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As the U.S. Goes, So Goes Britain / Artikel mises.org

verfasst von - Elli -, 10.11.2003, 18:06

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As the U.S. Goes, So Goes Britain
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By Grant M. Nülle
[Posted November
10, 2003]

<img alt src="http://www.mises.org/images3/blairbush.gif" align="right" border="0" width="241" height="198">The
Mises Institute's October 24-25, 2003 Supporters' Summit dealt with the
topics"War, Prosperity and Depression." The title was apt,
considering that the United States still suffers from a financial hangover
courtesy of a Federal Reserve-induced stock bubble that burst in 2000. At the
same time, Americans have been compelled to bankroll the federal government's
insatiable appetite for borrowing and spending other people's money.

To the chagrin
of adherents of the Austrian School, America has also embarked on
military adventures abroad, ostensibly to root out the perpetrators of
terrorism and unseat those dastardly governments that would presumably harbor
Washington's foes, leaving American soldiers with the daunting
and thankless task of nation-building.

Washington has
not been alone in pursuing its crusade against terrorism and realizing
the fantasies of the Neo-Conservative movement. A muddled-headed
internationalist of the center-left persuasion, Britain's Prime Minister, Tony
Blair, reaffirmed his country's post-imperial foreign policy role of playing
the Greece to America's Rome. In the post 9-11 era, Westminster has backed
the U.S.-U.K."Special Relationship" to the hilt by participating in
the invasion and occupation of Iraq as well as Afghanistan.

Far from merely
sharing geopolitical preferences, Britain is similar to America in that it is
suffering from the same political and economic maladies that have befallen its
transatlantic cousin. Indeed, faced with a burgeoning fiscal deficit, fiat
money-precipitated economic imbalances and renewed imperialism, albeit at
Washington's behest, the U.K.'s own variant of"War, Prosperity and
Depression," underscores the sources of America's woes, which were
enumerated during the October Supporters' Summit.

Tory
Lite

After 18 years out of
office, the British Labour Party returned to power in 1997. The assent was
abetted in part by tax hikes, macroeconomic mismanagement, and the general
stodginess of John Major's Conservative government. Of greater importance to
the 1997 general election results was Tony Blair's instrumental role in
transforming his party's penchant for blatant economic interventionism into a
pragmatic and centrist pandering organization, rebranded"New
Labour." 

At the heart of the
political makeover was Mr. Blair's highly touted"Third Way," which
promised to incorporate the best features of Clement Atlee's 1945 imposition
of the welfare state on Britain and Margaret Thatcher's bid to roll back state
power.

Moderation was
the order of the day in the first New Labour government as Mr. Blair scrapped
his party's reputation for exorbitant tax and spend measures, opting to
commandeer Tory policies instead. Indeed, the prime minister focused on
modifying the British Constitution, participating in NATO's foray in Kosovo
and above all refraining from arousing the ire of centrist voters.

Her Majesty's
government was aided in this endeavour by robust economic growth, which was
largely driven by exports to an American economy at the apex of the boom phase
of the trade cycle. Taken together, a prudent political strategy and an
economy fueled by monetary easing (see below) on both sides of the Atlantic
returned Labour to power following the June 2001 general election with an even
larger parliamentary majority.

Unabashed
Interventionism

Flush with
victory, New Labour jettisoned its interventionist inhibitions and embarked
upon a spending spree reminiscent of previous premierships.

Telltale signs
of a statist agenda were discernible during Mr. Blair's first term from 1997
to 2001 as the government launched its"New Deal" headlined by the
institution of a minimum wage. Britain's Chancellor of the Exchequer, Gordon
Brown, deftly assumed the role of social engineer via his Byzantine system of
tax exemptions and statutory contribution schemes, which served to further
distort incentives and impair the operation of a free market.

In
contravention to a 1997 election manifesto pledge that,"New Labour will
be wise spenders not big spenders," in 2001 Messrs Blair and Brown
proceeded to posit massive sums of tax revenues into the public services. State
entities, like the notoriously inefficient National Health Service (NHS),
which accounts for a third of Britain's public service spending, received a
dollop of cash that year 11 percent greater than the previous one. The
government's Office of National Statistics also indicated that total public
spending for 2002 was 9 percent higher relative to 2001, the fastest pace
since Harold Wilson's profligate Labour government in 1975.

Overall, when
one includes the modest increases during Labour's first term into the
calculations, national spending on health, education, transport, and the like
is 40 percent greater than what it was prior to"New" Labour's
ascension to power in 1997<a id="_ednref1" title href="http://www.mises.org/fullstory.asp?control=1370#_edn1" name="_ednref1">[1]</a>.

Mr. Blair's bid
to modernize state-provided services by earmarking tax revenues for that
purpose has resulted in scant improvements in delivery and satisfaction. Worse
yet, Mr. Brown has saddled the country with a burgeoning budget deficit, a
mounting sovereign debt and a legion of newly minted bureaucrats.

