Britain and America Compete in Economic Suicide

Victoria Station. Picture by René Slaats

Victoria Station, London. Look around this 150-year-old rail station and you can see the rise and fall, and rise and now again decline of the British nation.

Victoria Station is just a few blocks from Buckingham Palace and was for many decades the connecting station with the "Continent" (Europe) and the greater world, much like the large international airports of the present day.

The kings and queens of England would greet the various European royals and other heads of state at Victoria Station.

Most of the parts of the station that were built in the late 19th century are still there - the great steel trusses and the Victorian brickwork. In its time, it was state-of-the-art, befitting what was the superpower of its day. After World War I, the station slowly was allowed to decay, as was the British economy.

Beginning with the Thatcher reforms, England had a quarter-century run as the fastest-growing major economy in Europe, but still slower than that of the United States. Yet the basic structure of Victoria Station was only partially renovated during the good years, even though rail privatization and sleek new trains began to reinvigorate rail travel.

Victoria Station now resembles a poorly designed shopping mall where passengers can shop in small modern stores for the latest in consumer electronics or go to a variety of food servers - from unsightly and even somewhat dirty fast-food outlets to better-maintained, but not elegant, restaurants.

Thus, the station is a rather unsightly hodgepodge of shops and trains. The neighborhood directly surrounding Victoria Station, however, has been almost totally rebuilt in recent years with tasteful, modern glass buildings and upscale renovations.

British government spending grew rapidly as a percentage of gross domestic product (GDP) from about 36 percent of GDP in 1950 to a peak of about 48 percent in 1980, which was one of the causes of the economic stagnation and seedy look of Victoria Station that persisted during that time.

In the early 1980s, Prime Minister Margaret Thatcher was able to reduce the relative size of government and the very destructive high marginal income tax rates. But government spending, as in the United States, has been allowed to drift higher during the past decade.

Professor David Smith, a former Bank of England economist and well-known commentator on the British economy, has forecast a rise in government spending to more than 53 percent of national income by 2010, the highest level since World War II.

To fund this expanded public sector, net borrowing will increase from 8 percent of national income last year to more than 14 percent next year.

Mr. Smith argues:

"There must be serious doubt whether deficits on this scale can be financed in a non-inflationary manner without very large capital inflows from abroad. And it is hard to see why such inflows should be forthcoming now that the British economy has become so highly taxed by international standards."

If President Obama carries through on his threats to greatly increase U.S. taxes on carbon, etc.; allows the George W. Bush tax cuts to expire next year; and does not begin seriously to reduce spending, many economists will be able to say the same things about the U.S. economy next year that Mr. Smith says about the United Kingdom's economy today.

Mr. Smith also says: "The rise in nonproductive government spending as a share of GDP since 2000 is likely to have cut the U.K.'s sustainable growth rate by some 1.0 to 1.7 percent per annum."

The evidence shows that almost the identical economic slowdown has occurred in the United States over the past decade as government spending has increased as a percentage of GDP.

Many studies have shown there are no discernible benefits in terms of objective measures of human welfare from raising the share of government spending beyond the 25 percent to 30 percent mark, yet Britain is slated to go over the 50 percent mark and America over the 40 percent mark.

The British and Americans seem to be in a suicidal race as to which country can put in the most destructive economic policies. The British are ahead at the moment. Unfortunately, there are no winners.

Immer wieder

@ KA

1) Presumably you know what a mathematical function is, with variables and coefficients and all that. Well, a production function is such a mathematical equation. and is typically employed in macro-economic models to predict the path of "production", i.e output.  Output is by definition equal to income and to expenditure in an economy.  "Paper Money" is not usually a variable in the producton function of any serious economic forecasting outfit (although some variant of the 'money sypply' often is).  One must also make a distinction between financial variables and 'real' variables, and most people tend to confuse nominal values with 'real' values.  I think we can leave it at that, for the moment.  My advise is to look at ex post real data on income and output, instead of alarmist talk by journalists in the media.   

 2) Indeed, that is often the case. That is why it is even more important that people try to distinguish between serious politicians and 'golden calfs' (copyright Atheling) like Obama.

3)  You often quote from the Asia Times!  I, too, am against "Ponzi schemes", but know little about them.  Yet, I suspect that they are more likely to lead to INTRA-generational transfers, rather than to INTER-generational ones.  Whatever be the case, they are illegal.

