Barack Obama Bests Britain's David Cameron in Economic Recovery Efforts

The fall of Lehman Brothers in 2008 sent shockwaves in the financial markets. Since the world markets are interwoven, many countries in Europe as well as the U.S. are still reeling from that financial collapse and continue to struggle with high unemployment. Though they faced the same challenges, these affected countries did not follow the same set of economic policies to deal with their problems. Nowhere are the effects of those contrasting policies more evident than in the U.S. and United Kingdom. Economic data shows that President Obama’s course of action has yielded more economic benefits than the policies put in place by the conservative government in Britain.

The Bush administration bequeathed a cratering economy to the Obama administration. At the end of 2008 and early in 2009, the economy was losing about 700,000 jobs every month. All in all, the economy shed almost 9 million jobs before the great recession was officially over. The job losses occurred in all the major sectors of the economy. For instance, between the end of 2007 and midway through 2009, construction, retail, and “professional and business services” each lost more than one million jobs. Moreover, there were a staggering two million job lost in manufacturing. 

Worse yet, the economic collapse has caused the most devastating foreclosure crisis in generations. In the first six months of 2009, about 1.5 million people had lost their homes to foreclosures. By the year’s end, the number of foreclosures reached four million and nearly a quarter of homeowners were either about to be foreclosed upon or could not keep up with their mortgage payments. During Obama's first year in office, it was estimated that close to 11 million homeowners owed more on their homes than these houses were worth. Furthermore, trillions of dollars of homeowner wealth had simply vanished.

At the beginning of his administration, Obama had two formidable challenges: he needed to create a plan that would first prevent the Great Recession from turning into the second Great Depression; then, he needed to restore economic growth.  At that point, the Congressional Budget Office (CBO) projected that the output gap, which is the difference between what the economy is capable of producing and what it is actually producing, for the year 2009-2011 would be $2.7 trillion. 

This output gap was caused by the economic slowdown and the severe curtailment in consumer spending, which accounts for 70% of economic activity because consumers, mired in debt and faced with the real prospect of losing their jobs, have not been spending much. As a result, many businesses could not sell their products and would, consequently not hire any new employees. In order to stop that vicious circle, the government needed to increase spending. It was against that backdrop that Congress enacted the stimulus bill, which has been the cornerstone of President Obama’s economic policy as he seeks to revive the economy.

Although there is indication that the $814 billion stimulus bill has not been large enough to fully close the $2.7 trillion output gap, evidence shows that the bill has succeeded in dramatically reversing the downward trends of the economy. A study by Alan Blinder, a professor at Princeton, and Mark Zandi, a former John McCain economic adviser, found that the stimulus bill has created nearly three million jobs and contributed more than $450 billion to the GDP. It also claimed that the unemployment rate would have reached 11% if there had not been stimulus bill. A report by the Congressional Budget Office, a nonpartisan agency, confirmed that the bill did indeed create more than 2 million jobs. More importantly, the economy has added jobs in 22 consecutive months, and the economy has grown at a yearly rate of 3%.

Conservative politicians have vehemently criticized the stimulus bill. In fact, no republicans in the House voted for the bill. They argued that the best way to grow the economy is to cut government spending. This gospel of austerity has been implemented by David Cameron, Britain's conservative Prime Minister, after he came to power in 2010.  Instead of being on a path to recovery, England's economy has been floundering. The estimated GDP for 2011 was a stunning 0.8%. Even worse, the economy shrank by 0.2% in the final quarter of the year, and  a recent report indicates that the country is on the verge of another recession.

The question that arises is why simulative measures have succeeded in restoring economic growth whereas austerity failed to deliver. Paul Krugman, economics professor at Princeton University, provides the clearest explanation. He notes that while making drastic cuts could revive the fortunes of a corporation, this strategy would fail to fix a country’s ailing economy. Corporations sell most of their products or services to non-employees, whereas countries tend to sell most of what they produce to their own citizens. Thus, a corporation could increase its bottom line by reducing its workforce since, theoretically, it would not be relying on those fired workers to buy what it is selling. 

On the other hand, in the U.S., six out of seven American workers work in the service sector, which is completely shielded from foreign competitors. Therefore, when governments that heavily depend on their domestic market for most of their economic activity engage in massive cuts, their unemployment rate spikes. As people lose their jobs, there is a sharp drop in consumer spending. Business sales suffer because of the lack of demand. Then corporations must not only stop hiring new employees, but also let current employees go, and government revenues plummet. Even though these austerity measures have been intended to curb government deficit in order to spur economic growth, they end up producing a more bulging deficit, high levels of unemployment, and a great deal of human misery.  Many countries in Europe, most notably the United Kingdom, are trapped in this vicious circle.

Although there is tangible evidence that austerity measures are not the best prescription for a country emerging froma financial crisis, many political leaders and even some economists in the U.S. continue to advocate such an approach. The economy still has a long way to go before it could return to its pre-recession levels. However, there is ample evidence that indicates that the stimulus bill — despite the protestations of Republicans — has managed to breathe new life into an economy that was on life support.

Photo Credit: Wikimedia Commons

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Peter Prime

I have been following and reading about politics and policy for a long while. I like to read a variety of sources from magazine, newspapers to blogs. Aside from my interest in politics, I like to play soccer, and tennis. I also follow both sports. I used to be a big fan of Andre Agassi and I like watching the Brazilian soccer team.

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