British
government statistics underscore the extent of Whitehall's expansion and the
deficiencies of its policies. The volume of government service output from
1997 to present grew by a mere 14 percent compared to the 40 percent increase
in spending on the provision of public services. In the span of a year, April
2001-April 2002, over 22,000 new civil servants were added to the government
payroll, bringing the cumulative total to over 512,400. The pace of public
sector hires exceeds the total increase in British employment by a factor of
five<a id="_ednref2" title href="http://www.mises.org/fullstory.asp?control=1370#_edn2" name="_ednref2">[2]</a>.

"Making
the pips squeak"

As the public
spending spree has accelerated since 2001, economic growth has slowed as
America's appetite for British products has slackened. Concomitantly, activity
in Britain's financial services and high technology enterprises, which account
for a substantial proportion of the country's slumping industrial exporters,
is subdued largely as a result of the puncture of America's stock bubble.
Business investment fell by 8 percent in Britain during 2002 and is expected
to decline again in 2003.

Although the
U.K. posted the highest GDP growth rate among G7 (2.1%) countries and third
highest in 2002 (1.7%), the results are well below the Bank of England's
(2.5%) and the Treasury's (2.75%) trend rates of growth.

Combining
augmented public spending and falling tax revenues—the result of a slowing
economy—has proven to be a recipe for a burgeoning budget deficit. Like
America, Britain's surpluses of the late 1990's have vanished with the only
distinction being the former dipped into the red by throwing money at tax cuts
and defence whereas the latter opted for plumping public services.

Her Majesty's
Treasury optimistically projects the government's budget deficit to exceed £27
billion or 3% of GDP in fiscal year 2003. Some private sector forecasters
reckon the shortfall to increase to near £40 billion per year by fiscal year
2005.

More troubling
for the maligned British taxpayer is the budgetary chicanery implicit in
Gordon Brown's future spending plans. In his spring budget, the Chancellor
announced that government expenditure growth would drop from 4.5% per annum
from 2002 to 2005 to 2.8% per annum from 2006 to 2008, allowing public
services' budgets to grow by 3.5% per annum in the latter period.

However, as The
Economist noted in early October, substantial spending commitments have
already been made for the NHS from 2006 to 2008 and the current pace of
education spending (6% year) is unlikely to be curbed, portending an abrupt
freeze in all other departments' funding growth if Mr. Brown's budget
projections are to be met. If one knows anything about politics, capping
spending on transportation, defense (especially amid America's war on
terrorism) and other services is simply unfeasible<a id="_ednref3" title href="http://www.mises.org/fullstory.asp?control=1370#_edn3" name="_ednref3">[3]</a>.

Britons confront
the unsavory prospect of tax hikes, better known as"making the pips
squeak," and swelling budget deficits in the near term and possibly
beyond, provided a Conservative Party beset by leadership and identity crises
cannot mount a credible opposition. Even if the Tories could surmount their
self-inflicted difficulties, their position on public spending differs little
from Labour.

Enter
the Bank of England

Abysmal interest
rates, if not commensurate with the unhampered market's time-preferences,
stoke present consumption and foster excessive debt. The hallmarks of a boom
phase are evident in Britain, care of the Bank of England.

Unanticipated by
almost all observers, with the exception of Alan Greenspan whose counsel and
consent was sought by the Treasury beforehand, New Labour's
initial act in office in 1997 was to enable the Bank of England to
determine interest rates independent of the Chancellor of the Exchequer. The
act reversed Old Labour's, if there really is a
distinction, nationalization of the bank in 1946.

Apart from an
increase of the repo rate from 6% in 1997 to 7.5% in 1998 and another brief
increase at the zenith of the 1990's transatlantic boom, interest rates in the
United Kingdom have fallen largely in tandem with the United States. Currently,
Britain's repo rate stands at 3.5%, the lowest since 1955; the American
equivalent is 1%.

The latest
edition of the Bank of England's Financial Stability Review<a id="_ednref4" title href="http://www.mises.org/fullstory.asp?control=1370#_edn4" name="_ednref4">[4]</a>
serves as a textbook example of some of the features of the Austrian Theory of
the Trade Cycle. If one is able to wade through the banking jargon-laden
report, it becomes evident that Britain's corporate sector, which has seen
profitability and investment figures decline since America stock bubble burst,
is being propped up by artificially low interest rates.

To be fair, rationalization
has occurred within Britain's corporate sector—its aggregate financial
balance has swung from a deficit of 3% of GDP in 1999 to a surplus of 1.4% of
GDP as of late 2002. However, the contraction of businesses and rectification
of malinvestments that one would expect to occur in the bust phase of the
trade cycle have been forestalled by the Bank of England's monetary easing.

Since 2001,
Britain's repo rate has fallen from 6% to 3.5%, notwithstanding a lull in rate
reductions during most of 2002 signalling a nascent revival in the corporate
sector's fortunes are beginning to appear, fueled by mean borrowing costs.

