Great article, a slice:
By Ezra Klein Bloomberg
Established Entities
A better analogy is found in the U.K. Like the U.S., the U.K. has been around awhile and it isn’t going anywhere soon. Like the U.S., the U.K. has established institutions -- the Bank of England was founded in 1694 -- that have been tested before. But unlike the U.S., the U.K. responded to the financial crisis with a quick turn toward austerity, imposed through tax increases and spending cuts, rather than Keynesian stimulus. As a result, the U.K. is falling into a double-dip recession, even underperforming its rate of recovery during the Great Depression. What’s more, with the economy sinking, austerity measures aren’t producing the desired fiscal balance. Economic health depends on the nation’s debt-to-GDP ratio: When GDP falls, as is happening in the U.K., debt must fall even further and faster to make up the difference.
The smaller, more open U.K. economy is also more buffeted by events in the euro area than the U.S. is. But as Gallagher, of the Scowcroft Group, says: “You never get perfect comparisons. You’re always approximating. The 1930s in the U.S. and the 1990s in Japan aren’t perfect examples either, but we use them to draw lessons.”
What lessons should we draw? Don’t be like Greece -- that’s the easy one. The more important lesson of the euro area is that a successful currency union should also be a fiscal and political union. The U.S. has little to learn on that score.
As for the U.K., well, it’s more about relearning a lesson that some in our country seem to have forgotten: Austerity does not create growth, and it’s not something you want to try prematurely.
In a recent paper, economists Ugo Panizza and Andrea Presbitero analyzed the evidence that high levels of debt hinder a nation’s economic performance. They failed to find proof of a causal link. What did seem clear, they wrote, is that high debt can reduce growth “because high debt leads to panic and contractionary policies.” That’s essentially what’s happened in the U.K. We would be wise not to let it happen here.
(Ezra Klein is a Bloomberg View columnist. The opinions expressed are his own.)
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