The United Kingdom is the world’s fifth largest economy. During the 1980s, Margaret Thatcher instituted pro-market reforms that cured the economy of its British Disease of stagflation and enabled it to become the economic powerhouse of the European Union. Her immense achievement has been dissipated since 1997 by successively worse Labour Governments, whose policies have eroded laissez-faire capitalism, and moved the nation seemingly irreversibly to the economic stagnation of the continental European social market economies.
As a consequence, the United Kingdom is sliding down the Index of Economic Freedom. In 2010, it lost its place among the 10 most free nations, slipping to 11th place, and losing a significant 2.5 points. This points reduction reflected reduced scores in freedom from corruption, financial freedoms and monetary freedoms. Most significantly, the score for fiscal freedom came in at a low 61.8 and for government spending at a disgraceful 41.9.
In terms of fiscal policy and government spending, the United Kingdom ranks with Greece as one of the two basket-cases of the European Union. This shows up dramatically in a recent listing of advanced nations in terms of budget deficits as a per cent of gross domestic product, where Iceland ranks worst at 15.7 per cent, followed by Greece at 12.7 per cent, followed by the UK at 12.6 per cent.
The explanation for this depressing economic performance lies in 13 years of socialist policies, deployed with increasing intensity by successive Labour governments, especially since September 2008. A dramatic expansion of state ownership took place as the British government nationalized or seized ownership in some of its largest banks. Deterioration in its public finances is worse than in all other leading economies, with public debt now measured at 60 per cent of gross domestic product. The government deficit is high and rising under unsustainable levels of expenditure on a poorly functioning National Health Service, on a poorly functioning state education system, on unproductive contributions to the EU agricultural dole system, on misguided so-called ‘green’ energy programs, and on exploding levels of welfare benefits. The economy is also reeling under the impact of inward migration from poorly educated individuals and households from central Europe, fueled by excessively easy access to welfare benefits and housing subsidies.
Nor is the budget deficit a result of low taxes. In 2009, the top rate of income tax was 40 per cent (since jacked up to 50 percent), the top rate of corporate tax was 28 per cent, and value-added tax rates are back up at 17.5 per cent. Overall tax revenues as a per cent of gross domestic product are a whopping, wealth-destroying 39.7 per cent. A loose monetary policy threatens to return significant inflation to the United Kingdom.
The Labour Government has rejected out of hand all immediate measures to implement cuts in government spending, largely one suspects for political reasons, given the general election that must take place within the next four months. In consequence, the country confronts a very real prospect that its credit rating will be lowered, with all the consequences that would follow for a run on sterling and for interest rate hikes on its national debt. In a nutshell, the United Kingdom’s economy has taken a well-deserved pounding in the ring over a wearing 13 rounds (years), has been down for counts of 9 on at least two occasions, and is now hanging onto the ropes for dear life as global market forces pound it into a bloodied pulp, and as it waits agonizingly for the relief of the final bell.
As might be expected, all the old, tired, hydraulic Keynesians have exited their retirement homes and joined the ringside in their wheel chairs and on their crutches to cheer on the failing Keynesian experiment in which Prime Minister Brown is so thoroughly engaged. In a list of some 67 Keynesian economists begging the Labour Government to maintain its loose fiscal stance, we find such Emeriti as Victoria Chick (Emeritus Professor), Sheila Dow (Emeritus Professor) Geoffrey Harcourt (Emeritus Professor), Grazia Ietto-Gillies (Emeritus Professor), Alan Kirman (Emeritus Professor), Lord Peston (Emeritus Professor), Robert Rowthorn (Emeritus Professor), and John Weeks (Emeritus Professor) as well as the usual list of somewhat younger hydraulic Keynesian suspects from the United States. Interestingly enough, on the other side of the ring, begging the sagging candidate to go down for the final count, we find just 20 non-Keynesian economists, none of whom appear to be Emeriti.
The $64,000 question, of course, is to which of these two voices will a majority of the UK electorate respond, the tired past or the vibrant future. The answer, one might think must be simple. Seldom can a government have come to the polls so battered and with such a string of failures to its discredit. Unfortunately, the situation is more complex. Since I emigrated to the United States in December 1983, I have watched with increasing dismay and sadness as my countrymen have succumbed to the Sirens of fairness and equity and have turned increasingly away from the wealth-enhancing goals of economic efficiency. So vulnerable has that electorate become to the specious demands of politicians for rational sacrifice, that many, perhaps most of them, now despise the selfish gene on which their survival as a small-island race ultimately has always depended. When the selfish gene abandons its innate selfishness, its viability is directly jeopardized. At best, the selfish gene ends up on the life-support sparingly provided by the hostile social market economy upon which it has allowed itself to depend.
The United Kingdom hovers on a margin of economic self-destruction as its electorate takes to the polls, most probably in late May 2010. My fingers are crossed that the selfish gene will pull itself together and do what it must. The unfocused and lost voices that I hear from across the Atlantic Ocean, guided by the constant drumming of the Keynesian impulse through the left-leaning British media, do not greatly reassure me that this most fervent wish will come to pass.
Hat Tips: Diana and Maggie