The British Economy Is Now Doing Worse Than In The Great Depression

by: Brad DeLong

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Source: NIESR http://www.niesr.ac.uk/, via the Guardian.

Yep. This many months after the start of the Great Depression, the British economy was rapidly converging back to its pre-depression level of production under Chancellor of the Exchequer Neville Chamberlain's policy of using stimulative policies to restore the price level to its pre-Great Depression trajectory.

By contrast, the Cameron-Osborne policies of expansion-through-austerity have produced a flatline for real GDP, and the odds are high that British real GDP is headed down again.

In less than a year, if current forecasts come true, the Cameron-Osborne Depression will not be the worst depression in Britain since the Great Depression, but the worst depression in Britain… probably ever.

That is quite an accomplishment.

As Phillip Inman of the Guardian puts it:

the UK's plan for recovery from the financial crisis was based on a full-throttle recovery in 2012... consumer confidence, business investment and general spending would converge to send the economy on a trajectory of above-average growth... the lack of investment will perplex ministers. They have done what the right-wing economists told them to do and moved out of the way – the theory being that public sector spending and investment was ‘crowding out’ the private sector...

It did not work: “Spain is showing the way with its austerity-driven recession. Where the weak tread, we [in Britain] look keen to follow...”

That expansionary austerity is not working in Britain should give all of its advocates great pause, and lead to a great rethinking. Britain is a highly open economy with a flexible exchange rate. Britain has some room for further monetary ease. There is no risk or default premium baked into British interest rates to indicate that fear of future political-economic chaos down the road is discouraging investment. There was an argument--I’m not saying that it was true, but there was an argument--that the Blair-Brown governments had overshot Britain’s long-term sustainable government-spending share of GDP (in contrast to those countries that had reduced their debt-to-GDP levels in the 2000s, where there was no such argument, and in contrast to the United States where the problem was not spending overshoot but taxation undershoot under the Bush administration) and that spending cutbacks were advisable in the long run.

Yet with a 10-year nominal interest rate in Britain of 2.098% per year, if low long-term Treasury interest rates were the key to recovery, Britain would be in a boom. If there was ever a place where expansionary austerity would work well--where private investment and exports would stand up as government purchases stood down--if its advocates’ view of the world was reality rather than fantasy, it would be Britain today.

But it is not working.

And the lesson is general.

If it is not working in Britain, how well can it possibly work elsewhere in countries that are less open, that don’t have the exchange-rate channel to boost exports, that don’t have the degree of long-term confidence that investors and businesses have in Britain?

Liberal Party leader Nick Clegg ought to end this farce today. He ought to tell Queen Elizabeth II Windsor that his party has no confidence in her government, and that his humble suggestion is that she ask Labour Party leader Ed Milliband to form a government.

It is true that if he does this his political career and his party’s electoral future are dog vomit. But his political career and his party’s political future is dog vomit anyway. At least defection from the ill-advised Conservative-Liberal coalition now would benefit his country.

Policy makers elsewhere in the world take note: starving yourself is no road to health, and pushing unemployment higher now is no road to market confidence.