Illustration by Tadaomi Shibuya
Entering the Bank of England is like walking back in time to the old British Empire. Its brass door is attended by the Pinks, men in black hats and pink tailcoats. Vast meeting rooms are decorated with richly colored carpets, high ceilings with gold filigree and ornate furniture. Between rooms, the marble floors bear monetary-themed mosaics. One depicts the development of the British pound. Elsewhere, the mosaics take the form of constellations — a reminder that the empire and its economy once dominated everywhere you could see the stars at night.
Muir Vidler for The New York Times
Adam Posen at the Bank of England in August.
One morning this summer, I went to the bank to visit Adam Posen, a member of its Monetary Policy Committee, the custodian of the pound. With bright red curly hair and a trim beard, Posen, who is 46, stands out in all the M.P.C.’s official photographs. He is “ fatter” and “fuzzier” than the other officials, he joked. Posen also happens to be only the second American economist ever to serve on the committee.
It’s impossible to imagine the uproar if President Obama ever nominated a British academic to work at the highest level of the Federal Reserve. But when Posen arrived, in September 2009, his job was to provide an outsider’s perspective. The bank was trying to steer Britain through the global financial crisis, and Posen seemed like a uniquely perfect fit. In the late 1990s, when he was a 30-year-old economist, his contrarian critique of Japan’s central bank and finance ministry helped that country put an end to its so-called Lost Decade. In the years since, Posen has become a well-respected adviser to (and critic of) many of the world’s key financial institutions. With this appointment, Posen crossed the line from scholar to decision maker. It was the first time that he had real power.
Posen arrived in London after the acute panic of the financial crisis had given way to the long slog we’re still in. At that point, policy makers around the world were given the task of assessing the damage and devising a plan that would best position the economy to function at normal levels. The United States had already responded with a roughly $800 billion stimulus package. In the spring of 2010, British voters went in another direction. They elected Prime Minister David Cameron, who had promised to reset the economy by severely cutting government spending, which would lead to significant public-sector layoffs. The economy’s only chance to return to long-term growth, Cameron argued, would be a painful, but brief, period of austerity. By shrinking the size of an inefficient government, Cameron explained, the budget would be balanced by 2015 and the private sector could lead the economy to full recovery.
Today these two approaches offer a crucial case study and perhaps a breakthrough in an age-old economic argument of austerity versus stimulus. In the past few years, the United States has experienced a steep downturn followed by a steady (though horrendously slow) upturn. The U.S. unemployment rate, which shot up to 10 percent at the end of 2009 from 4.4 percent in mid-2007, has now dropped steadily to 7.7 percent. It might be a frustrating pace, but it’s enough to persuade most economists that a recovery is under way.
The British economy, however, is profoundly stuck. Between fall 2007 and summer 2009, its unemployment rate jumped to 7.9 percent, from 5.2 percent. Yet in the three and a half years since — even despite the stimulus provided by this summer’s Olympic Games — the number has hovered around 7.9. The overall level of economic activity, real G.D.P., is still below where it was five years ago, too. Historically, it’s almost unimaginable for a major economy to be poorer than it was half a decade ago. (By comparison, the United States has a real G.D.P. that is around a half-trillion dollars more than it was in 2007.) Yet austerity’s advocates continue to argue, as Cameron has, that Britain’s economic stagnation shows that the government is still crowding out private-sector investment. This, they say, is proof that austerity is even more essential than was first realized. Once the debts have been paid off and the euro zone solves its political problems, the thinking goes, the British economy will bounce back quickly.
When I visited Posen this summer, he refused to publicly criticize a sitting administration’s policies, but every time the topic of austerity came up, he was unable to hide his frustration. Posen’s term ended in August, and his subsequent nondisclosure agreement expired last month. Now he wants to persuade everyone he can that Britain should abandon its austerity program. He says that he has a solution that would quickly return healthy economic growth. His critics say that his prescription would bring about another financial panic. But whether you think he’s right or wrong depends on what you make of the data.
Economics often appears to be an exercise in number-crunching, but it actually resembles storytelling more than mathematics. Before the members of the Monetary Policy Committee gather for their monthly meeting, they sit through a presentation from the Bank of England’s economic staff. The staff members take the most recent economic data — G.D.P. growth, the unemployment rate and more subtle details gathered from interviews with businesspeople throughout the country — and try to fashion it into a narrative. Does a sudden spike in new factory orders represent a fundamental shift, or is it just a preholiday blip? Do anecdotal reports of rising food prices herald a period of inflation, or is it the result of a cold snap? Which story feels truer?
God Save the British Economy
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