The big economic news today is that the United Kingdom is officially undergoing a “double-dip recession,” as its economy registered a second consecutive quarter of negative growth. Last time that happened was back in 1975: you know, when Labour Wasn’t Working.
But instead of paving the way for a Thatcherite austerity regime, the current double-dip recession could spell major political trouble for the Thatcherite austerity regime of David Cameron. As Paul Krugman notes today, Cameron isn’t just bringing back memories of the mid-to-late 1970s, but of an even darker era:
When David Cameron became PM, and announced his austerity plans — buying completely into both the confidence fairy and the invisible bond vigilantes — many were the hosannas, from both sides of the Atlantic. Pundits here urged Obama to “do a Cameron”; Cameron and Osborne were the toast of Very Serious People everywhere.
Now Britain is officially in double-dip recession, and has achieved the remarkable feat of doing worse this time around than it did in the 1930s.
Britain is also unique in having chosen the Big Wrong freely, facing neither pressure from bond markets nor conditions imposed by Berlin and Frankfurt.
Now, the defense I hear from Cameron apologists is that the austerity mostly hasn’t even hit yet. But that’s really not much of a defense. Remember, the austerity was supposed to work by inspiring confidence; where’s the confidence?
British economist Richard Murphy suggests we are seeing the self-refutation of British Chancellor of the Exchequer George Osborne’s very specific predictions that public austerity would quickly produce private abundance:
Osborne offered us his vision two year ago. It was of “expansionary fiscal contraction”.
His argument was that the more he cut government spending the more people would spend, liberated by knowing that if he succeeded in his aim of balancing the budget tax cuts would follow, letting them repay debt they’d take on now to spend. It hasn’t happened. People who face the prospect of unemployment, increased cost for things that were previously provided by the state, lower pensions, higher cost of childcare and the uncertainty of recession have simply stop spending.
And Osborne argued that as government cut back business would rush to fill the space that he would create in the economy because they would be liberated from the yoke of government interference in their activity. It hasn’t happened. Businesses have seen that their biggest customer is not spending and have cut their investment, reduced their employment plans, closed their premise, withdrawn from the High Street and battened down their hatches in the hope of survival: the last thing that they have done is expand.
This should be of great interest to Americans who could care less about British politics, because “expansionary fiscal contraction” is precisely the Big Macroeconomic Theory of the Republican Party, as expressed constantly from Capitol Hill to the presidential campaign trail. It’s the how-to-fight-a-recession doctrine that has supposedly displaced that bad old Keynesianism. And it’s manifestly “Not Working” in the United Kingdom.