4) Still beating that same horse?  I fear your BDS, Bush-derangement-syndrome, will never be cured.  I have let my Schroeder-phobia and Chirac-disgust go a long time go, even though the former is now working for the new Russian Tsar/Czar, laying the groundwork for increasing 'human bondage'.  Bush, by contrast, is now quietly retired, after having freed many people who apparently don't know how to deal with freedom.

5)  We agree, for once. Hallelujah! It won't last.         

@marcfrans RE: Economic Suicide 2

1.  You're not making any sense e.g. "production function". Let's leave it at that.


2.  Agreed, but political office is structured such that politicians have no interest in tackling chronic problems or preparing a long term strategy to be continued by successive office holders.


3.  I need to refer you to the Asia Times' Spengler/David P. Goldman, formerly of Credit Suisse First Boston. He is hardly mainstream media and has been decrying the inter-generational transfers or "ponzi schemes" at work in Western economies for years. A former investment banker of my acquaintance was already in cash before the subprime crisis hit, well before stooges like Cramer were drumming up demand for Bear Stearns a week before its total collapse.


4.  Bush was never there to help the Iraqis! That is patently obvious to everyone! He could have helped the Palestinians and Israelis and brought more peace to the Middle East than any of his predecessors. Bush chose Iraq for personal reasons and because his cabinet was determined to make war per the recommendations of the PNAC!


Conservatism has not been served by Reagan and Bush Jr. On the contrary, their economic records are traditionally conservative in the aggregate, not unlike Casper Weinberger who advocated cuts in military spending until he was given the reins. Both socialism and conservatism are ideological failures; a return to true classical liberalism is what is required. Instead, conservatives and socialists have appropriated aspects of liberalism to suit their immediate electoral needs.


5.  Agreed. I do agree with a more "two tiered" system personally, within limits. On the one hand, extreme wealth drives extreme advances*; on the other, provision of basic healthcare to all benefits society as a whole.


*Would a Renaissance-era pool of serfs have replaced the noble patrons of the arts? No.

Immer wieder # 2

@ KA

1) It is easy to agree on "limited data", but that does not make your earlier first paragraph any better.  Economic growth (in the sense of growth in per capita income) is NOT based on "paper money", not in the UK, not in the US, and not anywhere else.  Let's say, it is based on a 'production function', and not on fleeting notions of (Keynesian) aggregate demand, and leave it at that.

2) You have a point there about "the short and the long term" and about the (short term) economic problems associated with the short tenure of democratic governments. But, also, history teaches that there are 'natural limitations' to the Chinese "wharehouse-of-the-world" problem.

3)  It IS "media nonsense". Almost all journalists have no clue about the economic intricacies of inter-generational transfers (and I am no expert on that either, but I understand that it works via changes in 'genuine real investment' levels).  And the media have also little understanding of the 'determinants of economic growth'.  They prefer to deal with 'scandals' and parroting prejudgements and ideology.   I agree that Americans have been saving too little for quite some time (although change is in the air on that score and confirmed by recent data, as far as the private sector is concerned, not the public sector), and I also agree with your negative sentiment about "empire-building nationalisations".  There are ways of 'compensating' for the savings 'deficit', but there will be  consequences (not necessarily for future per capita GDP growth though). 

4)  No, you are making a silly argument. If you were to walk out of church - what an improbable thought! - and you were to give money or 'sweat/effort' to one beggar, it doesn't necessarily mean that you would help all beggars.  Your obsession with Bush (and Irak) has been border-line pathological, but that just means that you are one of a very big (mostly media) 'crowd'.

5) Indeed, a lot of nonsense can be encountered or  found on the airwaves and on the screens.  No one, or no particular 'side', has a monopoly on that.  Health care is a very difficult subject, from an economic perspective.  In many respects, US health care is superior to almost any other (particularly as it pertains to medical technology advances). But, there are many other factors that impact on average human health, besides technical care.  And there are other noneconomic considerations being followed in the health care debate.  The three single biggest advances that could be made with a view to lowering medical costs in the US would be (1) legal 'tort reform', i.e. to break the stranglehold of the lawyers lobby on the Democratic party (and to a lesser extent on some Republicans), (2) introducing market elements to force cost considerations in the minds of health care consumers for nonessential services, and (3) enforce immigration laws. Needless to say, these ar not on Obama's agenda.


@marcfrans RE: Economic Suicide



1.  I specifically referred to economic growth "in and of itself". Thereby, I am referring to the parable of the broken window, opportunity cost, etc. Essentially, the issue is of limited data and its impact on analysis and policymaking.


