US recovery shows the failure of Osborne’s ‘Voodoo Economics’


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By Ranjit Sidhu

Last Friday we found out the US economy had created 227,000 more jobs in February, with the number created in January revised up to 281,000, meaning a total of more than half a million jobs created in the first two months of 2012.

George-Osborne-corpseThis was just the latest in a string of positive news stories regarding the US economy; earlier in the week came the news (£) US GDP growth was revised up for the last quarter of 2011 to +3%, meaning talk of a double-dip recession was receding quickly as the markets now were asking ‘how strong will the US recovery be?’

The contrast with the UK could not be greater: in February we hit 2.67 million unemployed, up 48,000 on the quarter (pdf) with the last quarter of 2011 the GDP growth a disappointing -0.2%.

For the UK, thoughts of a recovery are receding fast with market talk firmly still on a ‘double dip’ recession.

The comparison with the US, not Europe, is the most telling for the UK. Both countries have large financial sectors, meaning the damage done after the financial crash was similarly devastating.

 


See also:

Osborne’s solution to unemployment? Make it easier to unemploy people 7 Mar 2012

New record high for NEETs in 2011 – but why? 23 Feb 2012

Osborne’s austerity obsession is betraying a generation of young people 16 Feb 2012

UK unemployment rate overtakes US for first time since recession started 15 Feb 2012

The US has turned a corner in unemployment; can we follow them? 6 Feb 2012


 

Both have their own currencies and central banks who have used policies such as interest rate cuts and quantitative easing to independently try to boost their respective economies, these in turn being the main factors leading to the low borrowing cost for government.

Indeed, they had similar policy reactions to the crash, with both countries engaging in stimulus packages with initial positive growth in GDP and confidence in the second half of 2009 and early 2010, yet, as Graph 1 shows, UK Q4 2010 saw negative growth, with growth yet to return to the levels of Q1-Q3 2010 – a stark contrast to the US.

Graph 1:

US-v-UK-GDP-growth-rate-2010q1-2011q4
The fundamental divergence from 2010 onwards was how to achieve growth.

The Obama presidency held resisted pressure from an increasingly militant Congress and kept to a solid economic strategy that while the private sector was weak it would be irresponsible for the government to cut public spending drastically; indeed it was the job of government to provide continuing stimulus to the economy. The UK coalition government took different view, believing that cutting spending would reassure business and lead to an investor-led recovery.

This UK policy was marketed as a populist shift from government to the private sector, that slashing 25% to 40% from bloated government departments and allowing the free market to take the slack would produce growth and jobs. The curious logic being that somehow the cuts made in welfare spending and government projects would trickle down and across to the private sector and boost spending there.

This is not a new refrain – it was a similar theory that underlay the supply-side ‘Reaganomics’ policies in the 1980s, that government and business were diametrically opposed and that government needed to just ‘get the Hell out of the way’ to allow the trickle down/across effect of the market to work.

Now, as then, the result is the same: the magical leap didn’t happen; now, as then, the deficit as a percentage of GDP has risen not fallen (£).

In contrast to this, through all the unpopularity Obama has suffered in the US over the last few years he stuck to the sometimes unfashionable idea that the US government did have a central role, with government and businesses having a symbiotic not combative relationship, that:

“…as a nation, we have always come together, through our government, to help create the conditions where both workers and businesses can succeed.”

The US government through stimulus and investment created a tangible bridge back from the abyss allowing the private sector to motor back to strong growth; our own bridge was kicked away by an ideologically-driven assault on government by the Conservative-led coalition just when it was needed most – the facts on growth and jobs are unfortunately now staring at us in black and white.

We in the UK are paying for our choice to turn away from sensible economic thinking to espouse the fear and loathing of government driven by George Osbourne’s own misguided version of Voodoo Economics.

 


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  • http://twitter.com/mrnonnymouse NonnyMouse

    If you are going to quote the US job creation number then where is the UK creation number? The UK economy added 20,000 jobs per month to the economy in Q411.

    If you are going to quote the US % in employment number to compare with the UK % in employment number? The US employment as % of potential workforce is at record lows, the UK one is at a record high.

    Where is the budget deficit graph? Obama has added $1 Trillion every year of his presidency.

    Where is the debt to GDP graph? The US now has debt >100%. They are heading for a Greece type default.

  • Creebo60

    er, no they aren’t

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  • http://twitter.com/Newsbot9 Newsbot9

    Of course they are, in his world. Never mind actual bond yields. After all, the 1% are not suffering, so who cares…

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  • Ranjit

    Thanks for the comments- regarding USA GDP to debt please follow the links for the data. The main pint I was making was:

    1. That government and business have a symbiotic relationship which requires government to understand what is required to get the economy moving again

    2. That the idea that cutting government will create a space for business to grow is a tentative logic.

    I would just add the markets are not stupid the interest on US bonds is very important as NEwsBot mentions, further market talk is now of lack of growth.

    Thanks again for your comments

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  • Mr. Sensible

    The thing is that the reason the US lost its AAA credit rating was because of political rangling.

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  • Ash

    Hang on a minute – surely those figures for the US represent *annualised rates* of GDP growth (which is how growth is reported over there), while the figures for the UK represent the actual growth happening quarter-on-quarter (which is how growth is reported over here)?

    Which means you’re comparing apples with oranges. In Q2 2010, for instance, the UK economy did indeed grow by just over 1% – but the US economy didn’t grow almost four times as much (just under 4%), as your graph shows. In fact quarter-on-quarter growth (> 1%), and so the annualised rate of growth (> 4%), was somewhat higher in the UK than in the US at that time.

    Either you should produce a graph showing quarter-on-quarter growth in the US and UK, or a graph showing annualised growth rates in the US and the UK. What you’ve got here is just a nonsense; basically it makes US growth appear four times higher than it is relative to UK growth.

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  • David Henderson

    Absolutely right Ash.

    The GDP table is wrong and should be corrected. Using unannualised data, the US grew less fast than the UK in Q2 2010 and Q1 2011 and just as fast as the UK Q3 2011. It did grow faster than the UK in every other quarter of 2010 and 2011 but this should not be exaggerated. These numbers are freely available here: http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=namq_gdp_k&lang=en

    Comparing US employment data with UK unemployment data is also misleading. Either compare employment data for both or unemployment data for both. Mixing the two provides little evidence of anything and it ignores labour inactivity.

    Ranjit, the arguments makes may well still hold but it would be good to see the actual evidence behind them.

    David

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  • Anonymous

    What is the UK’s debt to GDP?

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