Anyone interested in the ongoing argument about which government approach to a mediocre economy is better–“austerity” or “stimulus”–should keep an eye on the United Kingdom.
In the United States, we have pursued a mixed approach–some stimulus, some austerity. Our economy is gradually recovering, but at a disappointing rate.
Under the leadership of Prime Minister David Cameron, meanwhile, the UK has charged down the “austerity” path… cutting government spending and raising taxes on poor people in an attempt to reduce the deficit.
The goal of this policy has been to cut the national debt and restore “confidence” among businesses and consumers–with the theory being that the economy is weak because businesses and consumers are getting worried about the nation’s debt load.
Well, at least so far, the austerity policies have been a disaster.
Four years after the financial crisis, the performance of the UK’s economy has been much worse than that of the US economy. In fact, the UK is teetering on the edge of a triple-dip recession. Shockingly, the UK’s economic recovery has been even weaker than the recovery of its economy during the Great Depression.
What’s more, despite the spending cuts, the UK’s deficit has shrunk only modestly since the financial crisis. It’s still running at greater than 7.5% of GDP! (See chart at right).
The UK’s experience, in other words, reveals the big flaw in the “austerity” approach, one that economists like Paul Krugman frequently point out: You can’t cut your way to prosperity.
Cutting spending to reduce deficits in a weak economy weakens the economy even further. The weakening economy then produces less tax revenue. So whatever deficit shrinkage is gleaned from the spending cuts is neutralized by the lower tax revenue. This is the spiral that Greece and other weak European economies have fallen into in the last few years.
In any event…
The UK is about to launch into another round of policies designed to cut the deficit–this time driven by tax cuts for the rich and tax hikes and spending cuts on the poor. Not surprisingly, except among rich folks, these policies aren’t going over well.
I was in London yesterday, so I walked over to the Prime Minister’s house on Downing Street to see what was going on.
What was going on was a protest.
Some Britons, anyway, are annoyed enough about what David Cameron is doing to the economy that they’re happy to spend their Saturday afternoons chanting outside his house.
The main target of this particular protest was the so-called “bedroom tax”–the reduction of a housing subsidy that primarily benefits poor people.
It wasn’t a violent protest or anything, at least not while I was there.
But after a frigid March, in which high heating bills continued to clobber poorer Britons, the frustration with Mr. Cameron’s austerity extends much farther than this particular tax.
I approached Downing Street from the back… the St. James Park side.
The action was on the other side–on Whitehall Street.
A couple of angry young men with flags and signs confronted police at the Downing Street gate.
But most of the protesters were out on Whitehall, waving signs blasting the “Bedroom Tax.”
David Cameron could probably hear the protest at his house down the gated street.
One of the protesters had a message for Mr. Cameron. It was not very polite.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.