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The coming depression blog | July 12, 2014

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Austerity, Recession and Staving off Boomergeddon

A year and a half ago, I went out on a limb and predicted that the budget austerity plan implemented by the newly elected Conservative Party in the United Kingdom would pay off. While chopping down the size of the budget deficit would act as a Keynesian-style depressant on the economy, I hoped that re-establishing credible budget discipline would reinvigorate private investment and help the U.K. economy skirt a recession. The results of the English experiment, I suggested would serve as an economic model for the United States to either emulate or avoid.

Well, as much as it pains me to say it, I was wrong. The U.K. slid back into a recession in the 1st quarter of 2012, shrinking 0.2% after contracting 0.3% the previous quarter. That’s extremely mild as far as recessions go, especially considering the weakness of the Euro-zone economy as a whole, but a recession it is.

Reports the Wall Street Journal: “Recession’s return will provide fresh ammunition to opponents of Chancellor of the Exchequer George Osborne’s austerity drive, an aggressive program of tax rises and spending cuts aimed at closing a persistent budget deficit that critics say will strangle growth.”

Now we have proof (as if it were needed): There is no easy way out of the fiscal dilemma that modern democratic welfare states have constructed for themselves. Re-establishing fiscal discipline will cause short-term economic pain that will register as immediate political pain. Conservatives may have enough time before they are required to hold another Parliamentary election that they can tough it out. But the United States political system, with its two-year electoral horizon, is not constituted to endure pain for long.

Democrats aren’t inclined to budgetary austerity in the first place, but the English example will only amplify their natural intransigence towards spending cuts. More worrisome, fears of recession will reinforce the Republicans’ political timidity. If you base your credibility as a ruling party upon the ability to generate jobs in the short term, you can’t handle the blow-back from a recession, not even a mild one.

If the Dems hold onto the presidency this fall, I don’t expect any serious deficit-fighting efforts other than taxing the rich. If the Republicans take over, I foresee only tepid measures to roll back the size and scope of government. I could be wrong. I certainly have been before! But with the U.K.’s example providing little cause for hope, I just don’t see the political will in this country to pull us back from Boomergeddon.

Update: Maybe we have a case “faux”sterity, not austerity, on our hands. According to this gold bug, U.K. borrowing and debt has increased 32% under the Tories. If this is a fair and accurate representation of the facts, it might explain why private-sector enthusiasm for the British experiment never kicked in.

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