UK economy: Time for the thin upper lip

LONDON — At half past twelve, Britain's 39-year-old chancellor of the Exchequer rose from his place and ushered in a new era of austerity in British life.

With national debt, according to the Institute of Fiscal Studies standing at £770 billion ($1.1 trillion), and annual interest payments of 70 billion and rising, Osborne called this budget "unavoidable."

When he sat down an hour later he had ladled out pain to everyone. The headline is a rise in VAT (a sales tax on everything except food and children's clothing) from 17.5 percent to 20 percent starting in January. Then there's a £2 billion ($2.9 billion) tax on bank balance sheets (based on a formula so complicated it is impossible for me to explain). And an increase in the capital gains tax for people earning more than £50,000 ($74,000) a year.

But that's only a portion of the hurt. The government is going to shrink and shrink fast. Except for the National Health Service, departmental budgets are going to be cut by a quarter over the next five years. As the state is the source of 50 percent of national income in Britain, shrinking its size so dramatically is a risk.

Osborne and his boss, Prime Minister David Cameron, knew this austerity would be a tough sell and like farmers preparing a long fallow-field for new planting, they and their Liberal Democrat partners in Britain's coalition of the Con-Dem'd, have spent much of the six weeks since they came into office telling the people of the United Kingdom that things were going to hurt.

How bad will it hurt? It doesn't bear thinking about.

If the banking collapse and contraction of 2007-2008 represented the worst economic downturn since the 1930's then the austerity measures needed to bring down Britain's deficit — a bit more than 11 percent of GDP, the highest in Europe — will have to be of a similarly historic nature. That's a reasonable summary of the government's basic line. Early indications are that Cameron's attempt to soften the soil of British society sufficiently to receive the seed of austerity has succeeded, if this poll is any indication.

One important part of the strategy was to raise the specter of Freddy Kruger, aka the international markets. Even before the coalition was formed, Osborne was warning that the currency and bond traders were lined up at their desks in London itching to do to Britain what they did to Greece, destroy the currency and demand mafia-like interest rates on government bonds.

Osborne referenced the markets within the first five minutes of today's speech even though he had already begun to appease them. Last week £10.5 billion ($15.5 billion) worth of projects that had been green lit by the Labour Government at the start of the year were shelved.

Big-ticket items and small-ticket items were on the list: a billion pounds in re-training programs and relief for the unemployed, a £450 million ($665 million) new hospital, and free swimming for children under 5 and senior citizens.

The headline catcher was the cancellation of an £80 million ($118 million) loan for new equipment to Sheffield Forgemasters, a firm specializing in the manufacture of steel casings for nuclear reactors. That's "loan" not a "gift," the money would eventually have been repaid. But the business is in the constituency of Deputy Prime Minister Nick Clegg of the Liberal Democrat Party and perhaps an example had to be made so the message would be clear: there will be no favoritism when shrinking the state.

There will be much more to come.

Last week, the prime minister repeated the mantra that the deficit had to shrink in order to grow the economy. "You can't put a blindfold over your eyes and pretend that the world is not like that, because it is."

Well, allow me to state the blindingly obvious: the problem isn't that the state has grown too big. In the developed world, at least, free-market capitalism can no longer generate enough jobs to keep the working population in something like full employment and so the state has to make up the difference. If the free-market could, then 30 years ago, when Margaret Thatcher and Ronald Reagan bestrode the English speaking world, de-regulating industries, privatizing state enterprises and crushing unions, then a steady-state of full employment would have been the result. That never happened.

The reasons for unemployment have nothing to with right-wing doctrine. The state doesn't stifle through regulation and by siphoning off in taxes money that might otherwise flow into the economy in the form of investment as right-wing think-tankists claim. (Actually, France is the one advanced economy where the right-wing think-tankists case can be plausibly made.)

Advances in technology and outsourcing of work to low-wage economies over the last three decades, plus management's pursuit of "productivity" — a clever way of getting fewer people to do more work for less money — have made full employment in Britain (and the U.S.) virtually impossible.

In Britain it took the New Labour government providing employment, either directly through increased government spending on the National Health Service, education and infrastructure, or indirectly through seed money and tax breaks to businesses small, like Sheffield Forgemasters, and large, like Nissan and Siemens, to create a sustained period of low unemployment. If Tony Blair and Gordon Brown hadn't spent that money, the unemployment rate would have been in double digits.
On top of that the financial services industry — de-regulated and virtually unsupervised by government — has grown out of all proportion.

The primary services it provides are to yacht manufacturers and Maserati dealerships as the speculators use their bonuses to buy boy toys. The money generated by speculators long ago stopped being recirculated into productive investment. One of the reasons Sheffield Forgemasters went to the government for a loan is that private capital was not available.

But let's not argue from theory and numbers now. Let's leave economics aside, after all life is lived in reality not between the covers of whatever edition of Paul Samuelson's Economics textbook you read in high school. Let's argue from anecdote.

The cover of the May 24 issue of The New Yorker shows a young Ivy League type hanging up his Ph. D. diploma in his boyhood bedroom while his anxious parents look on — all that expensive education and their son can't find a job. Knowing chuckles all around.

In the June 1 edition of The New York Times, former Clinton Secretary of Labour Robert Reich puts the notion of "entrepreneurship" replacing the state as a source of employment under the microscope. Reich notes a recent study saying that a surprising number of new entrepreneurs started businesses in the last three years, despite the recession.

But rather than saying this was a sign of optimism in the economic future he notes that many were set up by people over 50 and 60 who either lost their jobs and will never find another one or found the value of their 401k's slashed by the crash. They are self-employed "consultants" and "contractors" earning a fraction of what they used to without getting any of the other benefits of employment.

The picture created by these two anecdotes is of economies in which no one under 30 or over 50 can expect to have a full-time job. The unanswered question is, if that's the case, who or what will pick up the slack? Britain's new leaders are convinced it can't be the government — the markets won't allow it. But if not the government, then whom?

Final anecdote: Early in 1988 — at the height of Thatcherism — I went to Liverpool to do a feature on the city's relationship with soccer, the only thing that seemed to keep the city's spirit alive. Liverpool FC had not been defeated since the start of the season, Everton, the city's other major football team, had lost only once — when it played Liverpool.

Otherwise the city was in terrible condition, damage from riots earlier in the decade fueled by cuts to city services, racism in the police, and just general social malaise had not been repaired. Young people were fleeing unemployment, the tax base was eroding. The atmosphere was infinitely grimmer than the perpetually sluggish gray skies that hang over the city. I did my reporting and got on the train back to London. In the Liverpool Echo newspaper I noted that there was one page of help wanted ads and two pages of death notices. That seemed to describe the place perfectly.

Today, Liverpool is unrecognizable from that time. Through government funding of higher education and cultural anchors like the Liverpool branch of the Tate Museum the place has become hip again. It's population has grown. Enterprises have relocated there. But those businesses cannot possibly be expected to employ those who will lose their jobs as government money dries up.

In his pursuit of a statistical measure to keep speculators at bay, it is clear that George Osborne has not asked what is worse for his society: a big deficit, or the re-ruination of people's lives because the true source of so much post-industrial employment — the government — is being pared to the bone.