England and US Take Different Approaches

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I’m trying not to blog every day (my next blog will be near the end of the week), but I wanted to send something out that was timely.  Last week, I was interviewed for an article that was being written for The Fiscal Times.  This is an internet newspaper (www.thefiscaltimes.com).  I believe that The Fiscal Times is funded by Peter Peterson, who made his billions in private equity (co-founder of  Blackstone) and is interested in the same issues that I’m writing about.


The article was published on Monday.  Here’s the link if you want to read it.


As way of background, there are lots of faculty that do a lot of these interviews.  I don’t.  For me, it takes a lot of prep work and usually one sentence is lifted from an interview (or nothing is used).  But, this article was something that was interesting to me and the writer was particularly interesting.  I learned a lot by researching for this interview and from speaking with Elaine Povich.


I think that the school likes us to do these interviews because it gets our name out there.  But, for me, there’s a lot more bang-for-the-buck to try to write an op-ed piece.  It doesn’t take much longer to write (than to prep for an interview) and if it gets published, all of your thoughts are included (or most of them at least)!


Anyway, since I did the prep work for this interview, I wanted to share some of my findings and thoughts.  (The hard work is done…writing it down is easy.)


The interviewer was asking the question of why the US has been using a “stimulus” approach while the UK is opting for austerity.  The question was relevant because both countries ran deficits close to 10% of GDP last year and both have unfunded liabilities that are equal to about 4X their publicly held debt.  So, I thought that the writer’s (Elaine Povich) question was really good – why are these two countries taking such different approaches?  Here were some of my thoughts:

1. The UK has a new government and they have some time to work through austerity measures.  Our government is looking at November elections and responding accordingly – spending money for votes.




2. The UK has a system in which the ruling party sets the budget (and it really doesn’t get changed).  In the US, our politicians horse trade and I would argue that this will never lead to the optimal situation.




3. The UK’s budget is actually set by one person, the Chancellor of the Exchequer.  Once a year, he will set the tax rates and what each department will be allocated.  This means that one person is accountable for what happens.  If you are going to be accountable for the results, it is easier to make the hard decision.




4. The US is currently in gridlock.  Republicans don’t want any more spending.  Democrats are split.  Some don’t want to cut benefits and others want to cut spending.  It depends on what district they represent and how tough their election will be.  But this is certainly not an environment which would lead to austerity measures.




5. The British pound has been weaker and this will help their exports.  This makes it a bit easier to impose austerity measures at home.  (For Britain, it’s a perfect world to impose austerity measures at home and hope other countries keep spending.)




6. Even though the US has many problems, the dollar is still seen as a store of value.  It’s a reserve currency.  This has allowed the US to postpone handling our problems.  The UK doesn’t have this (and they fear a currency run).




7. The UK is expected to have lower growth than the US and this scares investors.  To some extent, they are trying to restore confidence through austerity measures.




8. The UK is fearful of being associated with some of their weak European neighbors.  We don’t have that problem.




9. The UK has lower unemployment than the US.  This makes austerity measures easier to announce.

There is one thing that keeps sticking in my head about what I learned – it’s the fact that the British Chancellor really has an incredible amount of discretion.  In other words, one person has the duty of making the numbers work.  I find this really interesting.


Without question, you could have the wrong person in this position.  In addition, I can’t argue with the fact that this system has resulted in Britain having identical problems to us – so it doesn’t seem to have provided much benefit.  But, if you told me that one person was going to set our budget and our tax rate, I’d actually take my chances rather than leave it to the group of 535 who are doing it now and who got us into this mess.  I want one person who recognizes that we have problems and is willing to try to solve it without expensive compromises.

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