Monday, 22 June 2015

Best avoided: standing on chairs and austerity politics

You’re at a concert but your view of the stage is blocked by the heads in front of you. So you stand up on your chair. Brilliant: now you can see. You’ve gained an advantage over the rest of the audience.

Hey! How about standing on my chair? I'd get a much better view...
Until, that is, everyone else starts standing on their chairs too. At which point the view’s as bad as it was before – and now you don’t even have the comfort of being able to sit down.

That’s called the fallacy of composition. It’s the belief that because something is in the interests of an individual, it’s in the interests of a whole community. It’s most vividly illustrated in what Keynes called the paradox of thrift. Saving may be great for an individual, but if everyone starts saving more, then the amount spent across the economy goes down; firms start to lose money and lay people off; incomes go down; and saving, which is proportional to income, also goes down.

So everyone saving leads to less saving.

It’s even worse if one of the bodies saving, or at any rate spending less, is government. Thrift by government does away with capital projects and reduces employment, particularly at the low end of wage scale, where people spend a greater proportion of their income. That depresses demand and drives more companies into difficulties. Growth stutters or may even turn into recession.

That’s what happened in the States after the great crash of 1929. President Hoover tried to balance the books and watched the country sink into increasing depression. In 1932, he was replaced by Franklin Roosevelt, who followed a policy of deliberately spending for growth; by 1937, he’d turned the economy round. But he too was prone to the thrift argument, so then he tried to rein in government spending – and took the country back into recession.

That is the danger in Britain now. We have a little growth. Now we need to stimulate it, to make it sure it’s sustained. The government, however, is proposing to do exactly the opposite – to cut further. If it delivers on its dire promise to take £12bn out of the benefits bill, it will take £12bn out of spending, and the effect on the economy may be devastating.

An argument can be made to say that it’s immoral that some people, on the top rate of benefit, may be on £26,000 a year – more than the median earnings in work. But taking their payments down to £23,000, as now proposed, only takes another £3000 a year out of the economy for each of those households. The economic damage may far outweigh any moral satisfaction anyone might feel.

Benefits cuts don’t just hurt the recipients. They hurt all of us. And with all the other cuts proposed, they will hurt us even more.

What’s the alternative?
  • A great deal of tax is uncollected, especially corporation tax. Getting it collected won’t be easy, but why should we expect government to do only what’s easy?
  • There is probably room for some small increases in tax at the top end of the income scale: these are people whose wealth has grown astronomically since the crash, while at the other end living standards have fallen.
  • Establishing a more generous level of minimum wage – the living wage – and enforcing it would allow us to start reducing tax credits. If it’s applied for migrant workers too, it would put an end to the use of immigrants to undercut local wages.
  • And why are we so worried about debt? Interest rates are practically zero. There couldn’t be a better time to borrow moderately.
All of this would allow us to prime the pump of the economy. With growth secured once more, tax revenues would start to rise, simply because more people would be earning and spending. There may be a need for some cuts anyway, but on nothing like the scale now being proposed: smaller cuts and rising revenue would give a much more sustainable means to improve economic performance.

That, however, means freeing ourselves from the paradox of thrift. It means understanding that sometimes governments have to spend to save themselves from debt. It means ending our reliance on austerity to get us out of a hole which, as Greece shows, it only makes deeper.

When the Tories came to power in Britain, they kept using a phrase which was crass in its over-simplification but struck a chord with many voters: “the country has maxed out its credit card.”

It was nonsense because it ignored the ability of a government, unlike an individual, to increase its revenue by spending more. So in answer I suggest we adopt a slogan against austerity which is just as simple and direct – and actually has the merit of being true.

“If the roof’s leaking, fix it. Don’t burn down the house.”

Certainly gets rid of the problem of the leaky roof
But is it the most judicious way?

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