Call me crazy, but I have a touch of Olympic fever. While I love watching the sports, what really caught my eye during yesterday’s opening ceremonies was what a massive government stimulus package the Olympics really are. In fact, roughly £11.5 billion ($18 billion) in government funds have been spent on these games, about half of that going to infrastructure spending. Add in the £10 billion ($16 billion) in total revenue (with roughly £2 billion coming from foreign tourists) expected from these Olympics, and that is a nice little stimulus package for the British people. To be precise, that is nearly £350 ($550) for every person living in the United Kingdom. That would be equal to a stimulus package around $170 billion in the United States today.
So, why do we care about stimulus in Britain? Because the U.K. is a great parallel example to possible economic policies in the U.S. Early in the crisis, the newly elected conservative government in Britain decided to impose steep austerity measures and make massive cuts to government payrolls. The goal was to put Britain on a sustainable fiscal path, but the immediate consequences were hundreds of thousands of job losses. In many ways, these federal cuts in the U.K. are parallel to what we have seen in most states in the U.S. where budgets have been slashed, workers laid off and pensions dissolved. The economic consequences have been shockingly similar in some ways and widely divergent in others.
Both the U.S. and U.K. face 8.1% unemployment, but U.S. GDP is growing at around 1.5-2% this year while British GDP is shrinking at around 0.7% this year. So what explains this massive difference? Some might think it is the actions of the Federal Reserve, but the Bank of England has also engaged in quantitative easing to the tune of £375 billion (roughly $600 billion) since the crisis began in 2008. That may not sound like much compared to the roughly $1.9 trillion in balance sheet growth the Fed has undergone, but it is significantly more per capita. The BOE actually provided roughly $9300 per capita in stimulus compared to the Fed’s roughly $6100 per capita. So, if they spent 50% more, why are they getting worse results?
Some people will see these results as a failure of QE. Others will see them as a sign of how much more connected the British economy is to the European crisis. The facts also indicate that the roughly $800 billion stimulus package helped the U.S. economy restart while British debt reduction measures have constrained growth in the U.K. What is perhaps more shocking is that the markets have not viewed debt and deficit reduction as a signal of fiscal sustainability the way the British government had hoped. If anything, their austerity measures were completely lost on the bond markets. Despite the fact that our dysfunctional Congress is openly admitting they will not deal with the fiscal cliff until after the November elections, the U.S. is still paying less to service short term government debt (3 years and under in maturity) and long term government debt (10 years and longer in maturity) than the British government.
So, what is the take away here? The obvious macroeconomics lesson is that a crisis is a terrible time for austerity (remember: stimulus now, austerity later). The financial lesson is less clear. The U.S. still faces a great deal of fiscal uncertainty, but the fact that we are growing and it is costing the government basically nothing to service U.S. debt means that with even a modicum of political will (I know, that seems doubtful some days), the U.S. should be in pretty good shape in the long term. Maybe I am an optimist, or maybe comparing us to Britain or anywhere in Europe makes it easy to paint a rosy picture, but with the obvious growing pains the developing economies are facing, the 5-10 year time horizon still looks pretty good for the U.S. economy. So, I would not be afraid to go long on a few domestic investments these days.