Let me begin by stating that the debate should not be about what level of austerity is right for the UK, all the evidence suggests that there is no such thing, rather it should focus on what are the most effective ways to drive the economy out of its state of decline into one of growth, for that is the only way the national debt will ever be effectively reduce. The UK coalition government’s approach where austerity is the lead just isn't working, current economic policies have not only increased the national debt beyond all forecasts, but there is irrefutable evidence that they have stifled the recovery that started in 2010 under New Labour and any hint of growth since. All Cameron and Osbourne have succeeded in doing is to win the political debate as they came into power and to then control it thus far, but as I will argue below this success has been based on a gross misrepresentation of the financial facts and recent history, which has served to damage at best if not destroy confidence within the domestic market and the UK's standing within the international markets.
Compound this with an utterly oxymoronic approach to paying off the debt based on an imbecilic interpretation of what is required to create a recovery and you have the current governments total mismanagement of the nations finances. I then go on to look at what economic commentators from the opposing camp of opinion suggest the UK does when trying to cause growth and so reduce the debt, with ample evidence from Japan's last twenty years of 'balance sheet recession', advice that Dave and George really should listen to if the longest depression in UK financial history is to be curtailed as soon as possible.
This is not to say that there is no room for cuts (yes austerity) in areas of the pre-crash British economy, for example the ‘bonfire of the quangos’ was valid, the reduction of educational and health initiatives realised by umpteen consultants was eminently acceptable, but the slashing of University teaching budgets by 40% [1], the reduction in state school budgets [2] (Soho Parish (Pam’s ex) of 20% as an example), closures of Sure Start centres [3] were very much not justified, in fact these moves were incredibly short sighted, not to mention the privatisation of health services, reductions in budgets and closures of libraries etc etc [4]. These are examples of how the Conservatives have used the crash to implement their politically driven agenda, based on the propagation of economic falsehoods and myths.
And there is no doubt that the country was suffering New Labour fatigue, we had all had enough of Blair and Brown but, and this isn’t just a politically motivated observation, the economic facts speak for themselves. In the final five quarters of Alistair Darling's tenure we saw 3.1% growth, whereas since Osbourne took control growth in the economy reduced to minuscule levels before dipping back into recession [5] - more on this later - achieving less than expected in every quarter when compared to forecasts from all respected economic bodies.
One has to wonder that if Darling achieved that kind of growth within less than two years of one of the biggest economic crashes in economic history then I would suggest that something was being done right to nudge the economy and so debt reduction in the right direction. Then came Slasher Osbourne, the immediate message to everyone was that UK PLC was broke, that we were comparable to the soon to be defunct Greece, all of which sent out the message to the British people that we were on a sinking ship and so what happened, surprise surprise, everyone stopped spending and the country slid inexorably back into recession, which by the winter of 2010/11 was blamed on the weather – the mind is still boggling!
One has to wonder that if Darling achieved that kind of growth within less than two years of one of the biggest economic crashes in economic history then I would suggest that something was being done right to nudge the economy and so debt reduction in the right direction. Then came Slasher Osbourne, the immediate message to everyone was that UK PLC was broke, that we were comparable to the soon to be defunct Greece, all of which sent out the message to the British people that we were on a sinking ship and so what happened, surprise surprise, everyone stopped spending and the country slid inexorably back into recession, which by the winter of 2010/11 was blamed on the weather – the mind is still boggling!
Apart from the claim that the winter chill was the actual root of all evil, we have also repeatedly heard the argument from Slasher that the reason the national debt has increased beyond all forecasts and that the economy has returned to recession is because of the issues in mainland Europe and the rest of the world. Yes I concede that these must be an influence, but only between 11% and 17% (depending on what you read [6]+[7] - clearly 50% of all statistics are wrong) of the UK economy is export led, the rest of the national economy is household and government spending driven, and so it doesn't take a GCSE in home economics to see that if the message to everyone in the nation is that we are broke and that there are going to be cuts cuts cuts then naturally people within both the public and private sectors are going to assume that the future is more risky than it has been in the past and so they will prepare more for the rainy day than ever before. If there is nothing else driving the economy because the public sector is suffering drastic cuts and there is heightened nervousness in the private sector and there are lower levels of exports, then that can only mean reduced growth if not recession as well as reduced tax receipts (May 2012 down 7% on May 2011) and so further increases in projected borrowing - the negative feedback loop that everyone has been dreading but which Osbourne seems so reluctant to do anything about. And so in May of this year the government borrowed £17.9bn, £2.7bn more than a year ago. Worse, the total deficit for 2011-12 has been revised up by £3.2bn to £127.6bn, and the national debt is now £1.0134 trillion (95% of GDP) [8]
The solution to all of this, according to the economics genius that is Sir Slasher of Osbourne is ‘Expansionary Fiscal Contraction’, which was justified on the arguments that the country was broke, we needed to pay off the national debt as soon as possible otherwise credit ratings would be destroyed, the cost of borrowing would soar and we would be in a much worse situation.
