A Plan B for the UK and a lesson for the US, replacing austerity with investment and fear with hope

By John C. Dyer, UK correspondent

On 31 July, 2010 President Obama broke through Congressional deadlock over the looming United States debt ceiling. But the deal calls for Trillions in cuts over the next 10 years.

The President and Congress must compromise. The Tea Party's perception and intransigence hold the US hostage. Neither can ignore that portion of the electorate the Tea Party represents, however deluded I may think them.

That noted, it appears the United States may be about to repeat the mistakes of the UK and Eurozone. While this post's Plan B addresses the situation in the UK, Congress and the President would do well to take a close look at what they propose in light of the experience of the UK and Western Europe documented in "Time for a Plan B" and the principles outlined below in the proposed Plan B.

European and UK "Debt Crisis" mismanagement

The management of the "debt crisis" in Europe and the UK has not led either into a good place. Nor will it. Although the proposed pace of cuts in the US remains far less draconian than in Europe or the UK even now, the focus on cutting one's way out of a deficit in accordance with arbitrary deadlines is problematical. It surprises me that the electorate (and therefore the politicians) are not listening to the voices from the Clinton Administration who presided over the only reductions in the US national debt in a generation. Instead, they are listening to the voices of those who presided over the largest single increases in the National Debt, beginning with President Reagan.

Turning to the UK and the Eurozone, both would do well to study the administrations of both Clinton and, perhaps more relevantly, Roosevelt.

To recapitulate the current situation, sovereign debt in some members of the Eurozone became unsustainably high. Sovereign debt had not reached that level in the UK, but anxiety had by 2010. Recession draped all, even where there was some growth in Germany and France. The IMF, the OECD, Eurozone partners, and eventually the UK government concluded that the way to deal with both the unsustainable size of the sovereign debt and the faltering economy was a programme of draconian reductions in the public sector, the sale of public assets, and the privatization of public services, collectively dubbed an "austerity" programme (or the European Plan).

Downward cycle in aggregate taxes and upward cycle in interest rates

The UK also did some modest "quantitative easing," and both the Eurozone and the UK sought to contain interest rates, but quantitative easing was not on the scale seen in the US. Currently those economies which adopted the austerity programmes have at best flatlined - if not deteriorated - and their sovereign debt situation has worsened. Their austerity programmes touched off a downward cycle in aggregate taxes and upward cycle in interest rates charged by an ever increasingly panicked investor "market." The weakness in the collective and interrelated economies and increases in debt interest more than offset the cuts. This situation appears to me to at least echo the onset of the Great Depression.  

Calls for a "Plan B" to jump start a sagging economy grow within the UK.

Different voices call for divergent revisions. The Coalition Business Secretary, Vince Cable, argues for "quantitative easing" in addition to the Coalition's current programme of "austerity cuts," privatization, and sale of public assets. Labour argues the Coalition should "slow down" cuts and make cuts that are not "as deep" as those the Coalition has begun. Unions argue that their public service members are paying the price for banker irresponsibility while bankers walk away with big bonuses. The banks and tax avoiders should pay, they argue, asserting that would raise enough cash to plug the deficit.

Representatives of small businesses argue the Coalition should make life easier for them. Major manufacturers lobby for public investment in manufacturing through undefined incentives. The Chancellor is considering cutting the tax rate for highest earners and business. In all other respects he argues that the Coalition should stick to Plan A. August 1, 2011, the IMF opined that the UK economy faced a "bumpy ride" and should cut taxes and engage in more quantitative easing. Number 10 Downing Street reportedly grows impatient with its own lack of a growth plan.

Cornflakes are still cornflakes regardless of who sells them

Each call has obvious question marks or criticisms. Quantitative Easing does not appear to have successfully jump-started the US economy, although it may have prevented a double dip recession. The US economy may be recovering marginally faster than the UK economy, but signals remain mixed, debatable, and vigorously debated. Labour's "too deep and too fast" looks like branding. "We are Kellogg's Cornflakes, not General Food's Cornflakes." Still cornflakes.

Labour has failed to articulate a real alternative vision to the one already rejected by the voters in 2010, which the Coalition successfully paints as distinctions without differences. The diverse lobbying from various trade associations and unions comes across as "take care of me and mine, whomever else you hurt." The Chancellor looks to many like he is "in denial." IMF looks like it is playing politics to keep the Coalition together.

What do I suggest?

The answer to the sovereign debt crisis does not lie in the austerity programmes, which will only feed the downward cycle. The answer lies in sufficient economic growth to increase aggregate taxable income so that a responsibly frugal (but not reflexively austere) government can pay down the debt. I advocate for this purpose a programme of "pump priming"- the targeted investment of public funds and loan guarantees into projects that produce dozens of low middle to middle income skilled and white collar worker jobs. I also advocate it for the Eurozone. This, coupled with "fiscal responsibility" will lower the debt without dismantling all the advances made by the average bloke this past century or destabilizing the zone, as is presently occurring.