Binge
Borrowing

As for Britain's
households, debts are being amassed at a record clip. On October 29th,
the Bank of England announced that consumer borrowing in September 2003 topped
the previous all-time record. Britons tacked on £10.7 billion of debt that
month, up 14% since September 2002. Mortgage lending led the charge,
increasing by £8.8 billion in September, another record<a id="_ednref5" title href="http://www.mises.org/fullstory.asp?control=1370#_edn5" name="_ednref5">[5]</a>.
To complete the triumvirate of astounding borrowing figures, 136,000 mortgages
were approved in September, a level not posted since the halcyon days (as far
as boom enthusiasts are concerned) of 1999.

The flurry of
consumer activity has been most resilient in Britain's housing markets.
Nationwide, the country's largest construction society, reported that in
October annualized house price growth averaged 16.1% from the previous year.
October's clip scarcely dims in comparison from the annualized rate recorded
in May 2003, when Nationwide reported the figure as 17.9%.

Not since the
late 1980s, when Britain last suffered from a housing price bubble and its
subsequent puncture a couple years later, has the cost of acquiring a home
risen so quickly.

Meanwhile,
unsecured lending, particularly in credit cards, continues to grow by over 10%
at an annualized rate.

To be sure, the
unfounded optimism and lax mentality attendant amid an artificially cheap
credit marketplace fosters additional transgressions and excesses. A program
televised by the British Broadcasting Company on 29 October revealed advisors,
bankers and brokers of some of the country's largest financial institutions
had exhorted buyers to record incomes higher than they really earned on
applications to secure larger loans. Lenders have also eased rules permitting
borrowers to take out loans on houses amounting to 2.9 times greater than
their annual income, up from the typical 2.6<a id="_ednref6" title href="http://www.mises.org/fullstory.asp?control=1370#_edn6" name="_ednref6">[6]</a>.

Boom Endgame?

The most
important factor in explaining the relentless consumer borrowing remains the
Bank of England's interest rate tinkering. Growing increasingly concerned,
albeit at the eleventh hour, about the unmitigated accumulation of household
debts, Bank of England Governor Mervyn King and the Monetary Policy Committee
are expected to raise interest rates by a quarter point when it meets on 6
November, the first such rate rise since the early months of 2000.

The chairman of
Britain's Financial Services Consumer Panel, Ann Foster, has portended the
lean times ahead for British households resulting from climbing interest rates.
She recently said,"I have a horrible feeling that some people are in for
a nasty shock, particularly those who took out mortgages in low-interest rate
times. Some people have been borrowing to the limits because of high house
prices."

But without
self-inflicted financial fires to extinguish, where would central bankers find
employment?

As for Her
Majesty's government, it may want to take heed of the Conservative Party's
travails amid the housing boom and bust of the late 1980s and early 1990s,
which undermined the British middle class's confidence in the Tories' economic
policymaking competency. History may repeat itself for New Labour in the
twenty-first century, with Tony Blair being ignominiously remembered as George
W. Bush's articulate patsy and as another Labour"tax and spend"
prime minister.

In this latest
episode of"War, Prosperity and Depression," the best Britons can do
is brace themselves for the impending contraction of economic activity and
proliferation of corporate and household financial restructuring, including
bankruptcy, which are requisite to remove the distortions incurred during the
credit-induced boom. In short, they, like their American cousins, would be
wise to clench their pocketbooks tightly.


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Grant M. Nülle
is a Research Fellow at the Council on Hemispheric Affairs in Washington D.C.
He can be reached at grantn007@yahoo.com

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<div id="edn1">
<a id="_edn1" title href="http://www.mises.org/fullstory.asp?control=1370#_ednref1" name="_edn1">[1]</a>"The
parable of the unwise spender."  The Economist. June
5 2003.

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<div id="edn2">
<a id="_edn2" title href="http://www.mises.org/fullstory.asp?control=1370#_ednref2" name="_edn2">[2]</a>
"Swelling UK Civil Service
Raises Spending Fears." Financial Times. Oct. 16 2003.

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<div id="edn3">
<a id="_edn3" title href="http://www.mises.org/fullstory.asp?control=1370#_ednref3" name="_edn3">[3]</a>
"Gordon
feels the strain." 
The Economist. Oct. 2 2003.

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<div id="edn4">
<a id="_edn4" title href="http://www.mises.org/fullstory.asp?control=1370#_ednref4" name="_edn4">[4]</a>Bank
of England. Financial Stability Review, Issue 14. June 2003.

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<div id="edn5">
<a id="_edn5" title href="http://www.mises.org/fullstory.asp?control=1370#_ednref5" name="_edn5">[5]</a>"Record
borrowing points to UK rates rise."  Financial Times.
Oct. 29 2003.

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<div id="edn6">
<a id="_edn6" title href="http://www.mises.org/fullstory.asp?control=1370#_ednref6" name="_edn6">[6]</a>
"Debt
fears rise as UK house prices surge." 
Financial Times. Oct. 31 2003.


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As the U.S. Goes, So Goes Britain / Artikel mises.org - - Elli -, 10.11.2003, 18:06