Does Britain’s austerity hold lessons for US?

Updated 06 January 2013
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Does Britain’s austerity hold lessons for US?

WASHINGTON: The dog’s breakfast of a deal that “resolved” the US “fiscal cliff” fell far short of expectations.
In the hours after it passed, deficit hawks at the Committee for a Responsible Federal Budget and the tag team of former Senator Alan Simpson and former Clinton White House chief of Staff Erskine Bowles all expressed disappointment in a bargain that was anything but grand.
Senate Republicans gritted their teeth to accept a small increase in taxes on America’s highest-earning households while Senate Democrats made permanent the bulk of the Bush-era tax cuts.
A number of tax provisions that hark back to the 2009 fiscal stimulus law were extended, as were unemployment benefits, thus delivering a modest income boost to a large number of low-income households.
But the Social Security payroll tax cut, a Republican-backed replacement for the more narrowly targeted Making Work Pay tax credit that was part of the stimulus law, which benefited a wide range of affluent households as well as families of more modest means, was allowed to lapse.
Long-term spending levels, meanwhile, were left largely untouched, which is why rebellious House Republicans came close to scuttling the delicately constructed compromise.
One group that offered at least two cheers for the deal were deficit doves, who believe that premature fiscal consolidation poses a grave threat to America’s sluggish economic recovery.
Paul Krugman, the popular left-of-center New York Times columnist who never shrinks from apocalyptic pronouncements, was almost pleased to see that the deal avoided any serious spending cuts and that it entailed relatively modest near-term tax increases.
There is a coherent approach to reconciling the concerns of deficit hawks and doves, which has been championed by former Senator Pete Domenici and former Clinton budget director Alice Rivlin of the Bipartisan Policy Center’s Debt Reduction Task Force. Essentially, it entails addressing the federal government’s structural budget deficit — the gap between revenues and spending levels when the economy is humming along at its “normal” pace — while allowing for substantial deficits so long as the economy is in recovery mode.
There is one market democracy that has embraced something like the grand bargain American budget reformers have in mind, yet it has been widely panned as a poster child for the evils of fiscal austerity.
Since 2010, Britain has been ruled by a coalition government that unites the center-right Conservative Party with the center-left Liberal Democrats. Faced with a tanking economy and a budget deficit of 11 percent of GDP on entering office, and constrained by public spending levels that reached 47.7 percent of GDP under the previous Labour government, the coalition committed itself to a course of slow and steady deficit reduction.
The hope was that this fiscal consolidation would signal that Britain was serious about getting its public finances under control, and that this in turn would encourage growth. Yet Britain’s economic performance has been disappointing, and a growing chorus of critics insists that fiscal consolidation is to blame.
Before we turn to the fiscal consolidation debate, it is worth noting that Britain’s economic performance has also been downright confusing.
The unemployment rate is 7.8 percent, roughly in line with the US rate. It is also true, however, that Britain’s employment rate, i.e., the number of Britons who have a job, has recovered faster. But according to the GDP numbers, the US economy is recovering, albeit slowly, while Britain’s economy is teetering on the edge of recession. Indeed, British GDP remains 3.0 percent smaller than it was in 2008.
Normally, we’d expect GDP and employment levels to go hand in hand, but that hasn’t been the case in Britain. Because employment levels have remained fairly robust while measured GDP has not, measured productivity has actually declined over the last year.
One possibility is that Britain’s GDP is currently being underestimated, but the coalition is certainly not counting on that rosy scenario.
So is Britain’s dismal recovery a result of the coalition’s budget-cutting? During a recent visit to New York, George Osborne, Britain’s chancellor of the exchequer, offered a robust defense of efforts to curb his country’s structural deficit.
