Tuesday, June 13, 2006

US versus Britain

A Harvard history professor, who splits his time between the US and his British home, gives an economic comparison between the US and Britain. Relevant because the same would hold true if you substituted Britain with New Zealand;

Like the U.S., Britain has been enjoying a debt-propelled consumption boom. Household debt has grown at an accelerating pace since 1997 and exceeds 150% of post-tax income. Saving has plunged. As long as housing prices kept rising, the party could go on. But since the market cooled in the second half of 2004, the hangover has begun. Last year, Britain's economy grew by a miserable 1.8%.

The other source of growth in Brown's Britain has been public spending. Real government spending has surged since 1999 at an average rate of nearly 5% a year. Significantly, nearly a third of all the increase in employment since 1997 has been in the public sector, which now accounts for nearly 6 million workers.

As in the U.S., this splurge has been financed partly by borrowing. And, like the U.S., Britain also has a large current account deficit because imports have grown faster than exports.

Yet in the case of the United States, these vices are in large measured compensated for by the underlying vitality of its entrepreneurs and workers. Can the same be said for Britain? The answer is a resounding no.

Superficially, to be sure, British unemployment is low. But the official statistics are deceptive. In fact, about 5.3 million adults of working age are dependent on benefits, and 2.3 million of them have been living on welfare for more than five years. The reason they don't show up in the statistics is that many of them are counted as unfit for work rather than jobless. Every day, 23 teenagers in Britain sign up for disability benefits.

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