In a word rubbish. First time I saw those three words I thought ‘what, sounds like oxymoronic claptrap to me’, but what do I know about economics? So imagine my surprise when reading of Larry Summers’ (US Secretary of the Treasury 1999 to2001 + Director of White House National Economic Council until Nov 2010 [9]) comments in April 2011 ‘I find the idea of expansionary fiscal contraction in the context of the world in which we now live to be every bit as oxymoronic as it sounds’. [10]
I was just reading the words and struggling with the semantics, but it seems that there is equally plenty of evidence to suggest that Osbourne and Cameron are struggling with economic theory, which in view of their position and education is a worry. For example, the IMF, who as we know The Slash references regularly to support his policies, studied the effects of specific fiscal measures in 15 advanced economies between 1980 and 2009, they found just 2 cases out of 170 in which fiscal consolidation turned out to be expansionary for the economy as a whole [11], and when, the report continues, interest rates are at zero the output cost (reduction in GDP and increase in unemployment) doubles – and where have interest rates been in the UK for the longest time in history? – so when looking at OEFC (Oxymoronic Expansionary Fiscal Contraction) which is after all only a theory, surely that is enough evidence to suggest that it might not work,and lo and behold all of the empirical evidence since its implementation does nothing except prove that it hasn’t worked to date and probably won’t.
Moving on to the next fallacy sold by Messrs C and O, the country was broke and comparisons to Greece were perfectly justified – simply not true. National debt in 2010 was 82.2% of GDP compared to Greece’s 149% (US = 94.2%) (Global Finance Magazine [12]),also 20% of UK debt is held abroad, the rest at home, with Greece it was the reverse [13], so no wonder the rest of the Euro zone has been running scared. There is then the issue of debt maturity, on the IMF’s list of 30 advanced economies published in April 2011 the UK’s average debt maturity was higher than any other developed country on the list, 13.8 years compared to Greece’s 6.7, twice as long as that of the US, Germany or Canada, none of which I hope you will agree could be classified as economic basket cases.[14] Further still, if you look at the history of UK debt to GDP ratio [15] then right now and with the forecast of what it will increase to we will still have lower levels of debt (as a proportion of GDP) than those seen throughout most of the 20th Century. Clearly there were a couple of wars to fight back then which were a tad expensive, but we have just gone through the biggest global economic crash since the 1930’s, these are extraordinary circumstances and I would suggest that the country is perfectly capable of paying back the debt, presenting it in any other way is not only reprehensible it feeds the psychology of failure and further destroys confidence.
Now I do not mean to play down the size and seriousness of the debt, it is big, but to misrepresent the facts by taking them out of context to then justify an economic approach that the IMF and many economists around the world knew to be questionable at best does nothing except reinforce the idea that the Bullingdon Boys are selling us a lie to justify draconian cuts to push their own agenda, namely that ‘It is more government that got us into this mess’ [16]
Once again a fallacious misrepresentation of the facts that government and so public sector costs - which Dave and Slasher have managed to conflate in the public psyche - are the problem. Before the crash in 2007/8 net debt was down to 36.5% of GDP, just as an indication of what this means Labour inherited 42.5% from John Major’s government in 1997. As for public sector net borrowing, it was just 2.4% of GDP in 2007/8 compared to 3.4% in 1996/7 and of course before September 2007 the Tories were signed up to Brown’s spending plans.
Now that is not to say that economic mistakes were not made by Labour, indeed we now all know that the deregulation of the financial sector has had catastrophic consequences – just to steer clear of any accusation of banker bashing, the government and the financial industry were in it together and still are, there is way too much coziness between the two seats of power as there was way too much deregulation, started by Thatcher and wantonly continued by Blair and his cronies, but let us not forget that the Tories always called for more deregulation throughout the naughties - but to blame the financial debt of the country in view of the global meltdown on the ‘profligate’ and ‘spendthrift’ Brown is simply outrageous.
And the finest proof that as far as the Conservatives were concerned that at the time he was doing nothing wrong, in fact quite the contrary, in running the lowest national deficit and public sector costs in Europe, is simply that everyone was in agreement with regards to public spending as was confirmed with the Tory endorsement in a speech to the CBI in July 2008, ‘the new spending totals for the years 2008-9 to 2010-2011 show public spending growing by 2% in real terms, below the 2.75% trend growth rate of the economy.This is why we are sticking to Labour’s spending totals. Taken alone, these are tight.’ [17]
But by June 2010, in the name of political expediency the above proclamation had morphed into 'acts of reckless and irresponsible spending.'
