America is slashing spending – but its economy is still growing
IF you want to see what real austerity looks like, take a trip to the US. Real federal spending is set to slump by six per cent in the fourth quarter, compared with the same period a year ago, according to Goldman Sachs. That is a massive reduction, more than George Osborne wants to push through over the 6-7 years his cuts are supposed to last for.
The US numbers are only for federal spending but in recent years states and local governments have also slashed expenditure. The cuts in Washington’s spending have been caused by the provisions of the 2011 Budget Control Act, sequestration and the partial government shutdown. Cuts next year are unlikely to be as big.
Taxes have also been hiked drastically: personal taxes and social insurance contributions rose by 2 per cent of disposable income in January, primarily because of the expiration of the 2011 payroll tax cut. But despite all of this, the US economy is still expected by Goldman Sachs’ economists to grow by 1.7 per cent this year, with consumer spending up by 2 per cent and capex by 2.7 per cent year on year. It is amazing that the US has done roughly as well as the UK this year or slightly better.
There are many reasons for America’s resilience in the face of such intense headwinds. One often overlooked fact is that it boasts a series of massive, highly competitive urban economies, as analysed for the American Enterprise Institute by Mark J Perry, a brilliant professor of economics at the University of Michigan. The New York, Los Angeles and Chicago metropolitan areas produce more economic output annually than Sweden, Norway, Poland, Belgium, Argentina and Taiwan. New York City’s $1.33 trillion economy would rank as the 13th biggest economy in the world, ahead of Spain, Mexico and South Korea. Los Angeles (with a GDP of $765bn) was larger than Saudi Arabia and Switzerland. Chicago’s economy ($571bn) is larger than both Sweden and Norway. Houston, Washington and Dallas all had bigger economies than the likes of Austria or South Africa. US urban areas account for 11 of the top 50 and 36 of the top 100 economies in the world. The US remains in deep trouble, the Fed is still doing QE, Obamacare has turned into a political catastrophe, and President Obama and the Republicans are both in crisis. But one underestimates the underlying strength of the US economy at one’s peril.
CO-OP ROW TO HIT BOTH PARTIES
THE Co-op’s woes are primarily a problem for the Labour party, which has very close ties to it: the Rev Paul Flowers, the bank’s former chairman, was a member and councillor; and the Labour party continues to be in receipt of the Co-op’s largesse. But George Osborne, in a moment of intellectual confusion, also nailed his colours to the Co-op’s mast; at the time, he was keen to promote alternative forms of corporate governance, not least with his laughably ill-thought out “employee rights for shares” plan. There is a genuine place for mutual models of ownership, of course, and John Lewis, Nationwide and LV have done very well out of them. But Osborne’s foray into this sphere was a disaster.
As recently as in July 2012, he welcomed the ill-fated and subsequently cancelled decision by Lloyds to sell a large number of its branches to Co-op.
“This is another step towards creating a new banking system for Britain that gives real choice to customers and supports the economy," Osborne said. “The sale of hundreds of Lloyds branches to the Co-operative creates a new challenger bank and promotes mutuals.” Osborne still seemed to believe that the cooperative form of governance was self-evidently superior to that of PLCs, or at least deserved to be promoted, even though for the Co-op at least it made it harder to raise the capital it needed. The affair will hurt Labour the hardest – but it won’t leave the Tories unscathed either.
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