As Summers Puts It

James Bloodworth writes:

Largely missed yesterday due to the Bank Holiday (and because it appeared in the American press), former United States secretary of the treasury Larry Summers has penned a piece for the Washington Post slamming chancellor George Osborne’s policy of austerity. 

A bit late now that Osborne’s “plan is working”, I can hear some of you say.

But Summers, who has previously criticised Osborne’s Help to Buy scheme, has posited that, rather than growth vindicating the policy of swingeing cuts, it’s wrong to take it as a sign of the wisdom of austerity.

Indeed, Britain’s economic growth is not a sign that austerity works, Summers concluded based on four arguments:

1) While growth has been impressive recently, this is because the depth of the recession was so deep

“Whereas in the United States gross domestic product is well above its pre-crisis peak, in Britain GDP remains below previous peak levels and even further 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 was forecast, and the date when budget balance will be achieved has been pushed years back to the end of the decade.”

2) Britain’s reliance on financial services is not to blame

“The most commonly offered excuse for Britain’s poor performance is its dependence on financial services. 

“Yet the New York metropolitan area, which is even more dependent than London on financial services, has seen GDP comfortably outstrip its previous peak.

“While 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.”

3) Growth has returned to the British economy because treasury policy has become less austere

“The pace of fiscal contraction has slowed over the past two years.

“Slowing fiscal contraction means the decrement to growth caused by fiscal policy becomes more attenuated. Other things equal, this would be expected to produce more favorable growth performance.

“Ironically, the greater the fiscal multiplier, the greater would be the predicted turnaround when the pace of contraction slowed.

“So the turnaround in growth over the past 18 months is as much evidence against austerity as for austerity.”

4) The chancellor is relying on reckless policies to get the economy growing

“Help to Buy manages to recapitulate most of the sins of the U.S. government-sponsored enterprises.

“The stated goal of the austerity program was to improve confidence in Britain as a sovereign credit. Yet guaranteeing mortgages en masse creates a huge potential government liability, as do other loan-guarantee programs.

“Moreover, subsidized credit for housing risks reinflating bubbles as house prices in London have risen much faster than GDP over the past year.

“And, of course, all programs for the benefit of homeowners rather than renters have perverse distributional consequences.”

So in sum, the economic recovery is due in large part to 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 bubble-creating government loans,” as Summers puts it.