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America must be doing something right
Samuel Brittan The Financial Times 09/11/12

Despite much anecdotal evidence that many Americans are disappointed by the behaviour of the US economy, President Barack Obama has been returned to the White House with a convincing majority. Does this show that the campaign of former Democrat President Bill Clinton was wrong to focus on "the economy, stupid"? Not necessarily. I have a table of the behaviour of the main industrial economies since their pre-recession peak of 2007-08. Taking both that recession and the recovery from it, Canada heads the list with a net gain of real gross domestic product of 4.1 per cent. The US comes next with 2.2 per cent, followed by Germany with 1.7 per cent. France is still 0.8 per cent behind its earlier peak and Japan is 1.9 per cent short. The UK is almost bottom of the class with a net fall of 3.1 per cent, a drop exceeded only by Italy among the G7 countries.

These numbers contain some estimation but they are historical records, not forecasts. The discrepancies are too large to be explained by demography. The US must be doing something right.

Because of Congressional Republican opposition, the economic stimulus has not been as large as Mr Obama would have liked. Even so, it is a pity he has not had a Treasury secretary who would have proclaimed the relative superiority of US policy from the rooftops, as Larry Summers, an earlier Democrat incumbent of this post, would have.

The UK cannot expect to play the same part in international economic negotiations as during the special circumstances at the end of the second world war. Nevertheless, it still has a role to play. And a decisive part could be played by the new Bank of England governor, who is likely to be announced in December. There is a strong case for skipping a generation and appointing Andrew Haldane, executive director for financial stability. Mr Haldane knows more than most what is really wrong with banks, national and international; and his exasperation has led him to express sympathy for the so far entirely peaceful "Occupy" movement. He is a great sceptic on the potency of ever more complex regulation to improve the financial system. He notes that the 1933 US Glass-Steagall Act ran to 37 pages, while the 2010 Dodd-Frank Act is likely to generate nearly 30,000 pages of rules. He has had a notable spat on this subject with Mark Carney, Bank of Canada governor. But either would be a better choice than the usual establishment candidates.

The economic situation that the successful candidate will oversee is less favourable than the one Mr Obama revisits. The UK’s National Institute of Economic and Social Research has analysed the combined impact of fiscal consolidation programmes in European countries. We know that Niesr is against fiscal contraction in recessionary conditions and many economists would agree. Its analysis is similar to that of the International Monetary Fund but unlike the IMF it does not have to be politically tactful. Its key finding is that the contractionary effect of fiscal tightening is greater from the combined effect of several countries acting together than if any one of them had acted alone. That is why it is such a fallacy to hold up for admiration past instances of unilateral fiscal austerity packages. Isolated action by individual euro countries would cut the area’s GDP by less than 2 per cent. Allowing for interactions among the countries, the loss swells to 4 per cent. For the UK the loss increases to 5 per cent when interactions are included. The conclusion is that fiscal consolidation will fail even its own terms, actually increasing the government debt to GDP ratio in almost every country.

The US may not share all the same difficulties as the UK but it will have to work very closely in combating the international economic difficulties. Niesr predicts a pretty anaemic recovery in the main industrial countries with "few signs of broad self-sustaining expansion". Unemployment among this group is at its highest for 30 years.

Things could get worse. Niesr spots at least three risks to this already dismal outlook. First, there is still the possibility of eurozone break-up. Second, the fast-growing "Bric" economies, which have experienced very large real exchange rate appreciation, could slow. Third, there has been an unprecedented expansion in central banks’ balance sheets (without much effect on money supply growth), which could one day lead to a jump in inflationary expectations.

The situation requires leadership, but not "international co-ordination", as the likes of the IMF, the European Commission and the European Central Bank are fond of advocating. When there is so much disagreement about how economies work, there is a case for letting a thousand flowers flourish rather than attempting to impose a one-size-fits-all formula.


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Contact - samuel dot brittan at ft dot com