2.   Not unlike the minor peaks and troughs during Kondratiev waves, one must needs separate the short and long term. Whether one is discussing economic policy or grand strategy, the process inevitably outlives the comparatively short tenures of cabinets and party majorities. One of the problems with democracy as it is known today in the West, is the inability for politicians to deal with issues whose time horizons extend much further than their power ever will. Western countries still have not formulated an adequate response to de-industrialization and the rise of China as the world's warehouse.


3.  It is not "media nonsense". An entire generation decided that retirement would not mean relegation to the gold watch and gardening, but would mean traveling and enjoying the best things in life e.g. "freedom 55", etc. Unfortunately, the system was never set up for this, let alone for barbers to pay off 3 condos with 0 downpayment. The Baby Boomers relied on selling their houses to one another and/or using their artificially inflated home values to leverage lifestyle improvements. This is in spite of the fact that Americans are not exactly great savers and have been living on credit for some time.


Of course, the Europeans are not innocent. Iceland decided to live off speculation and leverage to maintain its living standards, and became ensnared in debt larger than it could ever service. And despite the empire-building nationalization of Paulson, Geithner et al, American banks are much more transparent than their European counterparts. Hitting rock bottom is more important for investor confidence than pretending nothing is wrong.


4.  If the United States wanted to truly "benefit" others through its military spending, it could have changed Zimbabwe's regime, where the democratic machinery lies just beneath the surface, and where a democratic opposition is ready to assume power freely and fairly. GWB instead chose Iraq, a disparate colonial remnant ruled by a strongman, who presided over competing tribes, ethnicities and religions, in which to establish American republicanism. Yet, the only Islamic states allied with the West were non-Islamist only due to the hypervigilance and brutality of their security forces e.g. Turkiye, Aegypt, etc. Oil had something to do with it, but even this does not benefit the average American or their economy - only oil companies and military contractors. It's called conflicts of interest.


5.  Many Americans disagree with public provision of healthcare. Fox News pundits even claimed that public healthcare would create Islamic terrorist physicians. In that case, Americans should be barred from purchasing cheap prescription pharmaceuticals from Canada. And the private sector should be recompensed for the medical insurance expenses that reduce their competitiveness vis-a-vis British, Canadian and West European companies. I have yet to see a socialist or neo-conservative properly address the issue of "efficiency", a non-partisan notion about what's best and what works, rather than what adheres to one's ideological commitments. 

The monopoly of shrink.

Britain never recovered from the 1980's decline, there was a cash grab from pension funds and loans underwritten by invisible ink. Do econimists not understand that no political ideology of the left or the right has a monopoly on bankruptcy. 

Immer wieder...

...the kapitein needs to be corrected.

1)  Growth is not indicative of a "healthy economy"?  So one wonders, what is?.  Growth in per capita income is of course the only serious measure of a healthy economy, because it tells us what the economy actually produces for its people in a particular time period. 

2) One has to look at growth over a long time period, to make that judgment about "health", because brief periods of high growth, followed by deep recessions, may well lead to relatively low AVERAGE growth rates over (say) a generation or so.  If the Kapitein were to look at empirical data over long periods of a decade or two, he would not be so smug and negative about Britain and the US.

3) The whole issue of past financial deregulation and the current financial crisis is a complex one.  But the ideas that (a) finance became the "engine" of growth and that (b) this engine was "secured by housing prices", are examples of the sort of shallow media-nonsense that does not deserve to be parroted.  This is not to deny that poor financial regulation and inflation in asset markets (as opposed to inflation in goods markets of current production) are best to be avoided, but their impact on 'growth' is highly overrated.  The Kapitein better ponder on the observation that virtually all serious economic forecasting outfits today are predicting that the current economic recession (not to be confused with the financial crisis) is going to be more shallow in the US than in most other industrial countries.  As to growth, we will have to wait and see a couple of years what the average will be. But, if that comparison will turn out to be unfavorable for Britain and the US over the next decade or so, it will be largely the result of unprecedented RELATIVE expansion of the public sector (government) that is under way, because average productivity/efficiency is almost always lower in the public sector than in the private sector.

 4) The Kapitein has valid points about "Detroit" and also about 'good' Canadian economic policies in the recent past.  But, he is talking nonsense about Canadian economic "decoupling from the US" and about "US military expenditures".  That is of course, because he is mixing apples and oranges here, in the sense that he is suddenly jumping from economic observations and reasoning to his personal ideological biases.  For an extreme moral-relativist and profound-cynic like him, it is inconceivable that anyone would spend 'national treasure' for longer-term and non-economic purposes or for the benefit of others.

