George Osborne’s outer fringes

Here’s George Osborne in The Daily Telegraph today justifying his deficit reduction plans:

“The alternative of more spending and yet more borrowing is now frankly ludicrous and places those who advocate it on the outer fringes of the international debate.”

Well, in that case the Chancellor considers Nouriel Roubini, the economist who predicted the 2008 meltdown, to be on the outer fringes and spouting ludicrous ideas.

In the Financial Times today Roubini argues (subscription):

“The best bet is for those countries that have not lost market access – the US, UK, Japan, and Germany – to introduce new short-term fiscal stimulus while committing to medium-term fiscal austerity.”

I’ve got another bone to pick with the Chancellor’s column. He argues:

“The US economy has grown more slowly than the UK economy so far this year, despite fiscal stimulus in the former and fiscal consolidation in the latter.”

This is misleading on three counts.

First, although US growth in 2011 has been poor, the UK has hardly been roaring ahead  (0.7% growth here vs 0.4% growth there).

Second, the US stimulus package had its greatest impact in 2010. And the Congressional Budget Office predicted last year that the impact of the stimulus would diminish in 2011 (see Table 1 on page 2). The Chancellor is not comparing full-on stimulus with full-on austerity.

Third, despite this year’s alarming slowdown, the US has already caught up* to its pre-2008 economic output levels. The UK is still some 4 per cent off where it was before the recession. This graph (courtesy of the FT) illustrates that.

The notion that “austerity” UK is doing better than “stimulus” US  is a dog that simply will not hunt, however hard the Chancellor blows the horn.

*A tweeter called impedant points out, rightly, that the recent downgrade of the US GDP figures for the first quarter means that the America is still below it’s pre-crisis peak. It is still, however, much closer to that peak than the UK.

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• Guest

  Those numbers are stale, Ben; the revisions to the old data in the BEA 11Q2 have US real GDP still below the pre-crisis peak.  See, e.g.

  http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/07/revisions.html

• pilsden

  Further reading from Tullet Prebon “thinking the unthinkable”By Dr Tim Morgan

  Quote from press release
  “The British economy, as currently aligned, is incapable of delivering growth at anywhere near the levels required by the deficit reduction agenda,” says the report. The underlying problem is that, during the bubble which preceded the crash, the UK became dependent upon private borrowing and public spending. A swathe of industries, encompassing real estate, construction, finance, health, education and retailing, and responsible for 70% of economic output, have been rendered ex-growth by the slump in private borrowing and the ending of unaffordable expansion in public spending.  Dr Morgan argues that the ruling  Coalition is right to  argue that the fiscal deficit must be eliminated and the Labour opposition is correct that fiscal tightening will undermine growth. Whilst the fears of both sides are accurate, neither set of prescriptions will work”

  I think also in your use of the US budget office of last year you are missing the new stimulus of QE2 and the continuation of the Bush tax breaks.The reality is the financial stimulus now doesn’t buy you longterm growth just like Japan found out and with debt levels reaching c 90% you are hitting the barrier to growth identified by Reinhart and Rogoff.

• manofthepeepl

  It strikes me you’re accusing the chancellor of comparing apples with pears, while you’re using apricots and peaches. The 2 economies aren’t the same. In fact I’d say we were probably closer to the eurozone economies of Italy and Spain, and borrowing to spend hasn’t done them much good, has it?

• gj1966

  To be fair he did say less slowly, rather than claiming that UK growth was quicker, and so implying any speed beyond barely moving.

  In George Osbourne’s “Bouncy Wouncy Wabbit Guide to Macroeconomics” it clearly says that the Private Sector will pick up any reduction of Public Expenditure, so obviously Roubini is talking socialist nonsense.