The Greatest Threat to U.K. Economic Growth is in the U.S. House of Representatives

After some tough times, the U.K. is experiencing some much-needed economic growth. Because the rate of growth in the U.K. is about comparable to that of the U.S. despite radically different economic policies, debate will no doubt emerge between Keynesian-types trying to minimize the U.K.’s good news and deficit-hawks overselling it. Like virtually all such debates about public debt, these battles will be boring, dumb and unproductive, so let’s debate something else: What is the leading threat to better economic times in the U.K?

Some observers would argue for unemployment, which stands at 7.8%. That’s much lower than the Eurozone but still unacceptable. British policy makers should be particularly concerned about long-term unemployment of the sort that entrenches families in a marginal economic situation for generations. Growth in employment overall does not guarantee breaking this cycle, particularly with job-seekers from the continent being highly mobile and in many cases, highly desperate. There are many indigenous Brits who were left out of the job growth of the Blair years; the same thing could easily happen to their children.

Others commentators might suggest that inflation, at 2.7% for the year, is the U.K.’s biggest economic worry. The U.K. has the highest inflation rate in Europe, which may be a result of all the “quantitative easing” they have undertaken.

But as serious as those challenges are, they pale against the possibility that a group of reckless and misinformed people in the U.S. House of Representatives may force the United States of America into default in less than a month. No one knows precisely what the worldwide financial impact of such a disaster would be, but it certainly would be felt very keenly in a country with an outsized financial sector and extensive economic interaction with the U.S.

I feel sorry for and worried about my beloved U.K. Its economy should be in the hands of shopkeepers in Brighton, schoolteachers in Manchester, factory workers in Sheffield and elected politicians in Westminster. But instead the sword dangling over British heads is held by a bunch of Tea Party lunatics who are willing to wreck the world’s economy just to stop a democratically elected President from giving health insurance to sick people.

Comments

  1. Russell L. Carter says

    “Others commentators might suggest that inflation, at 2.7% for the year, is the U.K.’s biggest economic worry.”

    Looking at the real data you provide (thanks for that!) it seems that the UK unemployment rate is 7.8%. If I understand the underlying drivers at a modest level of lay competence, the price level in the absence of large commodity shocks has a significant component that is rising wages. Rising wages imply increased demand for labor which implies that modest inflation is at least partially an indicator that demand is rising for labor. Until the unemployment rate gets down to something you would accept as reasonable, why might other “commentators” worry about inflation?

    Following that line of logic, why would “Keynesian-types trying to minimize the U.K.’s good news” be doing something than operating with a lag focused on the unemployment rate? If unemployment starts to go down, steadily, I suspect all people other than those cretins in the US House would celebrate, irregardless of the reasons.

    • Russell L. Carter says

      Just to be clear, I understand that wages indirectly drive the price level, and are not an explicit measured component of “inflation”.

    • Keith Humphreys says

      The worries about inflation in the UK, at least based on what I have read is how fast it has increased in the past year and how it will eat into the value of nest eggs accumulated by OAPs.

      • Katja says

        Inflation (CPI) has not been particularly high the past year compared to the years before. It has, in fact, been lower.

        In any event, it’s questionable that QE has much to do with inflation (at least not directly). The M2 money supply has not increased out of proportion (compared to, say, the US). Contrary to popular belief, QE is also not “printing money”. It is acquiring assets from newly created base money. Critically, this process (unlike handing printed money over to the government to spend) is reversible by selling these assets. The Bank of England just has not seen fit to do so.

        Major reasons for the high inflation have been the devaluation of the pound in conjunction with rising oil and commodities prices, driving up the cost of imported goods (e.g., gas prices [1] approximately doubled during the eight years we lived in the UK). Unfortunately, the devaluation of the pound may have been necessary to keep the economy running by facilitating exports. Another contributing factor has been the high inflation for services (as opposed to goods).

        Pensioners’ nest eggs are a different story. Defined benefits plans have been doing just fine, outpacing inflation. The problem that the UK has in this regard is the recent transition to more defined contribution plans, plus a fairly low NI-based state pension (the UK in general has a fairly stingy welfare state compared to other affluent European countries).

        [1] Petrol in the local vernacular. :)

  2. Blanche Davidian says

    Well, now we know how stupidity would run a superpower. We know too well how incompetence and greed does the job. Just another learning experience.

    • Blanche Davidian says

      Sorry! I mean “how incompetence and greed DO the job.” Where has my subject-verb agreement gone? And where are the snows of yesteryear?

  3. Ken Rhodes says

    I’m confused by all the talk about “default.”

    It seems to my simple mind that if, on some particular day, we don’t have enough revenue to pay the expenses for everything we intend, then we must spend less on expenses like Federal employee wages, purchase of bombers, purchase of fuel for government cars and trucks, etc., so that we can continue to meet our Constitutional obligation to pay our “debts.” Sequestration times two (or more), but not “default.”

    • Brett Bellmore says

      No, the assumption is that, if the House refuses to increase the debt limit as much as the administration wants, then the administration will continue to engage in all the spending it wants, stiff our creditors, and blame the House for it’s decision. Actually restraining spending in response to a shortage of money, or negotiating over the terms of the increase, being beyond the pale.

