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Direction Deficit: How the U.S. Could Follow the U.K. Into Another Recession

Republicans and Democrats eager to slash federal spending should glance across the pond, where the U.K.'s own experiment in austerity is going haywire. As Britain hacks away at its deficit, personal income is plunging even faster than after the Great Depression.

London's Center for Economic and Business Research expects British households' spending power this year to fall by nearly $1,500, compared with 2009, before the U.K. embarked on its new strategy. As a result, consumer spending is likely to decline 0.8 percent in 2011. Britain's GDP shrank 0.6 percent in the fourth quarter, even more than the initial forecast of a 0.5 percent dip.

That's likely to restrain economic growth in the U.K. for the next several years, the consulting firm concludes. As one expert told the NYT:

"My view is that we are in serious danger of a double-dip recession," said Richard Portes, an economist at the London Business School. "This is going to be a cautionary tale."
What both parties won't admit
For now, of course, the experiment continues. The U.K. is only in the first of a five year-plan to drastically shrink its deficit. And although the CEBR expects Britain's economic growth to slow in the short-term, the consulting firm expects GDP to pick up in 2015 (such longer-range predictions are notoriously fickle, of course). But certainly the results so far should give pause to anyone here in the U.S. who's convinced that immediately chopping spending -- as opposed to in a few years, when the economy is stronger -- is likely to kick-start growth.

Anyone like President Obama, who last week avowed his commitment to quickly reducing the deficit, and like Rep. Paul Ryan, R-Wis., whose draconian budget cuts the House approved on Friday on a party-line vote. Those poles seem to delimit the official discourse in Washington and among much of the commentariat, who argue that boosting the economy requires cutting spending by several trillion dollars over the next few years.

The U.K. is taking an even bigger cleaver to its budget than what either Obama or Ryan have proposed. Yet it's also being more responsible by raising taxes and maintaining a top rate of 50 percent on the richest taxpayers. Not so here at home. The Democrats, who pass for the party of fiscal sanity these days, can barely bring themselves to even allude to a tax hike, even in the name of closing the deficit.

As for Republicans, who under the Ryan plan voted to reduce the marginal rate on the richest Americans from 35 percent to 25 percent, they continue to wallow in supply-side fantasies about tax cuts spurring economic renewal. That's not a "path to prosperity" -- it's the same, tired ideology masquerading as economic policy.

Lost in translation
We're now seeing the impact of deficit reduction on the U.K. And stateside? Here's what investor and policy wonk Marshall Auerback expects:

Ask your favorite economists what that does to GDP. My guess is that they'll tell you it will shave a few more percentage points off GDP growth. And maybe a 50 percent increase in unemployment as the output gap skyrockets from already insanely high levels. In other words, we could well see years of flat to negative growth unless the private sector (including non-residents) spending somehow increases at least by that much.
And private spending is unlikely to rise enough to offset public cuts, as consumers and businesses continue to deleverage. Slower economic growth and rising unemployment in turn would lead to -- hey, didn't we wander down this path already? -- higher deficits. Then the U.S. can serve as another country's cautionary tale.


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