According to Osborne, his government has been sensitive to the need to preserve Britain’s safety net in a time of economic distress while recognizing that the long, arduous process of deleveraging means Britain will need to increase the cost-effectiveness of public spending.
He explicitly compared his approach to deficit reduction to that of America’s Bowles-Simpson commission, pointing to his insistence on using tax increases as well as spending restraint.
Osborne was countering the oft-heard charge that he is a zealot blindly committed to deficit reduction at all cost, which seems fair given that Britain’s deficit last year was 8.3 percent, roughly similar to the US federal government’s budget deficit of 8.7 percent that same year.
It is hard to know exactly why British GDP growth has been so weak.
Fiscal consolidation aside, Britain has been buffeted by the ongoing economic crisis in the eurozone and a super-sized banking sector burdened by bad debts.
We tend to think of Britain as a hybrid that lies somewhere between the social democracies and continental Europe and the more market-oriented economies of North America, and there is some truth to that.
There are, however, many other distinctive aspects of the British economy that make it a less-than-ideal petri dish for policymakers.
The financial services boom of the 1990s and 2000s had a transformative impact on the country. Rising productivity in the financial sector made the British economy as a whole look quite strong. Surging tax revenues generated by the City of London helped finance a dramatic expansion of social transfers, a policy that effectively redistributed income from England’s flourishing, immigrant-rich southeast to the rest of the country.
So it is hardly surprising that when the financial crisis struck, it had a profoundly damaging impact on Britain’s public finances.
Moreover, the North Sea oil and gas fields, a major part of the Scottish economy, are in secular decline, with output per hour dropping by an alarming 40 percent over the past five years.
Taken together, there was good reason to believe that Britain’s structural deficit had increased. That is, if the financial boom years weren’t about to come back and oil and gas weren’t going to ride to the rescue, Britain had to do the long, hard work of building a more balanced economy and a more fiscally sustainable public sector.
Rather than fixating on British fiscal policy, which has been caricatured by its critics, a number of observers, including Bentley University economist Scott Sumner, have argued that the real culprit behind Britain’s economic woes has been its monetary policy. That policy has in many respects been active and innovative.
For example, the Bank of England and the Treasury launched Funding for Lending, a program designed to increase the availability of business loans and mortgages.
What the Bank of England has yet to do is adopt a nominal output target, a monetary policy rule designed to keep aggregate demand growing at a steady rate. By creating more certainty about future demand, such a target would tend to encourage long-term investments by companies and households.
And one of the biggest weak spots in the British economy has been business investment, motivated in no small part by the ongoing chaos in the eurozone. Interestingly enough, the incoming governor of the Bank of England, the widely admired governor of the Bank of Canada, Mark Carney, has floated the idea of embracing a nominal output target. This would be a revolutionary step that might turn the transatlantic debate over economic policy on its head.
The economic policy debate in Britain is particularly relevant to the US because, as Brad Plumer of the Washington Post has observed, the cliff deal includes $ 355 billion worth of deficit reduction in the form of tax increases and spending cuts, or 2.1 percent of GDP. Plumer notes that this is considerably more than Britain’s deficit reduction measures over the past two years of 1.5 percent and 1.6 percent.
If a relatively modest deficit reduction effort causes economic bedlam, we’re all in big trouble. If, on the other hand, smarter monetary policy is what we need to make fiscal consolidation palatable, there is a way out of our economic doldrums.
— Reihan Salam is a Reuters columnist
but his opinions are his own.


