Austerity vs. Stimulus- the US vs. the UK

My thoughts recently were kicked off by this NYT editorial:

Austerity was a deliberate ideological choice by Prime Minister David Cameron’s ruling coalition of Conservatives and Liberal Democrats, elected 17 months ago. It has failed and can be expected to keep failing. But neither party is yet prepared to acknowledge that reality and change course. Britain’s economy has barely grown since the budget cuts began taking effect late last year. The most recent quarterly figures showed the economy flat-lining, with growth at 0.1 percent.
New figures released this week reported Britain’s highest jobless numbers in more than 15 years. Independent analysts expect unemployment — now 8.1 percent — to keep rising in the months ahead. The government has kept its promise to slash public-sector jobs — more than 100,000 have been lost in recent months. But its deficit-reduction policies have failed to revive the business confidence that was supposed to spur private-sector hiring.
Drastic public spending cuts were the wrong deficit-reduction strategy for the weakened British economy a year ago. And they are the wrong strategy for the faltering American economy today. Britain’s unhappy experience is further evidence that radical reductions in federal spending will do little but stifle economic recovery.

I sent this to a conservative sparring partner of mine, and he responded with two comments (which I've paraphrased):

1. Applying the logic of the pro-stimulus forces in the US, one might say that things would be much worse in the UK if not for austerity.  Maybe cutting government saved two million jobs and they'd be in a Depression if they hadn't gone that route.
2. The UK and the US are both growing anemically.  Why would the Times look at one and say that policy has failed, while looking at the other and say their policy has succeeded?

As to the first comment, yes austerity is intended to create/save jobs just like stimulus is. I think that advocates of either policy need to present a model as to how this happens, and then find historical or current day examples that support the model. The view from 50,000 feet is important, yes, but you have to describe a plausible causal explanation. The causal explanation for austerity was that it would restore confidence and investment- this clearly hasn't happened. The formula for stimulus is that it would spur growth by stimulating demand.  I think there's more historical evidence for this over time, though it hasn't been tried at enough scale this time around.

My understanding is that the UK's situation got notably worse after they switched to austerity measures. In the US it seems that the economy was growing when there was (very moderate) stimulus (I say very moderate because states cut back at the same time that the feds stimulated, so the overall effect was small), and is now stuck in the mud with stimulus completed.

The thing about austerity specifically and Hayekian economics in general as I understand it is not that government action of the right kind in a down economy works wonders, but rather that the business cycle is fated to play out naturally and government is just counterproductive or at least unproductive. So in that case, austerity isn't a way to "kick start" the economy, but rather a way to stop interfering and let the business cycle bring it all back eventually through creative destruction. But in our current depressed economy it's pretty clear nothing is coming back on its own for a long time. 

 

Now I still respect the point- maybe it's true that government just can't help- but the theory doesn't say that these policies will goose the economy and speed up the recovery. As I understand it, conservative economic measures being proposed now are not intended to spur recovery, just make the eventual recovery that happens on its own more sustainable. If so, it's pretty clear that austerity specifically and conservative policies more generally are being oversold quite a bit right now.  I don't think it's too likely that ending some regulations is going to do much in the short term for a demand problem in the economy, and I don't think any serious conservative economist would say that either.

As to the second comment, it's a good point- the US isn't going great either. But things are worse in the UK than they are in the US.  This seems like an apples to apples comparison:

2011 Q2 growth in the UK was 0.2%, while in the US growth in the same quarter was 1.30%. Now on the one hand both countries are doing pretty badly. On the other hand, US growth was 6.5 times better than the UK's. Now I admit that is only one data point (though it's the first one I came across and compared googling, so I didn't cherry pick), and of course there are so many factors in all this (the UK might be much more affected by the European crises than we are, the UK has socialized medicine and a larger welfare state, etc. etc.) but it's something.

 

It is so difficult to get past one's biases in these matters.  The way I'm trying to get past mine is to set parameters at the outset regarding what constitues evidence of effectiveness, and then follow that evidence through, come what may.  We'll get a great chance for that if there is a Republican sweep in 2012 and they implement austerity as they say they will.  I think that will lead to a double dip recession in short order.  If the GOP does win and does implement the policies they're running on, and it works?  I'll have to rethink my positions.

 

In the current environment, however, I'm trying to do the same thought experiment by comparing different responses to the crises in different countries and seeing what happens.  Ever since the UK announced austerity, I've been watching them in contrast to the US to see whether that works better than the somewhat-more-stimulus approach of the Obama administration.  We'll keep watching.