5) Finally, his claim that "it has been CONCLUSIVELY PROVEN that health care is more efficiently provided publicly" is laughable on its face.  It suggests that he does not know what "efficiency" means and/or that he is not aware of the incredible non-economic pre-supposition that is implied by that statement.  It is the sort of 'fundamentalism' (belief-with-certainty) that is typical for youthful Obamaniacs, perhaps on a par with Ahmadinejad's belief in the coming of the Second Imam, or pvdh's belief in global warming. .       

RE: Britain and America Compete in Economic Suicide

Growth is not in and of itself indicative of a healthy economy. As in the United States, British growth was due in large part to the deregulation of financial services, the massive expansion of the derivatives market and the underlying housing market. Finance became the engine of economic growth in both countries, secured by housing prices, which in turn rose in response. By finance, of course, I am referring to paper money. The vulnerabilities of this feedback mechanism have been thoroughly exposed due to the subprime mortgage crisis and its aftermath.


Certainly, Japan can be blamed for permitting the "lost decade" rather than immediately rectifying their own burst housing bubble. Yet Japan remained oriented to manufacturing exports. Whereas Detroit's money was appropriated by the unions for pensions and benefits, Toyota et al. invested heavily in R&D. The United States and Britain have relied on the financial sector, while allowing their manufacturing bases to descend further into obsolescence and bankruptcy.


The issue is not merely of quantity, but of quality. So to with state spending. Recently, large military expenditures by the United States and Britain have served to benefit certain domestic interests, but in the main have squandered national wealth in the deserts of Iraq.


Canada is accused of being "Soviet Canuckistan" by various American neo-conservative pundits for its spending on healthcare and education. Yet, Canada has spent almost two decades slashing wasteful spending, transforming deficits into surpluses, cutting its national debt and developing its strengths - provision of natural resources. Its banking system has been rated the best amongst the G20 countries, and while its economic growth does not stand out, it has managed to decouple itself to a large extent from dependence on the United States, and is strongly positioned to ride out the global recession. Tax cuts by Reagan and Bush Jr. were steps in the right direction, yet these were overshadowed by the infrastructure deterioration, wasteful military spending, collapsing healthcare and education systems and reliance on Wall Street.


Given that the Baby Boomer generation demands a substantial healthcare sector in order to prolong and improve quality of life, and that it has been conclusively proven that healthcare is more efficiently provided publicly, is it any wonder that state spending is increasing? An effective education system is essential for enabling students to advance to post-secondary institutions properly, which is vital if the Chinese are going to be factory workers and Americans are going to dominate the global economic highground. Yet, successive presidencies have ignored the problem.


Economic suicide is much more than growth vs. government spending.



Perhaps your right, perhaps not. It's hard to tell. A lot of the economy these days is between the ears. If people don't invest (read: take risks) the economy will not gain momentum. By trying to give the good example, trough investments paid by deficits the governments try to get the mood changed. Will it work? I don't know. But I've the feeling it is better then doing nothing at all.   How can you know U.K.'s sustainable growth rate is cut by some 1.0 to 1.7 percent per annum, because of government spending? What is the mechanism that makes people not invest because of deficit spending?




Glass biulding?

Why would someone want to go to a soulless industrial building to do something nostalgic such as ride a train?

The place would probably look much better if they ditched the glass and put on facades to mimic Victoria Station.

Quote:  "The neighborhood

Quote:  "The neighborhood directly surrounding Victoria Station, however, has been almost totally rebuilt in recent years with tasteful, modern glass buildings and upscale renovations. "

Huh! Many of us consider these glass buildings the architectural rape of a once beautiful city.

30 St Mary Axe is politely called 'the gherkin' but it is an undisguised turd dumped on a great city.

The United Kingdom has not had a decent government since Harold MacMillan's. Heath has been overtaken as Britain's worst Prime Minister ever by Gordon Brown, who also doubles up as the worst Chancellor of the Exchecquer ever.

Thatcher was the inevitable consequence of the closet commie idealoguism of Labour and the world's worst trades unions. Typically she threw the baby out with the bathwater by all but destroying the manufacturing industry.

England needs to rid herself of the UK and EU and focus on straightening out what's left of her wrecked economy. This was also an inevitability once we let Scots take control who have a pathological hatred for England and the English.