In the longer term, I advocate that the UK, the particular focus of my interest at this time, adopt a "sustainable" economic model more like Norway and Sweden than like China, the US, Japan or Russia. I am particularly keen on government investment in reversing the trend toward the economy replacing medium skilled and white collar worker jobs with low paying, part time semi skilled jobs.

General Principles

What follows is less detailed blue print than framework. For those interested in more detail, it is available, but it is much more detailed than appropriate for a blog post.

Leadership should adjust how they measure British economic success. Putting the “great” back into “Great Britain” is asking for disappointment. Trying to achieve it risks significant overextension of the limited public purse. Britain has limited potential for market share in the global marketplace for the foreseeable future. Therefore Britain should be wary of overestimating the potential for "rebalancing" the economy around major manufacturing.

The measures of British economic success should be: 1) sustained growth of middle income employment, 2) a positive trade balance, 3) a ratio of aggregate taxable income to GDI such that the Treasury is able to carry out the principles of this framework, 4) “full” employment, defined as 94% of those of working age who want work can find work; and 5) inflation held to Bank of England targets.

The British worker has limited tolerance for any roll back of wages and benefits. Making Britain “competitive” with China and India off the backs of workers will risk substantial and, ultimately, goal-defeating destabilization, not to mention failure at the ballot box. In the long term, unless the nation's economy raises all boats, the wealth of the few will prove transient.  

The UK should develop a “New Deal” for the British.

Work should always pay better than benefits; but it should always pay to be a British worker. Government should not incentivize a race to the bottom by dumping thousands of redundant public workers and benefit recipients into the job market and reducing the pay and benefits of thousands more. The prosperity of the few is directly dependent on the prosperity of the many.

Those of working age who can work should. But the government should provide at least the basic means of life to those who cannot work (and do not have investment or retirement income) whether due to disability, the unavailability of work, or even if, as Tory rhetoric suggests, their work ethic may be more the origin of their circumstances than an incapacity to work. The government should provide these minimal benefits without harassment or the stigma of the classifications “deserving” or, even impliedly, “undeserving.” The aggregate cost to track, inspect, and enforce is not value for money.

Those who reap British privileges should always pay their fair share of tax. Each element of society should know what, long term, is expected of them and on what, long term, they can count.

A reinvented Tax system has the potential to be the mechanism of the New Deal.

The Eurozone's health is vital to the UK, but the centrifugal forces of long historical memory and divergent culture and language make a United States of Europe unlikely. European rules of the game based on the US of European model should be adjusted so as not to cause a backlash that throws the baby of a Common Market out with the bath wash of a failed model.

On the other hand, significant long term prosperity and sovereign fiscal responsibility cannot be managed entirely in isolation. Significant transnational issues require significant transnational solutions.

Stability is among the first priorities of government. Fear leads to panic, panic to disintegration. Roosevelt captured this reality well during the dark days of the Great Depression, seeking with his New Deal to reassure "we have nothing to fear but fear itself." Plan A already has had an adverse impact on economic, social and political stability, one of its many drawbacks. Unless modified, this can be expected to intensify. This alone is reason enough for a Plan B that focuses on the positive rather than bone grinding austerity.

Principles for any effective Plan B

Arbitrary targets

The UK Coalition has set 2015 as the target for eliminating its deficit altogether. Labour says this is "too fast." The trouble with both is they are arbitrary, not tied to the specifics of deficit components. These include the cost of Afghanistan and Libya. I argue such conflicts should not be paid down in the same time frame as either operating deficits or the bail out of banks. While it is tempting to move the target from 2015 to 2017 or 2020, etc., that too would be arbitrary.

Deficit Reduction

The deficit should be reduced, but deficit reduction should be based on the nature of the deficit creating pressure, not a deadline pulled from the air. Operating deficits should be eliminated as soon as possible. Operating deficits, if they are indeed operating deficits should not be tolerated. But non operating deficits composed of "pay as you go" purchase of capital assets, the costs of emergencies like environmental disaster (example: flood damage to infrastructure) or foreign campaigns (example: Libya and Afghanistan) are another matter. Those costs, if they should be incurred, should be spread over a much longer period of time.

The UK Treasury reports it does not track aggregate taxable income and has no solid estimates of taxes lost through avoidance and evasion. As to both operating deficits and long term deficits, the actual time frame should be calculated after the government does an immediate assessment of the impact on taxes of tax avoidance and undisclosed off shore deposits. Unless and until the government tackles this issue austerity cuts will lack the credibility necessary to secure them from public rebellion. Thus it is imperative the government make this examination rapidly.