And then there is the question of the UK having its credit rating lowered – one question, would it really matter, it doesn’t seem to have affected the cost of borrowing for the US or France since they both lost the top spot? As David Blanchflower (external member of the Bank of England's interest rate-setting Monetary Policy Committee (MPC) from June 2006 to June 2009 + currently a tenured economicsprofessor at Dartmouth College, Hanover, New Hampshire [18]) wrote in April this year, the consequences of trying to keep it with rising unemployment, falling growth and declining living standards are worse than the costs of losing it. [19]
In the same article he fundamentally questions the Osbourne approach and, as mentioned above, quantifies the difference between Darling’s final months of tenure which saw 3.1% growth and the ‘Osbourne collapse’ since the 4th quarter of 2010 to Q1 2012 of -0.3% and our re-entry into official recession - oooops, at least this winter's disastrous performance wasn’t blamed on the weather.
Blanchflower continues with an assessment of what a Labour government might have done in these circumstances, they would still have had to deal with the deficit but they would have done so at a slower rate with greater emphasis on tax increases rather than cuts, the distribution of pain less focussed on the poor, children, disabled and single mothers. A Labour government may also, if the 2010 recovery is anything to go by, have reduced the deficit through growth rather than increasing it through cuts as we have seen since. And he concludes - it is also clear that any Labour government would not have talked down the economy by saying it was bankrupt or claiming that in some way the UK is comparable to Greece, Botswana or Zimbabwe.[20]
I now turn to the work of Richard Koo for a rational explanation for the mess the UK is in and possible solutions with his theories around the ‘balance sheet recession’ based on all the evidence that has come out of Japan since their crash of the early 90’s, a modern take on Keynes’ theories and how the only way out of this situation is through government sponsored spending.[21]
Maybe the numpties that are the Dave and Slasher Show would benefit from the following explanation, as I indeed have.
There are two kinds of economic contraction, you can tell by interest rates, in one they are high, in the other they are low. Both are influenced by a lack of borrowing, in one the lenders go on strike, in the other the borrowers go on strike.
The first kind is common and caused by inflation-fighting moves by the central bank, lenders require high interest in return. The second kind is rare and caused by the bursting of bubbles yielding many people with great debt, so much so that they don't want to borrow any money, they want to pay down their debt.
The solutions? In the first kind monetary policy, it caused the contraction and it can cure it by easing. Fiscal policy is irrelevant. In the second monetary policy is useless, even with zero interest rates people won't borrow, they want to pay off their debts.
The first kind is short, the second is very long because people think it is like the first and resist the correct cure. Example of the second: US - 1929 - 1940 cured by the attack on Pearl Harbour. The great borrowing and spending for the defence department cured the depression, finally. And now, 2008 - ? Everybody wants to "cure" the debt of the government, but that is not the answer, the government must first cure the economy. Then it will be easy to cure the debt, as we saw in 1946 - 1955. This is also Paul Krugman's thinking.
We are in trouble because most people think the debt is the problem, but with zero interest rates the debt is easily financed (relatively), and when nobody else wants to borrow, the government must. Beware "the fallacy of composition."[22]
So the message (backed by considerable evidence) is clear, these are unusual circumstances that require extraordinary measures implemented by government. They may be counter intuitive (i.e. spend more when the debt is so high) but as the evidence from Japan shows, every time the government turned off the tap the economy nose-dived once again – slide 15 of Koo’s presentation. [23]
There are two kinds of economic contraction, you can tell by interest rates, in one they are high, in the other they are low. Both are influenced by a lack of borrowing, in one the lenders go on strike, in the other the borrowers go on strike.
The first kind is common and caused by inflation-fighting moves by the central bank, lenders require high interest in return. The second kind is rare and caused by the bursting of bubbles yielding many people with great debt, so much so that they don't want to borrow any money, they want to pay down their debt.
The solutions? In the first kind monetary policy, it caused the contraction and it can cure it by easing. Fiscal policy is irrelevant. In the second monetary policy is useless, even with zero interest rates people won't borrow, they want to pay off their debts.
The first kind is short, the second is very long because people think it is like the first and resist the correct cure. Example of the second: US - 1929 - 1940 cured by the attack on Pearl Harbour. The great borrowing and spending for the defence department cured the depression, finally. And now, 2008 - ? Everybody wants to "cure" the debt of the government, but that is not the answer, the government must first cure the economy. Then it will be easy to cure the debt, as we saw in 1946 - 1955. This is also Paul Krugman's thinking.