      • politicalfootball says

        The president doesn’t get to spend money without the authorization of Congress. If Congress wants Obama to spend less money, or spend more money, or spend it on something else, it just needs to say so. There are elements in our reckless and well-informed Congress that want a default, and that’s what they will vote for.

        • Mark Kleiman says

          It’s not just that the President can’t spend without Congressional appropriation. The President must spend what the Congress appropriates. It’s not up to him. An appropriation bill is a law.

          “Default” doesn’t just mean not making bond payments; when any entity fails to pay its bills when they come in, it has defaulted on its obligations. That’s what default means.

          And no, I don’t really believe that Brett isn’t smart enough to understand this. Why he prefers not to understand it, or to pretend not to understand it, is a different problem.

          • Brett Bellmore says

            We have legal precedent that the President must spend what Congress appropriates if he actually has it to spend. We have, so far as I know, no precedent that he must spend money he doesn’t have, and has no legal avenue to obtain, if so ordered by Congress.

            What’s with this sudden fastidious attention to the President’s obligation to see the law faithfully executed? He’s non-enforcing laws left and right, and suddenly his obligation to spend money even when he has the legal wiggle room I referred to above is absolute?

            Please, don’t be so disingenuous. If we default over this, it’s because your party finds default useful, not because there’s no way out. It’s not impossible to get the House to vote to increase the debt ceiling. They’re just refusing to give the President exactly what he wants.

          • Katja says

            Brett, I don’t think you’ve got a good idea what “not spending the money” would actually entail. See the BCP’s report I linked below for the gory details. It would be disastrous no matter how you cut it, no matter how you prioritize your spending (that’s assuming that prioritization of spending in such a way is even a practical possibility, given that there about a 100 million payments made each month, and by a computerized system that would have to be reprogrammed).

      • Katja says

        Brett: No, the assumption is that, if the House refuses to increase the debt limit as much as the administration wants, then the administration will continue to engage in all the spending it wants, stiff our creditors, and blame the House for it’s decision.

        Brett, I think you do not have a full understanding of the actual situation. The Bipartisan Policy Center has been running day-by-day breakdowns for the past years, projecting what would happen if the debt ceiling were hit (the slides linked above are from January; the details have changed, but the same principle holds). There simply isn’t a whole lot of discretion that the treasury has. Inflow and outflow occur in batches; it’s going to be pretty much random (even if you prioritize) whether there is enough money to pay what’s due on any given date. Call it Washington Roulette, if you will.

        The House is getting blamed because it has authorized the expenditures (and thus required the administration to make them), but not the money to pay for them. If it didn’t want the spending, it shouldn’t have passed the appropriation bills mandating that spending.

  4. politicalfootball says

    Because the rate of growth in the U.K. is about comparable to that of the U.S. despite radically different economic policies

    UK growth, for any period but the most recent one, has not been in any sense “comparable” to that of the US. The UK has quite a bit of catching up to do if its foolish policies are going to have the sort of outcome that the somewhat-less-foolish policies of the United States have had. But if our point of comparison is the Euro area – especially the part of the Euro area that didn’t benefit from Keynesian policy – then UK policies (and results) were much more similar to those of the US than the EU. For areas caught in a liquidity trap, the more Keynesian you were, the better. It’s very straightforward.

    Here’s one chart that’s not particularly on point because the time period is too narrow, and another chart that isn’t great because the time period is too large. But they give you an idea of how US and UK economic performance compares since we entered liquidity trap conditions.

    • politicalfootball says

      But as serious as those challenges are, they pale against the possibility that a group of reckless and misinformed people in the U.S. House of Representatives may force the United States of America into default in less than a month.

      Certainly the words “reckless and misinformed” describe a lot of the folks proposing that the U.S. renege on its commitments, but I think people of good will fail to reckon with how pre-meditated – how reckless and well-informed – the whole debt-ceiling debate is. There is a core group of Republicans who would be very well-served by economic calamity.

      • Brett Bellmore says

        And there’s a core group of Democrats who are so determined to maintain a level of federal spending which the nation has never previously attained outside of major wars, and even then only for a few years, that they’re willing to bring the country to a constitutional crisis to do it.

        The House isn’t refusing to raise the debt ceiling. They’re refusing to raise it on the terms Democrats are demanding. They’re refusing to do it without significant spending cuts. That makes the Democrats as responsible for default as Republicans, if it happens; You regard sustaining extremely high levels of spending as more important than avoiding default.

        • politicalfootball says

          As I say, “reckless and well-informed.” Brett knows exactly what’s going on – he knows exactly, for instance, how current debt compares with past debt – and is rooting for crisis, because he believes that a crisis will be blamed on Obama and the Democrats. This is a well-informed strategic choice. The far-right has created crisis after crisis, and has largely prospered because of it.

          I’m actually quite optimistic that this crisis will be avoided, but let’s not kid ourselves about what the Brett’s of the world are looking for here.