Almost all major economies had great difficulty dealing with the aftermath of the 2008 financial crisis—high unemployment, low growth and, for some, solvency concerns, and high interest rates on public debt.
Clearly, then, the best way to avoid the terrible problems that arise after a financial crisis is not to have a crisis in the first place. How can you do that? In part, one might hope, through better regulation of financial institutions. We turn next to attempts at regulatory reform.
An election in May 2010 led to a shift in power in Britain, with a Labour Party government replaced by a coalition dominated by the Conservative Party under the new prime minister, David Cameron. The new government was firmly committed to the austerity side of the great post-crisis policy debate, and it changed policy accordingly.
Unlike Greece or Ireland, Britain wasn’t under any immediate pressure to slash its budget deficit. Like the U.S. government, the British government was still able to borrow cheaply despite its large deficit. And the British economy was, if anything, even more depressed than the U.S. one, with fewer signs of recovery. The Cameron government believed, however, that preemptive cuts in public spending combined with some tax increases were necessary to preserve investor confidence and also that such cuts could boost the economy by improving confidence.
How have these policies performed? As of mid-2012, the experiment in austerity had yielded disappointing results. British economic growth was weak—in fact, considerably weaker than in the United States, even though U.S. performance was lackluster. And as Figure 18-9 shows, the hoped-for surge in business confidence that austerity measures were supposed to generate had failed to materialize.