Mushy Peas: Austerity bites

The U.K. economy will grow less this year than previously forecast, pushing the Bank of England to keep its main interest rate at a record low until the first quarter of 2012, the Confederation of British Industry said.

Gross domestic product will rise 1.3 percent in 2011, compared with an estimate of 1.7 percent in May, Britain’s biggest employers’ group said in quarterly forecasts released in London today. The CBI’s growth prediction for 2012 is unchanged at 2.2 percent.

The British economy barely grew in the second quarter and data this week may show manufacturing and services expansion slowed in July. The Bank of England will keep its key rate at 0.5 percent on Aug. 4, according to all 55 economists in a Bloomberg News survey, even after inflation was more than double its 2 percent target in June.

Widespread antisocial and criminal behavior by young and usually unemployed people has long troubled Britain. Attacks and vandalism by gangs of young people are “a blight on the lives of millions,” said a 2010 government report commissioned in the aftermath of several deaths related to such gangs. They signal, it said, “the decline of whole towns and city areas.”
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Politicians from both the right and the left, the police and most residents of the areas hit by violence nearly unanimously describe the most recent riots as criminal and anarchic, lacking even a hint of the antigovernment, anti-austerity message that has driven many of the violent protests in other European countries.

But the riots also reflect the alienation and resentment of many young people in Britain, where one million people from the ages of 16 to 24 are officially unemployed, the most since the deep recession of the mid-1980s.

When the recession began there were many wise words about having learnt the lessons of both the Great Depression and Japan’s long malaise. Now we know we didn’t learn a thing. Our stimulus was too weak, too short and not well designed. The banks weren’t forced to return to lending. Our leaders tried papering over the economy’s weaknesses – perhaps out of fear that if we were honest about them, already fragile confidence would erode. But that was a gamble we have now lost. Now the scale of the problem is apparent, a new confidence has emerged: confidence that matters will get worse, whatever action we take. A long malaise now seems like the optimistic scenario.

I’m told White House political operatives are against a bold jobs plan. They believe the only jobs plan that could get through Congress would be so watered down as to have almost no impact by Election Day. They also worry the public wouldn’t understand how more government spending in the near term can be consistent with long-term deficit reduction. And they fear Republicans would use any such initiative to further bash Obama as a big spender.

So rather than fight for a bold jobs plan, the White House has apparently decided it’s politically wiser to continue fighting about the deficit. The idea is to keep the public focused on the deficit drama – to convince them their current economic woes have something to do with it, decry Washington’s paralysis over fixing it, and then claim victory over whatever outcome emerges from the process recently negotiated to fix it. They hope all this will distract the public’s attention from the President’s failure to do anything about continuing high unemployment and economic anemia.

When I first heard this I didn’t want to believe it. But then I listened to the President’s statement yesterday in the midst of yesterday’s 634-point drop in the Dow.

I’m still trying to make sense of this global intellectual failure. But the results are not in question: we are making a total mess of a solvable problem, with consequences that will haunt us for decades to come.

The super-committee itself is a profoundly conservative and anti-Democratic entity, immune from public pressure and tasked with deciding between two bad choices—a so-called grand bargain that would significantly reduce the social safety net vs. deep across the board cuts at a time of economic peril. The idea of doing anything to stimulate the economy is totally absent from its purview. The scope of the committee itself, rather than who’s on it, is the real problem.