DeLong: The Humiliation of Britain

Brad DeLong:

The Humiliation of Britain, by J. Bradford DeLong, Commentary, Project Syndicate: ...Even though the British government’s credit is still solid gold, Prime Minister David Cameron’s administration is about to embark on what may be the largest sustained fiscal contraction ever: a plan to shrink the government budget deficit by 9% of GDP over the next four years. ...

Cameron’s government used to claim that its policies would produce a boom by bringing a visit from the Confidence Fairy that would greatly reduce long-term interest rates and cause a huge surge of private investment spending. Now it appears to have abandoned that claim in favor of the message that failure to cut will produce disaster. ...

What is so bad about continuing to run large budget deficits until the economic recovery is well established? Yes, the debt will be higher and interest on that debt will have to be paid, but the British government can borrow now at extraordinarily favorable terms. When interest rates are low and you can borrow on favorable terms, the market is telling you to pull government spending forward into the present and push taxes back into the future.

Advocates of austerity counter that confidence in the government’s credit might collapse, and the government might have to roll over its debt on unfavorable terms. ...

To be sure, back in the 1970’s, confidence in the credit of the British government collapsed, forcing it to borrow from the IMF... But that is why Keynes and Harry Dexter White established the IMF in the first place. An IMF program restores confidence in the fiscal soundness of governments that markets distrust. The lending allows the necessary medium- and long-term spending cuts and tax increases to be undertaken at a more appropriate time.

Borrowing from the IMF may be humiliating for government officials. But businesses establish lines of credit for future contingencies all the time, and they don’t think there is anything humiliating about resorting to them when those contingencies come to pass. And what, really, is so humiliating about borrowing from your own citizens? ...

To borrow from your own people is especially non-humiliating when your economy is in depression, when the interest rates at which you can borrow are at near-record lows, and when every economic argument cries out for spending now and taxing later.

What is humiliating is to have a government that cuts a half-million public-sector jobs and causes the loss of another half-million jobs in the private sector. In an economy of 30 million jobs, that translates into an increase in the unemployment rate of 3.5 percentage points – at a time when no sources of expanding private-sector demand exist to pick up the slack. Britain’s finest hour this is not.

As I noted yesterday, my worry is that the outcome of the midterm elections will make it more likely that we'll catch the austerity bug and begin trying to balance the budget before the economy is ready.