Obamanomics

America shows that austerity cramps growth, stimulus aids it. The potential of the UK labour market depends on strategic investment.

The most valuable economic asset any country has is its people. And when those people are squeezed by circumstance, policymakers need to ask themselves what they can do to support the workers who form the very engine of economic growth.

Despite protestations from the Office for Budgeting Responsibility, data from the Organization of Economic Cooperation and Development suggests that the UK is back in recession. With pressures mounting, especially on the middle that bear the brunt of an economic downturn, it is time for policymakers to turn their attention to what can be done to help workers and their families and to get the country’s struggling economy back on track.

If necessity is the mother of invention, then the first thing policymakers should do is invest in good jobs, infrastructure, public services like education and health, and a progressive tax system. The current government’s austerity measures have thrust the UK into a double dip recession.  These policies are simply not working for the British economy.

The total number of jobless in the UK is at a 17 year high, with an unemployment rate of 8.4% and almost three million people without work. The jobs that are available lack appropriate wages, worker protections and opportunities for economic mobility. They are ‘just jobs,’ and they fuel the inequality that threatens long-term economic growth for the country.

At a time when the economy most needs jobs and job security, the UK government’s fiscal consolidation is forcing redundancies in public sector employment. This is a damaging strategy, as public sector downsizing during a downturn comes with negative externalities that exacerbate unemployment, exert pressure on already weak aggregate demand and fuel uncertainty. Alternatively, investments in public services like education and health not only help build human capital, but the very provision of these services employs workers, which aids the current economic situation.

Investing in education is also key to promoting economic mobility, benefiting communities across the country. And yet, as the importance of educating young people becomes all the more critical, the latest UK budget shows cuts to education funding. This kind of short-sighted thinking not only damages the recovery, it jeopardizes long-term growth.

Infrastructure projects can pay dual dividends, too, by improving the nation’s competitiveness and creating jobs that act as a stimulus to aid recovery. Infrastructure projects are a way to create direct jobs in the near term in which workers are deployed for a finite period of time making it easier to use this as a counter-cyclical measure. And better infrastructure helps private sector operations as well, contributing to productivity.

Another way to help the squeezed middle now is to ensure that at a time when wages are stagnant, targeted tax measures are helping workers. In the United States, that took the form of a bipartisan agreement to cut payroll taxes. The Institute of Public Policy Research’s Tony Dolphin saw the multiplying effects this policy had stateside, and called for a similar measure in the UK. Temporary cuts to National Insurance would ensure that hardworking families have more money in their pockets during these difficult times, and in turn could circulate that money in the economy.

Working towards a more progressive tax system will also help the squeezed middle. Unfortunately, the budget unveiled on March 21st moved in the opposite direction, courtesy of Value Added Tax increases, which hit the less well-off harder while the top rate of income tax declines. These are exactly the wrong moves at the wrong time.

Strategic investments like those detailed above not only put the UK on a path to economic recovery, they also help address the pernicious problem of inequality, which itself is a drain on growth. Issues of inequality in the UK are not new, but they are getting worse. Income inequality is higher now than it has been since the period just after the Second World War. Turning around this damaging trend will be key to securing a stronger economic future.

At the close of 2011, the New York Times ran a lead editorial on ‘Britain’s Failed Experiment.’ It called for turning away from doctrinaire austerity measures and focusing on growth through “wiser policies, mixing short-term stimulus with long-term deficit reduction.”

It is not too late to change course.

Call it plan B. Call it Obamanomics. Whatever we call it, it will certainly be a strategic investment in strengthening the middle, so that communities across the country can play their part in contributing to the economic recovery.

Jennifer Erickson, Director of Competitiveness and Economic Growth at Center for American Progress

Sabina Dewan, Director of Globalization and International Employment at Center for American Progress

This article appears in the latest issue of Fabiana