Two books judging international responses to the financial crisis will make uncomfortable reading for David Cameron – and us all
While Britain may have narrowly avoided a dreaded triple-dip recession, the government's programme of swingeing cuts to public-sector spending looks increasingly ill-advised as the economy flounders. Two books judging the wisdom of international responses to the financial crisis will make uncomfortable reading for David Cameron, albeit for different reasons.
In The Body Economic: Why Austerity Kills, David Stuckler and Sanjay Basu investigate the human cost of austerity, especially when governments have axed spending on healthcare and social benefits. Admiring President Roosevelt's New Deal of the 1930s, the authors establish a link between healthcare spending and productivity and argue that channelling stimulus funds into the former can ultimately fuel a recovery.
Some meticulous research supports their position. In Greece, cases of HIV infection leapt by 52% between January and May 2011 as the government slashed its budget for a needle-exchange programme targeting drug addicts. In Iceland, authorities rejected the IMF's calls for radical austerity, instead increasing "social protection" spending from 21% to 25% of GDP between 2007 and 2009. The result? Icelanders' health may even have improved during the crisis, while its economy grew by 3% last year.
The IMF takes considerable flak from Stuckler and Basu, who reckon countries acceding to its demands have fared poorly as a consequence. Contrasting the post-crisis fortunes of the US – where stimulus has provided some boost – with those of Britain, they also take aim at David Cameron for writing "prescriptions of austerity for the body economic, in spite of evidence that it has failed". Could the blame lie with Thatcherist ideology? With even the IMF now urging Britain to ease back on austerity, it seems a plausible explanation.
Given the academic backgrounds of Stuckler and Basu, and their heavy reliance on statistics, this is a surprisingly readable book with a compassionate tone. The inclusion of stories about ordinary individuals affected by austerity lends it a poignancy not typically found in economics literature.
While Stuckler and Basu advocate stimulus as a cure for the economic malaise, Stephen D King sees it as part of the problem in When the Money Runs Out: The End of Western Affluence. King, HSBC's chief economist, reckons neither stimulus nor austerity will engender a recovery at historical rates, with troubling implications for western societies. Countries that have previously spent their way out of stagnation did so when budget deficits were less egregious and growth opportunities more obvious. Austerity, moreover, seems doomed to failure without accompanying structural reforms.
Yet King leans towards austerity, blaming the "culture of entitlement" for a worsening of Britain's fiscal position even before the crisis. Social security spending, for instance, rose from 4% of national income in the early 1950s to nearly 14% in 2010. Put simply, we are living well beyond our means, and younger generations will pay for it.
Depressingly, King reckons stagnation could be the "new normal". Having increased by 36% between 1993 and 2003, per-capita incomes have risen by just 4% in the last 10 years – the lowest rate of growth in half a century. What's more, the nod to stimulus of quantitative easing appears to have backfired, prolonging the "melancholy" of stagnation.
King is not devoid of humour, joking in a passage about ageing populations that members of the Who have evidently changed their minds about dying before they get old. Mostly, however, this is a solemn and dispiriting treatise, whose final chapter of proposed fixes fails to leaven the mood. Among other things, the author suggests that ratings agencies assess creditors as well as debtors, central banks focus on nominal GDP rather than inflation and eurozone countries work towards fiscal union. But these appear to be ways of adapting to the "new normal" of stagnation instead of remedies for it. If stagnation is the progenitor of social unrest – as King asserts in earlier chapters – the prognosis remains bleak.
Nevertheless, King writes with an authoritative and erudite voice, making him an excellent guide through the convolutions of the financial crisis. Nor is he entirely at odds with Stuckler and Basu. "[In] some cases, austerity policies have made matters worse," he acknowledges. The big difference between the two books is scope. Stuckler and Basu operate within the parameters of the system; King deems it broken. Both are hard to ignore.
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