The Conservative Party in Britain won the general election in 2010, inheriting one of the worst economies in recent history. New Labour under Tony Blair and Gordon Brown had failed to spot the inherent flaws in their economic platform and sat helpless as the financial sector collapsed in free fall in 2008. The Conservatives won the election based on Labour's disastrous handling of the economy, successfully arguing that Labour had abused the public's trust and could not be relied on to steer Britain back to economic prosperity.
In the US, the Democrats swept to power in 2008 after George Bush did much the same. Having presided over the economy for 8 years, the Republicans took full blame for the catastrophe on Wall St and John McCain felt the impact at the voting booths. The public bought into the Democrat's argument for a better regulated, more equal society and Obama took office on the basis he would turn things around.
There is an obvious parallel between the two scenarios - in both countries, the party presiding over the economic meltdown in 2008 lost the subsequent election. But the differences were striking - the Conservative in Britain were not offering a platform of more regulation and more equality, instead they promised sweeping austerity measures and less regulation in order to get the economy back on track. In America, President Obama passed a multi billion dollar stimulus package and attempted to regulate Wall St, promising a dose of Keynesian measures to rebalance the economy.
The Conservatives achieved an astonishing feat in convincing the public that their ideology would work, and much of the credit should go to Margaret Thatcher who successfully shifted the country so far to the Right during the 1980's that Labour had little choice but to follow to remain electorally relevant. New Labour under Tony Blair came to power in 1997 on a platform of conservative economics. They promised tax cuts, deregulation and a pro business culture that was completely alien to the party's roots. Tony Blair and Gordon Brown went about turning London into the financial capital of the world, presiding over a decade of mass deregulation and transforming the city into a tax haven for the wealthy, and a flexible labor market for big business. The city turned Britain into an economic powerhouse while times were good. As financial whizz kids on both sides of the pond figured out new, complex trading techniques, buying and selling mortgage backed securities (while betting against their own investments at the same time), the country radically changed from an industrial based economy to a financial services based economy. Trading and increasing debt was the name of the game, and the banks were making a fortune out of it.
Simultaneously, Wall St was transforming America in much the same way, and it worked while everyone drank the Koolaid. But when reality set and the debt was called in, the economy collapsed like a deck of cards turning Wall St and the city of London into a parasitical entities rather than an engine of economic growth.
Gordon Brown, then prime minister quickly reverted back to traditional Labour/Keynesian economics and ordered the nationalization of several major banks and injected billions of pounds into the economy. He was widely credited with saving the banking system and pulling the economy back from the brink. Barack Obama passed the American Recovery and Reinvestment Act of 2009, allocating $831 billion of stimulus money over 10 years. The effects were as follows:
Writes Frank J. Lysy on the graph above:
The graph above shows the path of GDP growth in the UK and in the US by calendar quarters from the pre-recession peaks in GDP (set equal to 100). This peak was in the fourth quarter of 2007 for the US, and in the first quarter of 2008 for the UK. The downturn started in the US. The UK economy then dropped further and faster, as the financial sector was at the center of the collapse and the financial sector (with London as the most important international center) is a larger share of the UK economy than it is in the larger and more diversified US economy.
The US economy began to recover soon after Obama was elected and was able to pass and start to implement the fiscal stimulus package (along with aggressive measures by the US Fed and other actions). The UK economy also began to turn around at about the same time. The Labor Party Government under Gordon Brown was following similar measures as were being implemented under Obama in the US. Both economies then began to grow, at roughly similar rates.
But then the UK held the May 2010 elections, which the Labor Party lost. The Conservatives (in coalition with the Liberal Democrats) took control of the Parliament and of the government. David Cameron became Prime Minister. He immediately announced that an aggressive austerity budget would be drawn up and implemented, and it was, starting in the summer of 2010. This was the tenth quarter from the pre-recession peak for the UK of the first quarter of 2008.
The impact has been clear and stark, as shown in the diagram above. The economy reached a peak in its recovery in the tenth quarter, but then the recovery stopped.
The numbers are clear: The stimulus worked in America and in Britain, then dropped off in the latter when austerity measures were passed by the new Conservative government.
The Tories managed to convince the British public that the same economic philosophy that caused the crash in the first place would work if implemented with even more severity. And in the US, Mitt Romney is trying to argue the same to the American public.
But in America, it doesn't appear to be working despite Republican attempts to tie the poor state of the economy to Obama. There is no doubt that things are bad in America - the deficit is rising, unemployment is still above 8.1% and poverty is increasing. However, Americans are not buying into Romney's argument that austerity and deregulation are the keys to turning it around. An article in the National Journal attempts to explain why:
Each passing day and each new poll brings further evidence that the Romney team has miscalculated. Obama has erased a once-formidable Romney lead on the question of who would handle the economy better as president; in some polls, the president has actually seized the advantage on that front. Economy-first independent voters are drifting Obama’s way. Voters increasingly say that the economy is on the right track.....
Voters appear to be prizing that (albeit slow) progress over the economy’s still-terrible levels of output and job growth. This attitude fits at least one historical pattern of American politics: University of Michigan economist Justin Wolfers studied more than 600 gubernatorial elections across recent American history—a much more robust sample size than presidential elections—and found that voters were much more likely to retain an incumbent when unemployment was falling, regardless of how high the rate was. It’s all about trajectory, no matter how slow or slight. Three years ago, the unemployment rate stood at 10 percent, meaning that it dropped almost 2 full points during Obama’s first term; those are the headlines voters remember, regardless of how the job data are interpreted.
As Jared Bernstein, the former top economist to Vice President Joe Biden, put it: “It makes a great deal of difference if you are sailing into a storm or sailing out of it.”
It finally looks like the public are catching on to actual facts despite the overwhelming propaganda coming from the Right, because there's only so long you can sell an ideology that doesn't work. In Britain, the Conservatives are in the process of making themselves unelectable for the next generation as the public has grown tired of cut after cut after cut with no results. In America, it looks like voters savvied up faster - they understood in 2008 that more Republican economics would hurt rather than help, and they understand again in 2012 that despite the slow progress, they are at least on the right track.