At their press conference, Cameron and Obama will probably spend as little time as possible on the most significant disagreement between them: economics
At their press conference, David Cameron and Barack Obama will probably spend as little time as possible on the most significant disagreement between them. It is not over Afghanistan or Iran, Syria or the Falklands. It is over something much closer to home: economics.
For all their smiles and handshakes and jointly written op-eds, the Conservative prime minister and the Democrat president sit on opposite sides of one of the most important issues of our times: whether the public sector should be spending more to stimulate the economy. Almost as soon as he took office, Mr Obama encouraged his G20 counterparts to provide more stimulus – and failed to find many takers. For his part, Mr Cameron has committed his government to the most stringent spending cuts ever seen in Britain – and indeed in any country that we might consider similar. Compare that with Mr Obama’s hard won $787bn boost to the US economy. That is the divide, starkly put, and as the two leaders meet there is a welter of preliminary evidence that indicates Mr Obama’s call was the right one.
Take the most basic one: growth. Mr Cameron inherited an economy that was enjoying a tepid recovery – ever since, it has effectively flatlined. The UK’s economy has grown a mere 0.2% since the spending review of autumn 2010, while over the same period the US has expanded 2.2%. This cannot be pinned on the eurozone crisis, which only reached its climax last summer. Then there is the jobs market: in the year to last November, the UK’s unemployment rate rose 0.7 percentage points, while the US rate fell 1.1 percentage points. More to the point, it is clear that Mr Obama feels confident enough about the prospects for the US economy to make it part of his campaign for re-election. It takes a feat of imagination to see Mr Cameron doing the same with his economic policy. Indeed, it is telling that Labour has chosen to campaign this week on the very different records of the US and UK economies.
There is plenty of room here for caveats. First, America’s labour market remains in dismal shape – indeed the Nobel laureate Joseph Stiglitz estimates that on current trends it will take until 2025 for the US to return to full employment. Second, the roots of America’s problems lie in its housing market – and home prices continue to sink. This January,the economists who put together the well-respected S&P/Case-Shiller house price index remarked: “The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand.” In an election year, it is easy to imagine the US economy being sluiced with public money and political feelgood. What happens after that – and, crucially, how America achieves a lasting reduction of its public and household debt levels – remains shrouded in fog.
But there is a reason economists prefer to do their experiments in a lab: it leads to much neater results. Out in the real world, the most remarkable economic experiment has been taking place between the US, and the UK and Europe – or rather between the stimulus brigade and the austerity mob. And the early evidence in this long-running fiscal trial would suggest that the stimulus brigade are ahead.
When politicians and commentators suggest that all any country need do to get out of a predicament is copy another – whether that be Sweden or Germany or America – that is usually cause to worry. It ignores institutions, cultures and politics. Nevertheless, it is clear that the promises made by the coalition for its austerity strategy – that the public sector would retreat and the private would automatically advance – have not come off. Against that, the Obama strategy – use the public balance sheet, while the private sector is shrinking its own, and bail out industries other than banking – looks like a gamble that is paying off. In this real-world economic experiment, a lot more evidence is still to come in; but so far it doesn’t look good for Mr Cameron.
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