Jewish World Review June 13, 2006 / 17 Sivan, 5766

Britain's economy is just like America's — minus the entrepreneurs and growth

By Niall Ferguson

http://www.JewishWorldReview.com | Summer is the time of year Americans are most likely to visit Britain, and Britons to visit America. Last week I bumped into one of my Harvard students in the West End. Meanwhile, Gordon Brown, chancellor of the exchequer and prime minister in waiting, is looking forward to his annual sojourn to Martha's Vineyard.

London on a sunny June evening is an alluringly vibrant place. The crowds spilling out of the pubs are abuzz with anticipation of the World Cup, hopeful of English victories.

No wonder Brown wishes he were in the United States, the one place in the world that will largely ignore the next two weeks of 24/7 soccer. As a Scotsman, Brown finds himself in a quandary because Scotland failed to qualify for the finals. He may insist that he is supporting England. But because the rest of his countrymen north of the border will back anyone — even Trinidad and Tobago — against the "auld enemy," no one believes a word of it.

Brown has other reasons for preferring the States in the summer. He loves to proclaim his admiration for the U.S. economy, lacing his speeches with phrases such as "supply-side dynamism."

American visitors to London can be forgiven for buying the claim that Brown has turned Britain into USA Lite. In many ways, central London has become a kind of low-rise Manhattan. The best restaurants are thronged by young men whose net worth is in direct proportion to the casualness of their attire. (If you're wearing a tie, your hedge fund must be in trouble.)

Yet appearances can deceive. Just as Brown sees only Martha's Vineyard in the summer, and therefore has no inkling of the misery of Massachusetts in mid-winter, so Americans who visit only London know nothing of this country as a whole. For the capital — that strange hybrid of Londhattan and Londonistan — has never been less British. Enriched by the growth of international financial services, populated by immigrants, London is to Britain what Hong Kong is to China.

It is when you take a closer look at the People's Republic of Britain that the absurdity of Brown's transatlantic rhetoric is laid bare. The most that can be said is that, in financial terms, Britain has become Mini-me to the United States' Dr. Evil.

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.

This reflects a crisis of public education as much as of public health — precisely the sectors into which Brown has been pouring money. As the Organization for Economic Cooperation and Development points out, an exceptionally large share of British pupils leave school without qualifications. It may be technically correct that the disabled are not unemployed. The reality is that they are unemployable.

Nor do employed Britons rate very highly in international comparisons. In terms of productivity, Britain lags behind not only the United States and Germany but France and even Italy.

So, as much as I love Britain in the summer, I see all around the first intimations of a coming winter of discontent. And I feel angry at the way Brown has gotten away with all this through a combination of dumb luck (the global economy has given him a free ride) and a distinctly Scottish ability to intimidate critics.

So go to Martha's Vineyard, Gordon. Enjoy. But this time do England a favor. Don't come back.