Austerity versus Stimulus

"Past experience with fiscal austerity at home and overseas strongly suggests that it is best for the economy's long run performance to restrain government spending rather than raise taxes." - Mark Zandi

British GDP will exceed the pre-recession level this year as the economy grows for the fifth consecutive quarter.  It is now the fastest growing G-7 economy as GDP growth is expected to exceed 3% in 2014.  Furthermore the government's austerity program has resulted in $108 billion in savings to date with an additional $100 billion expected in the coming two years. While these cuts may seem small to an American, the total budget is just under $1 trillion so $100 billion is equivalent to a 10% savings. The British unemployment rate is now 6.9% even though the government cut its work force by 13%.  To achieve these heady numbers the British government embarked on an austerity package that, at its peak resulted in workers real incomes falling to their lowest in a decade.  This pain was taken up front and on the chin rather than kicking it down the road and while debt to GDP is around 90% the pace of growth is slowing and seems well under control.

This is in stark contrast to the United States whose stimulus package has resulted in a debt to GDP ratio of 110% which continues to rise.  Furthermore the methodology being pursued is sure to result in more spending at all government levels taking this debt level even higher.  The can has been squarely kicked down the road in an effort to alleviate any pain to the consumer.  United States unemployment is still north of 6% and if you add in all the part time workers it is above 10%.  Furthermore the participation rate is at a level not seen since 1978. This slack participation rate means that there are millions of Americans that would love to have a job but have given up.  With GDP growth predicted to barely beat 2% in 2014 (I do not think that we will even come close to this number) there is little in the way to celebrate the money printing methods of the Federal Reserve.

As I have mentioned in blogs past, austerity will ultimately win out as you cannot repair a debt problem by adding more debt.  Any economic benefit from adding debt are short lived and ultimately result in inflation.  Inflation is now being felt as oil prices spiked on the problems in Iraq and Ukraine; food prices continue to spiral higher and medical costs and taxes jump.  The United States consumer is still hurting all these years and many trillions of dollars later.  So while the Federal Reserve is now slowly cutting its stimulus to me this is too little too late and as with all problems, delaying the inevitable will result in far more pain.

While this is not a happy situation I believe that we still have time to right the ship as the United States will benefit from the rising oil prices.  It is also still a technology power house and the innovations from this sector continue to produce benefits that can remove competencies from other countries (take 3D printing as an example) giving the United States a continued competitive advantage.  I  am hopeful that once the stimulus program is ended that the new Federal Reserve Chair Janet Yellen will continue to cut these types of market manipulating policies as they do not stimulate the economy nor do they produce jobs or economic strength.  What they do is erode consumer confidence and weaken the long term prospects of the country.  Hopefully Yellen is learning a thing or two from her counter part at the Bank of England, but I am doubtful. It appears that once again the United States will take the road of least pain and resistance and this will not provide the required outcome but will result in long term economic weakness.