Where the weak tread, we [in Britain] look keen to follow...”

The failure of expansionary austerity in Britain should give all of its advocates around the world reason to reflect on and rethink their policy calculations. Britain is a highly open economy with a flexible exchange rate and some room for further monetary easing. There is no risk or default premium baked into British interest rates to indicate that fear of political-economic chaos down the road is discouraging investment.

There is an argument – not necessarily true, but an argument nonetheless – that, while in office from 1997 to May 2010, the Labour governments of Tony Blair and Gordon Brown overshot long-term sustainable government spending as a share of GDP. Their actions stand in contrast to countries that reduced their debt-to-GDP levels in the 2000’s, and to the United States, where the problem was not excessive spending but insufficient taxation under the Bush administration.

Yet, if one takes this view seriously, Britain, with a ten-year nominal interest rate of less than 2.1% per year, should already be in a boom. If there was ever a place where expansionary austerity should work well – where private investment and exports should stand up as government purchases stood down, confirming its advocates’ view of the world – it is Britain today.

But Britain today is not that place. And if expansionary austerity is not working in Britain, how well can it possibly work in countries that are less open, that can’t use the exchange-rate channel to boost exports, and that lack the long-term confidence that investors and businesses have in Britain?

Nick Clegg, Britain’s deputy prime minister and the leader of Cameron’s coalition partner, the Liberal Democrats, should end this farce today. He ought to tell Queen Elizabeth II that his party has no confidence in Her Majesty’s government, and humbly suggest that she ask Labour Party leader Ed Miliband to form a new one.

To be sure, if Clegg did this, his political career would probably be finished, and his party’s electoral prospects would be damaged for a long time to come. But Clegg’s political career and his party’s fortunes will be shaky for a long time to come in any case, given the economic hardship that Britain is enduring (and will continue to endure). At least defection from the ill-advised Conservative-Liberal coalition now would benefit his country.

Policymakers elsewhere in the world take note: starving yourself is not the road to health, and pushing unemployment higher is not a formula for market confidence.

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    1. CommentedPaul Ingram

      I am disappointed to see your understanding of Neville Chamberlain's effective policies through the lens of your own political leanings.

      It's all very well using trendy modern trite meaningless phrases like 'expansionary austerity' when you haven't noticed that UK government spending is up not down. Let's not allow the facts to get in the way of a good story, eh?

      Chamberlain cut public spending by 10%. It was a brave move which restored public confidence. He lowered taxes - firstly to those less well off. Those are the facts.

      The problem in the UK is well understood by the public - it's the career politicians, academics, economists and in particular a peculiar class of unaccountable meddlers known as HM Treasury and the Bank Of England who keep telling us what we want.

      We the public know that we need control of our own employment law, human rights law, fisheries & farming, immigration, less government, less regulation, lower taxes and a government that does not seem to delight in spending our money like water unwisely. Mr Laffer has shown us the way and recent drops in tax revenue and hysterical noises from HM treasury concerning the black market tell us that the government still doesn't get it.

      Recent Union action tells us we have union problems where 10% of the workforce can humiliate the entire country.

      So before you lecture anyone else with your slanted views please:-
      read your subject matter thoroughly
      avoid slanting your conclusions to support your political stance
      run a successful business for say, Oh, twenty years dealing with the treasury, employees, unions and banks
      do this whilst politicians do their level best to increase your burden, improve their haul and give away your sovereignty without asking you.

      I am a great supporter of reading, but when the only book in town is Keynes I despair. Please find a new book to read which involves less burden, more encouragement. There is more to an economic downturn that fiscal stimulus (implying government borrowing). There is humanity - and we need hope that tomorrow will be better than today and our suffering will come to an end. We won't do that by increasing our debt.

      Perhaps then I and others might listen.

    2. CommentedH Gerken

      Appeasement? Well, getting back to real very lately after the republic was destroyed by the financial conditions.

    3. CommentedKonrad Kerridge

      I believe that the concern over expansionary austerity is misplaced. Remember that the current generation of Tory leaders were brought up under Thatcherism. They may incidentally believe in 'balanced budgets' and 'good housekeeping' but they primarily believe in small government.....even if it takes a long time for the private sector to emerge into the space created by a decimated state. The decimated state is the primary objective. It is the fundamental structural reform that will set Britain on an entrepreneurial private sector led path to prosperity. This political objective is guiding the austerity policy, not the belief that austerity is expansionary. The issue they need to tackle is to get re-elected whilst decimating the state and before the prosperity comes about. That's why they have the continued dialogue and media discourse about 'austerity we need to have'.

    4. CommentedPeter Hollingsworth

      Independent of the falecy of the expansionary austerity idea it remains that all of the political parties, Conservative, Lib Dem and Labour plus the majority of the population subscribe to in one form or another. This isn't helped by the media which keeps reminding us that austerity is required. This is true even though by some estimates median real earnings may not return to there 2008 level until 2020.

    5. CommentedProcyon Mukherjee

      Yes, austerity theorists have been proven wrong, but the malaise is far more deep rooted in the British economy. The question is where should the incentives be headed that would spur growth, to the financial sector that would create further rise in capital exports of Great Britain or in the other productive sectors of the economy that would create a labor intensive supply of goods and services that is more home grown? The attention better be more directed towards those policies of the government that does not boost domestic demand or supply as productivity has deteriorated continually over the last decade that barring a few specialized sectors manufacturing and service is almost fully outsourced; minus austerity, the situation does not change if the direction of investments and policies is headed wrong.
      Procyon Mukherjee

    6. CommentedPaul A. Myers

      Substantial investments in public infrastructure and human capital should have large payoffs in the coming years. Those countries that make these investments should therefore improve their competitiveness and comparative advantage.

      There are two sources of funds from which to make these substantial investments: (1) domestic savings, or (2) borrowing.

      Those countries with low borrowing costs, such as the US or the UK, (but low savings rates) should borrow and invest in their future competitiveness and growth. If they do not, they will emerge from the current recession with reduced prospects and prosperity.

      The UK has fatefully chosen the wrong course. It remains to be seen where the American people come down on this fundamental question. The United States does have a huge strategic opportunity in front of it. Will anyone frame the question correctly in the current debate?