Public Investment to "prime the pump"

The Coalition should invest substantial pounds in supply side measures, even if that requires borrowing. Increases in collected taxes over aggregates estimated in the budget should be earmarked for debt reduction until debt is brought down to current capital outlay. The Coalition should invest in construction and redevelopment in and throughout the UK that contributes to economic growth, directly through leveraged partnerships and indirectly through tax incentives and loan guarantees. These should be numerous smaller ticket items as opposed to the big one-time items like High Speed Rail or Nuclear Power Plants or major military hardware.

The Coalition should develop a UK Bond structured to permit devolved and local governments to borrow, within parameters, for the sole purpose of leveraged redevelopment.

High Speed Railway, new Nuclear Power Plants, and Trident Replacement

The Coalition is posed to commit to a £32 billion high speed railway of questioned economic benefit. It is also proposing replacing a Trident at £35 billion. Together, these two projects of dubious economic benefit total £57 billion. Once again, the willingness of the Coalition to pay costs they acknowledge to pursue only theoretical general economic benefits (which many doubt) seems to many to fly in the face of Coalition assertion the government is broke. (Not quite sure what you mean by the first part of this sentence). In fact, the commitment to the high speed rail project, to the "reforms" to privatize public services, and to financing a new Trident have critics pointing out that the Coalition doesn't have any money except ... except for its friends.

While there is a significantly greater argument for the Nuclear Power Plants, there is also a significant price tag. The UK should consider tabling some or all of these projects as well.

Note I am not calling for abandoning these projects. I am calling for tabling them until the economy can support them.

Short term Quantitative Easing

The Coalition should undertake some "quantitative easing." A high value to the pound is a two edged sword, with higher values dampening export sales and increasing the "value" of debt. But the UK should not rely exclusively on monetarist policy to save it.

"Reforms"

Privatization (by whatever name) should be tabled unless and until the economy begins to grow. The government acknowledges that these reforms cost a lot of money. But the costs critics estimate are even greater that the Coalition acknowledges. The willingness of the Coalition to pay the costs they acknowledge and risk the costs they do not flies in the face of Coalition arguments that austerity cuts are "no choice." Beyond their internal inconsistency, they feed the fires of destabilizing resentment.

Defence spending

A sound defence policy is critical to a sustainable economy and a healthy Treasury. Inadequately financed wars without exit strategies (in Afghanistan, Iraq, etc.) were a major factor in the origin of the sovereign debt crisis (along with the freeing up of domestic banking deposits for speculative risk, transnational depositing of investor money off shore, and globalization of the marketplace). The US alone spent trillions of dollars it did not have, drawing down the world's credit resources. These adventures have also drained off needed British resources. Except where the nation's very survival is at stake, there should be no decisions to deploy combat forces unless the deployment is backed by a sustainable financing plan as well as an exit strategy. If it cannot be financed, it should not be undertaken.

International Conventions

The Government should negotiate international conventions to jointly govern transnational banking, disclosure and audit of financial records; the Currency market, the Commodity Market, and transactions on the Internet. These should be as tightly regulated as Securities. No single government can do this effectively on its own any more.

What do they mean, No Options?

A Plan B that puts into play Keynesian principles is achievable. It has better chances of success than the current plan. It is time to shelve a Plan A that has failed for a Plan B that has a chance of improving the situation. Whether the specific plan I propose or another based on these principles, let's end the race to the bottom and begin the race to recovery.

RELATED WHIRLED VIEW POSTS

“Changing the dial” John C. Dyer, Whirled View (2 August 2011)

“Time for a new plan” John C. Dyer, Whirled View (27 July 2011)

“A Step back from the brink: Can Greece Save Itself” Patricia H. Kushlis, Whirled View (1 Jul 2011)

The IMF, independent expert or “credible face” of a political agenda” John C. Dyer, Whirled View (13 June 2011)

“Without a Vision the Labour Party languishes” John C. Dyer, Whirled View (8 June 2011)

“In the Wake of the Obama Visitation: Elephants in the Commons” John C. Dyer, Whirled View (6 June 2011)

RELATED GENERAL BLOG POSTS AND ARTICLES

“The Wrong Medicine: Why Fiscal Austerity Is a Bad Idea for a Slumping Economy” Alejandro Reuss, Dollars and Sense (4 August 2011)

“Time for a Plan B?” John Sloman in Pearsonblog, the Sloman Economics News Site (June, 2011)

“Austerity Isn’t Working. It is Time for a Plan B” Matthew West in CNBC (10 June 2011)

“Time for a Plan B: Economists turn against Osborne” Ian Dunt in Politics (5 June 2011)