Monday, 16 June 2014

Britain's "Natural Economic Experiment"

Terrence Casey from the Rose-Hulman Institute of Technology discusses the Coalition's economic 'experiment'.

Back in October 2012 I participated in a panel on economic issues for the upcoming presidential election. In discussing the budget fights between the White House and Congress, someone brought up the austerity policies of the Coalition Government. One of my economist colleagues jumped on this, claiming the two countries represented a wonderful “natural economic experiment”. President Obama was stimulating the economy through the $800 billion American Recovery and Reinvestment Act; the Conservative-led Coalition was slashing spending in the midst of recession. In my colleague’s opinion the results were unequivocal: America was enjoying the fruits of sound fiscal policy; Britain was a disaster. 


Figure 1
Two years on, the results are not quite as clear as my colleague laid out then. As the quarterly GDP figures for the two economies (Figure 1) show, the UK avoided a “triple dip recession” in 2012 and has managed steady, albeit modest, growth since. Britain looks to have the fastest growing economy among the G-7 this year, with the IMF predicting 2.9% growth. The employment side is also brighter. Unemployment has dropped to 6.8% and the Office for National Statistics reports that the employment rate in May was 72.7%,[1] not far behind the pre-crash peak of 2005. US unemployment is lower at 6.3% and our economy has regained all the jobs lost since the crash, but as the progressive Economic Policy Institute reported,[2] the low unemployment rate disguises that nearly six million workers have dropped out of the workforce all together. With them, the true unemployment rate is closer to 10%. The picture is the same in both economies: a steady but fairly anemic recovery. Our “experimental data” is a wash. 


Now that doesn’t negate my Keynesian colleague’s point. The experiment was based on divergent fiscal policies which have since realigned. Political gridlock pushed the US into its own brand of austerity via “sequestration” – a series of automatic spending cuts of $1.2 trillion from the federal budget over nine years, including $80 billion in 2013. While certainly not having the doomsday impact portrayed by the White House at the time, the Congressional Budget Office estimates that sequestration will cost up to 1.6 million jobs through 2014.[3] Either way, our experiment becomes rather muddled.

What if we expand our comparison farther afield? The financial crisis began in the neoliberal heartlands and certainly one of the dominant post-crash narratives, particularly among academics (see Mark Blyth, Colin Crouch, or Colin Hay, among others), is that neoliberalism is dead as a growth model – a point I have contested elsewhere.[4] As such we should expect a better post-crash performance among other “varieties of capitalism”. Remember those? This was all the rage in comparative political economy in the 2000s, particularly the Peter Hall and David Soskice version[5] with its emphases on historical path dependence and comparative institutional advantages. The explicit purpose, in good positivist social science form, was to catalog how microeconomic institutions affected macroeconomic performance. The implicit, sotto voce political theme was to provide an intellectual bulwark against liberal triumphalism – to argue that the organized market economies of continental Europe need not change in the face of globalization. They represent a viable -- indeed, economically and morally superior – alternative (Jonas Pontusson’s Inequality and Prosperity[6] is a good example).  The relative health of the German economy since 2008 is held up as prima facie evidence in support.


Figure 2
The wider evidence is confounding, however. Figure 2 gives the average GDP since 2008 for a quick categorization of major economies into Anglo-Saxon, Scandinavian, Northern European, and Southern European groupings. The developed Asian economies performed best, with the neoliberal economies behind and Southern Europe being an obvious economic nightmare.[7] The US and UK were pummeled in the recession, yet other liberal economies, especially Canada and Australia, weathered recent economic storms relatively well. Even on a one-to-one comparison, German growth since 2008 has on average been lower than the US. Switching to unemployment (Figure 3) also presents a mixed picture. Thomas Pikketty’s bestseller brought economic inequality back to the political forefront, but the fact of the matter is that inequality in the last 30 years has increased substantially in egalitarian, social democratic Sweden just as it has in the heartless, market-driven United States.[8] For all the dramatic economic events of the past decade, there is no clear pattern relating variations in institutions and policies to macroeconomic performance. Things are tough all over.


Figure 3
Pointing this out does not ameliorate the problems facing the British and American economies. The crash of 2008 was an economic, political and social disaster. Recovery has been glacial. The US and UK have only just regained the ground lost in output and jobs, the slowest recovery of any major recession since the Great Depression. Per capita GDP in the UK remains roughly £1300 lower than in 2008 according to the IMF. Government borrowing requirements have been consistently revised upward from the amounts projected by Chancellor Osborne in 2010 when he promised fiscal consolidation within one Parliament, a day now pushed until the latter half of the next Parliament, at the earliest. Of even greater worry is a new burst of house price inflation, particularly in the south east, potentially rendering recent economic gains ephemeral. The United States for its part remains mired in political gridlock that hinders concerted economic action until 2017, if even then.


That said, if the question prior to the crash was “What kind of capitalism works best?”, one would be hard pressed to find a clear-cut answer sifting through the economic data since 2008.  Each political economy has its own specific and peculiar factors shaping economic performance, overlain in many states by the mess of the Eurozone. The bigger point here – and one very relevant to understanding Britain’s economic performance in context – is that the Great Recession is as close as we can get to a natural experiment in political economy. Too much of the post-crash analysis focuses on chronicling the failings of neoliberalism or trashing austerity programs. Those are all fine and legitimate in themselves, but we have to think in a clear-headed manner about alternatives. At first blush the evidence of the superior performance of actually existing alternatives working better is just not there. Arguing “neoliberalism failed” in an environment when the dominant European models are equally stagnating is not much of a basis for a reform program. We need to follow the data wherever it takes us to get the true results of this “natural experiment”.

 
Terrence Casey is a Professor of Political Science and Head of the Department of Humanities and Social Sciences at the Rose-Hulman Institute of Technology. He is also Executive Director of the British Politics Group of APSA. He researches British and comparative political economy.




[1] Office for National Statistics, Labour Market Statistics release, May 2104.   (http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/may-2014/info-labour-market-statistics-may-2014.html ).
[2] Economic Policy Institute, “Missing Workers: the Missing Part of the Unemployment Story”. June 6, 2014 (http://www.epi.org/publication/missing-workers/#chart-unemployment-rate ). 
[3] Erik Wasson, “CBO: Sequester cuts would cost up to 1.6M jobs through 2014.” The Hill, July 25, 2013. (http://thehill.com/policy/finance/313555-cbo-sequester-cuts-would-cost-16m-jobs-through-2014).
[4] Terrence Casey, “How Macroprudential Financial Regulation Can Save Neoliberalism,” British Journal of Politics and International Relations, Forthcoming. Available in Early View -- http://onlinelibrary.wiley.com/doi/10.1111/1467-856X.12042/abstract .
[5] Peter A. Hall and David Soskice, eds., Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (New York: Oxford University Press) 2001.
[6] Jonas Pontusson, Inequality and Prosperity: Social Europe vs. Liberal America (Ithaca, NY: Cornell University Press) 2005.
[7] These are unweighted averages. Weighting the category averages by size of economy would, in practice, flatten out some of the difference as Japan and the US were low performers in their category and Germany a high performer in Northern Europe. That would not change the basic point that none of these categories indicate clearly superior performance.
[8] OECD, Divided We Stand: Why Inequality Keeps Rising (Paris: OECD) 2011.

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