‘Naked Diplomat’ author Tom Fletcher bares all on life as UK ambassador to Lebanon

Updated 6 min 43 sec ago
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‘Naked Diplomat’ author Tom Fletcher bares all on life as UK ambassador to Lebanon

Tom Fletcher might be best described as “the anti-diplomat.” Not in the sense that he sees no value in diplomacy, but in his steadfast refusal to live up to the stereotype expected of the ambassadorial profession.
While British ambassador in Beirut, he tweeted his way to acceptance by his hosts with an informal style and social accessibility that was in distinct contrast to the stuffy image of the traditional diplomatic circuit.
He told the BBC that there was not a single Ferrero Rocher in the embassy building — referring to the chocolates jokingly associated with the job after a 1990s TV commercial — and his “Dear Lebanon” farewell blog in 2015 after four years in the job boosted his broad international online appeal.
Now, Fletcher is running a portfolio of careers in the space where business, technology and public policy intersect. He is a visiting professor at New York University in Abu Dhabi, specializing in international relations, and is also involved with the Emirates Diplomatic Academy, the “ambassadors’ finishing school” in the UAE capital.
The former envoy is also chairman of the international board of the UK’s Creative Industries Federation and a member of the United Nations’ Global Tech Panel, as well as continuing a career as a successful author. His book “The Naked Diplomat” explored the interactions between governments, technology and big business, and became an international bestseller.
His experience and Internet renown make him a star attraction on the international forums circuit. He was on a panel in Dubai recently to discuss the findings of the 10th Arab Youth Survey, and afterwards went into some detail on the findings of the poll, which showed — alarmingly for some — that the US was waning in popularity in the region under President Trump and that Russia was increasingly regarded as a friend for young people in the Middle East.
Fletcher told Arab News that there was some reason to be worried about those findings, but also cause for optimism. “We have seen a striking fall in reputation among young people in the region since the US elections. But it was also worth noting the wider admiration for the American people as a whole, which looks quite resilient.
“The Russia results were interesting, because Russia has not always been a stabilizing force in the region. On Trump, they are further confirmation that the election of the leader of the free world created a vacuum. But the lights will eventually come back on in the shining city on a hill,” he said.
The survey seemed also to reveal a generational split in the Arab world, with many youngsters demonstrably not sharing their elders’ view of the US president. “I think that the region has access to the same information as the rest of us, and can take from it a pretty clear assessment of Donald Trump’s reliability. There are clearly some areas of alignment with some countries, such as the rejection of the Iran deal. But the survey shows that people across the region also hear the Trump administration’s wider messaging on the Middle East,” Fletcher said.
The Iranian situation was clearly on his mind, but he said there were alternatives to an escalating confrontation between the US and the Gulf states on the one hand, and the regime in Tehran on the other. “Wherever you stand on the Iran deal, its violation is a concern for regional security. The issue we have to ask ourselves is ‘what is the alternative for restraining Iran’s nuclear potential?’ Personally, I haven’t seen a better answer to that than the existing Iran agreement.
“Of course, the Iran deal in itself isn’t sufficient in reacting to Iran’s wider regional role, not least in Syria. But I worry that it is the hard-liners in Tel Aviv and Tehran who seem keenest to end the agreement,” he said.
A lot of his time in Beirut was spent dealing with the regional fallout from the Syrian crisis, which started just as he began the ambassador’s job. Surely, seven years on and with no solution in sight, that represents a failure of traditional diplomacy?
Fletcher’s response was, well, diplomatic. “Not all has failed. Huge effort has gone into keeping Lebanon relatively stable, despite the scale of the Syria crisis just across the border. Diplomacy has failed on Syria and on Palestine/Israel. But George Mitchell (the American politician credited with helping bring about an end to the Northern Ireland conflict in the 1990s) said that making peace was 700 days of failure and one of success. We have no choice but to keep trying, and to work harder than those who want to see diplomacy continue to stumble,” he said.
Fletcher’s work in the Gulf has enabled him to take a broad overview of developments in the region, and there is no more intriguing situation than in Saudi Arabia, which is going through a rapid transformation of the economy and society under the Vision 2030 strategy. “I think there has been a shift in international opinion on Vision 2030 over the last year. Initially many were curious, and conscious of the obstacles.
“But there is now a growing realization of how important a reform agenda is, especially if it succeeds in creating more opportunity for young people, including women. We all should hope it succeeds — I think it can, but will need maximum involvement of citizens themselves in shaping an open approach,” he said.
Fletcher also has a clear view of the kind of socioeconomic order that will emerge from the transformational policies of regional leaders.
“The Gulf has clearly realized that there is a need to move away from oil dependency well before the oil runs out. The answer has to lie in a knowledge economy. I’m heartened by the kinds of issues that my students at NYU AD want to work on and pioneer. And by the government focus on themes like wellbeing and education reform.
“Twenty-first century skills will need to be at the heart of the school curriculum, with learners encouraged to be curious, to seek out sources of knowledge and wonder, and to learn teamworking and innovation. This is happening increasingly in the larger cities, but there is still work to be done to mainstream knowledge, skills and character in education systems,” he said.
With the power of Big Data coming under scrutiny as never before in cases such as the controversy over Facebook’s role in the political process in the US and elsewhere, Fletcher’s work for the UN is more relevant than ever, and he believes there is a big role for the Gulf states to play in that debate.
“The Middle East needs to ensure it is better represented in the international architecture. It needs to be a key part of the debate about security and liberty online — the UAE Artificial Intelligence Minister (Omar Bin Sultan Al-Olama) is a great example of this. And it needs to help get everyone on to a free Internet,” he said.
Before entering the diplomatic service, Fletcher was an adviser on foreign policy to three British prime ministers, which gives him a unique perspective on the big current issue in the UK — the increasingly bitter process of leaving the EU, or Brexit.
The search for new trading partners has seen a succession of British ministers visiting the Gulf region in a bid to clinch new business. Fletcher does not share the view of some that the UK is destined for insularity and isolation in the post-Brexit world.
“The UK is going through a complex process, but it is always at its best when it has a worldview formed from having actually viewed the world. When it is open minded, outward looking. When it stands for more liberty — rights, trade, thought.
The creative industries are already showing the way. And the royal wedding was a brilliant reminder of what the UK can be — diverse, modern, self-aware, creative. We all badly needed that reminder,” he said.
Fletcher was the youngest person ever to get a major ambassadorial post, and seems well set to pursue a handsomely paid career in virtually any sector, from international policy-making, to domestic UK politics or the private sector.
But he still regards himself as a diplomat with a creative twist. “I still write diplomat on the landing cards in planes.” And there is a second book in the works, he revealed: “I’ve just finished a murder novel, featuring an ambassador detective,” he said.
It is doubtful there will be a Ferrero Rocher mentioned in the book.