A British double-dip
Voters in the United States weren’t the only ones cleaning house last year. Their counterparts in the United Kingdom sacked the Labor Party government in May, ushering in a coalition of Conservative and Liberal Democratic lawmakers who pledged to close the country’s outsized budget deficit. The coalition’s austerity plan recently ran into an unexpected hurdle, however: The government reported that the British economy, which had appeared to be slowly recovering, reversed course and shrank in the last three months of 2010, raising fears of a double-dip recession. The events there offer a cautionary tale for U.S. policymakers, who are grappling with the twin challenges of a huge deficit and a weak economy.
The power shift in Britain, like the one here, reflected the public’s ire at the lingering effects of the deep global recession. The ascendant conservatives on both sides of the Atlantic declared that their predecessors’ Keynesian response to the recession — a sharp increase in government spending — was not only a failure but an obstacle to growth.
The new leaders in Britain announced ever-tougher plans in May, June and October to reduce the deficit dramatically over four years through extensive cuts in government programs and tax increases. Opponents warned that the economy, which had grown modestly through the first nine months of 2010, was too fragile to withstand the austerity measures. When the government reported the startling turnabout in the three months that followed — before the deficit-cutting measures had fully kicked in — the critics said, “We told you so.”
The slippage in Britain shouldn’t stop policymakers here from adopting a blueprint for bringing the federal budget back into balance. As a new report from the Congressional Budget Office shows, Washington is amassing debt at an alarming and unsustainable rate. The issue, as the experience overseas shows, is when to start stepping on the brakes.
Like it or not, deficit spending helped sustain the U.S. economy after the financial markets imploded, preventing an even deeper and longer recession. Economics isn’t a precise science, so it’s hard to know when the recovery has gathered enough steam to no longer need the help of government spending. If the government pulls too much money out too soon, either through spending cuts or tax increases, we could be stuck in a stagnant economy or, worse, heading downward again.
Congress should develop a multiyear deficit-reduction plan that phases in spending cuts gradually, yet which ultimately prevents the national debt from growing large enough to discourage investors and raise interest rates. The timing of the cuts should be tied to signs of a durable recovery, such as reductions in unemployment. And rather than cutting for the sake of cutting, it should focus its attention on the biggest factor in the long-term deficit: healthcare costs, particularly in Medicare. In the meantime, lawmakers should concentrate on getting people back to work, speeding the economic growth that is vital to solving the nation’s budget problems.
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