(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Lawrence Summers
May 4 The British economy has experienced the
most rapid growth in the G7 over the last few months. It
increased at an annual rate of more than 3 percent in the last
quarter - even as the U.S. economy barely grew, continental
Europe remained in the doldrums and Japan struggled to maintain
momentum in the face of a major new valued added tax increase.
Many have seized on Britain's strong performance as
vindication of the austerity policy that Britain has followed
since 2010, and evidence against the secular stagnation idea
that lack of demand is a medium-term constraint on growth in the
Interpreting the British strategy correctly is crucial
because of the political stakes in Britain, the question of
future British economic policy and, most important, because the
British experience influences economic policy debates around the
globe. Unfortunately, when properly interpreted, the British
experience refutes the austerity advocates and confirms John
Maynard Keynes's warning about the dangers of indiscriminate
budget cutting during an economic downturn.
Start with the British economy's current situation. While
growth has been rapid recently, this is only because of the
depth of the hole that Britain dug for itself. While the U.S.
gross domestic product is now well above its pre-crisis peak, in
Britain GDP remains below previous peak levels and even short of
levels predicted when austerity policies were implemented. Not
surprisingly given this dismal record, the debt to GDP ratio is
now nearly 10 percentage points higher than forecast, and the
date when budget balance is predicted has been pushed back to
the end of the decade.
The common excuse offered for Britain's poor performance is
its dependence on financial services. Yet the New York
metropolitan area, far more dependent on financial services than
Britain, has seen GDP comfortably outstrip its previous peak.
Though the euro area has performed poorly, even a casual look at
trade statistics confirms that this cannot account for most of
Britain's poor growth.
The U.S. economy grew at a rate of 9 percent for a number of
years after the trough of the Great Depression in 1933. Such
rapid growth in peacetime is unheard of in U.S. history. Why did
it happen? Only because of the depth of the Depression. No one
has ever taken the pace of the U.S. recovery from the Great
Depression as any validation of the austerity policies that
helped create it. Similarly, part of the story of British growth
is that it is simply catching up after a major crisis caused a
huge output gap to develop.
History shows that deeper recessions are followed by
stronger recoveries. For example, the New York metropolitan
area, though falling relative to the rest of the country in the
2008 fiscal collapse, enjoyed more rapid growth after.
Two additional points about Britain's growth require
emphasis. First, the acceleration in growth has less to do with
austerity spurring growth than with a slowdown in the pace at
which austerity is imposed. Whether one looks at the deficit
itself, or the various structural deficit measures advanced by
local and international organizations, the pace of fiscal
contraction has slowed over the last two years. Slowing fiscal
contraction means the decrement to growth caused by fiscal
policy is becoming more attenuated.
All things being equal, this would be expected to produce
more favorable growth performance. Ironically, the greater the
fiscal multiplier is, the greater would be the predicted
turnaround when the pace of contraction slowed. So the
turnaround in growth over the last 18 months is as much evidence
against austerity as it is pro-austerity.
Second, in the face of deficit reduction's potential damage
to demand and economic growth, the British government has been
forced to introduce a number of extraordinary measures to
support lending. Most significant is the so-called Help to Buy
program that gives low teaser rate mortgages to some households
and guarantees the mortgages of others so they can put only 5
percent down. There are also special programs to reward banks
for lending to small business and involve the central bank in
Especially in the case of Help to Buy, which manages to
encompass most of the sins of the U.S. government-sponsored
enterprises, all these programs are highly problematic. The
austerity program's stated goal was to improve confidence in
Britain as a sovereign credit. Yet, guaranteeing mortgages en
masse is actually creating a huge potential government
liability, as do other loan guarantee programs.
In addition, subsidized credit for mortgages risks
recreating real estate bubbles - house prices in London have
increased much faster than GDP over the last year. And of
course, programs that benefit homeowners rather than renters
have perverse distributional consequences.
Britain's growth then reflects a combination of the depth of
the hole it found itself in, the moderation in the trend toward
deeper and deeper austerity and the effects of possibly creating
a bubble through government loans.
It may still be better for the citizens of Britain than any
alternative. But it certainly should not be seen as any kind of
inspiration to other countries.