The Reckoning

Cameron’s Trailblazing Road to Ruin

British Prime Minister David Cameron tries to get the wind to his back - unsuccessfully.

Photograph by Carl Court/AFP/Getty Images

Perhaps it is a sense of diplomatic propriety that has kept David Cameron’s economic policies out of the American election campaign so far —with the Obama administration, where detachment has risen to the level of art, you can never rule out the possibility that the president cutting off his political nose to spit his face.

But Britannia has offered up precisely the model that I argued last year would serve as a cautionary tale for American voters of the dangers of cutting a swathe through the public sector at a time when private sector job growth is anemic.

On Wednesday, the U.K.’s Office for National Statistics officially confirmed what everyone has known for months now: the U.K. is back in recession.

The dreaded double-dip will be blamed by the country’s leadership—the Tory Prime Minister David Cameron, and his too-compliant Liberal Democratic ally, Nick Clegg, on external forces. The rolling policy train wreck in the eurozone certainly affects Britain—though Cameron can happily tout his long-held opposition to Britain joining the currency union (as opposed to his Labour opponents) as a feather in his cap.

Yet the policies of Cameron’s government are more to blame than any other single factor for the second coming of economic stagnation. If the to-and-fro of the austerity vs. stimulus argument in America leaves you cold, one need only look at the British economy for a living, bleeding case study of radical austerity’s effects if implemented into the teeth of a global economic downturn.

Citing the reforms of Margaret Thatcher in the early 1980s, Cameron in late 2010 passed radical cutbacks in public spending, on average 20 percent across most government ministries. This is basically what Mitt Romney would do, though with some alterations for our own unique pathologies (for instance, vast increases in defense spending).

The result was predictable (and predicted by many, too): a nascent economic recovery stalled, and Britain dove once again toward zero growth and a possible “double dip” recession.

British debt problems mirror those in the United States in many ways: for decades, governments in London have spent far more than tax revenues could raise, making up the shortfall by selling “gilts,” the British equivalent of Treasury bonds. Once the 2008-2009 financial crisis hit, the need to produce a sustainable medium-term fiscal blueprint in Britain was even more pressing than in the United States: British debt—at 62 percent of GDP as of September 2011—would reach 100 percent of GDP by the end of the decade if no action were taken, and global markets would be far less forgiving of a mid-sized former hegemon than they have been to date of the current superpower.

Even under Cameron’s current plans, however, debt would not stabilize until 2017 or later, where with some luck the debt-to-GDP ratio of around 60 percent might begin to be whittled away by stingy government budgeting. But “front-loading” the austerity so radically offsets the benefits of lower government borrowing, critics argue. Britain’s public sector is huge compared with most developed economies’. Since the 1960s, government spending has accounted for about 40 percent of British economic activity—a figure that swelled to 45 percent as post-crisis bank bailouts took effect in 2010. (U.S. government spending, by comparison, historically drives about 33 percent of economic activity, though in 2010, TARP and other recession-related spending programs caused a spike at 40 percent.)

In effect, by strangling the British public sector at precisely the time when British consumers and corporations felt most distressed, Cameron has guaranteed a deeper downturn, gambling that long-term economic balance is better served by a smaller public sector, with all the sacrifices that implies, than by policies that stimulate GDP growth.

Among critics of this approach, David Blanchflower, arguably the world’s leading labor economist, had warned in 2010 that deep austerity on the heels of a deep recession was a historic policy mistake that could permanently lower the “speed limit” of British GDP growth. He accused George Osborne, the top policymaker in Cameron’s government, of engaging in a short-term accounting trick to make Britain’s national accounts look better, all fueled by Thatcherite ideology rather than economic reason. Today, this period stands as Britain’s worst-ever post-crisis recovery, supplanting the long, Depression-era slog of 1930 to 1934.*

Now, it would be unfair to hang the Great Recession around Cameron’s neck—remember, it was the Labour Party that presided over the years of the bubble, just as the Republicans in the U.S. sowed most of the seeds of trouble here.

But there are lessons in what not to do in Cameron’s Tory response. The parallels will be rejected on the right, of course. But this is a powerful argument for a “controlled burn” approach to our own economic torpor. The United States should have (and still should) pour fuel into the fire of economic growth, creating a kind of firebreak for the recession. Only after a sustained winning-streak of (let’s say) five to six consecutive quarters of growth at a 2 percent annual clip should we relent.

And here’s the kicker: At that point, cuts along the lines recommended by Romney and implemented by Cameron do make sense, but only as part of a national grand bargain. They’re right that the current trajectory is not sustainable. What they’re wrong about is the idea that we’re in any shape to start cutting now. Growth must precede such pain—otherwise the pain will bring no gain.

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*Correction, April 25, 2012: This blog post originally misidentified chancellor George Osborne as David Osborne.