We are in trouble because most people think the debt is the problem, but with zero interest rates the debt is easily financed (relatively), and when nobody else wants to borrow, the government must. Beware "the fallacy of composition."[22]
So the message (backed by considerable evidence) is clear, these are unusual circumstances that require extraordinary measures implemented by government. They may be counter intuitive (i.e. spend more when the debt is so high) but as the evidence from Japan shows, every time the government turned off the tap the economy nose-dived once again – slide 15 of Koo’s presentation. [23]
And then there is Martin Wolf’s recent review of policy-making options for a deeply depressed economy - that would be the UK – where he assesses the case for stimulus, paying particular attention to the balance between fiscal and monetary policy – there are three good reasons why the UK is now a prime candidate for a well directed Keynesian stimulus: [24]
- the existence of substantial under-utilised capacity – not least the capacity of young people desperate for employment.
- the likely impact of stimulus on future national output and on reducing debt levels and increasing government revenues, not simply the short term boost to aggregate demand.
- the existence of ultra-low real interest rates – short and long term – confirming the ineffectiveness of monetary policy in current circumstances.
So you see with all of the above I don’t agree that Will Hutton’s article that triggered this whole discussion was the work of a failed commentator of little worth or credibility, his arguments in the article and those he has published consistently since the 2008 crash are not the work of a crazy on the fringe with a reprehensible track record, there is plenty of evidence to suggest that on the contrary such accusations can be directed at the current chancellor and his immediate boss. In my view Hutton's article clearly summarises the growing consensus from commentators and economic experts across the political spectrum, some of which I have referenced above.
The government is spending anyway with quantitative easing (£325 billion to date and as I write there is another £50 billion expected this week), the debt is increasing beyond all previous pessimistic forecasts, the UK is in recession, so why not change the message and indeed the policies so that ‘we are all in this together’ actually means something where the government will explicitly support the economy rather than being the authors of its further destruction?
[1] http://www.guardian.co.uk/education/2010/oct/20/spending-review-university-teaching-cuts- accessed 25th June
[2] http://www.bbc.co.uk/news/education-13346238- accessed June 27th
[3] http://www.guardian.co.uk/society/2011/nov/14/sure-start-centre-closures-coalition- accessed 25th June
[4] http://falseeconomy.org.uk/ - accessed28th June
[5] http://www.newstatesman.com/2012/04/edward-heath-u-turned-will-osborne-be-forced-do-same- accessed June 24th 2012
[6] CBI – A vision for Rebalancing the Economy – A New Approach to Growth - http://www.cbi.org.uk/media/1231301/cbi_rebalancing_the_economy_report_301211.pdf- Dec 2011
[7] Wikipedia ‘Economy of the UK’ - http://en.wikipedia.org/wiki/Economy_of_the_United_Kingdom- accessed 25th June 2012
[8] http://www.newstatesman.com/blogs/staggers/2012/06/osbornes-failure-deficit-becomes-clearer - accessed 27th June 2012
[9] http://en.wikipedia.org/wiki/Lawrence_Summers- accessed 3rd July 2012
[10] DailyTelegraph, 9 April 2011 (www.telegraph.co.uk/finance/economics/8439865/Britains-deficit-cutting-plans-are-oxymoronic-says-former-US-treasury-secretary-Larry-Summers-html)- Quoted in ‘Summer of Unrest: The Debt Delusion – MehdiHassan 2011 – kindle edition Loc 293 of 984
[11] The Debt Delusion – Mehdi Hasan 2011 – kindle edition Loc 280 of 984
[12] http://www.gfmag.com/tools/global-database/economic-data/10394-public-debt-by-country.html#axzz1yoHJvdDQ– quoted in ‘The Debt Delusion’ – accessed 25th June 2012
[13] The Debt Delusion – Kindle Edition Loc 170 of 984
[14] ‘The Debt Delusion’ – Mehdi Hasan - Kindle Edition Loc 178 of 984
[15] http://www.ukpublicspending.co.uk/uk_national_debt- accessed 25th June 2012
[16] David Cameron party conference speech, Manchester, 8th Oct 2009
[17] David Cameron speech to the CBI, London, 15th July 2008 –quoted in ‘The Debt Delusion’ – Loc 428 of 984
[18] http://en.wikipedia.org/wiki/David_Blanchflower- accessed 3rd July
[19] http://www.newstatesman.com/2012/04/edward-heath-u-turned-will-osborne-be-forced-do-same- accessed June 24th 2012
[21] http://www.businessinsider.com/richard-koo-the-world-in-balance-sheet-recession-2012-4?op=1– accessed 28th June 2012
[22] http://www.businessinsider.com/richard-koo-the-world-in-balance-sheet-recession-2012-4#comment-4f881cc4ecad04b66200000e– Ben Green @wewerewallstreet.com – accessed 2nd July 2012
[23] http://www.businessinsider.com/richard-koo-the-world-in-balance-sheet-recession-2012-4?op=1– accessed 28th June 2012
[23] http://www.businessinsider.com/richard-koo-the-world-in-balance-sheet-recession-2012-4?op=1– accessed 28th June 2012
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