Austerity: is it really a Tory blind spot?

A joke frequently told against Gordon Brown, when he was Chancellor of the Exchequer in the Labour governments led by Tony Blair, that he was having an extramarital affair. The object of his affections was a mystery woman known as Prudence. He simply couldn’t stop himself mentioning her whenever he spoke, so that the catchword for everything he did in dealing with the country’s finances was that it was down, he claimed, to Prudence.

“Mock on, mock on”, he might be saying today. And “what side of your face are you laughing out of now?”

After David Cameron brought the Conservatives to power, Prudence was unceremoniously dumped for a much less attractive siren known as Austerity. Far from seducing the Chancellor alone, Austerity seems to have bedded most of the senior figures of the Tory Party. Which isn’t to say they weren’t warned. Anyone at all familiar with the ideas of Maynard Keynes pointed out that there was a paradox at the core of the notion Austerity: when a government puts the brakes on spending the result isn’t necessarily a saving, but often the exact contrary. Reduced spending leads to reduced economic activity, and therefore reduced taxation, and far from emerging from indebtedness, the government merely sinks further into debt.

UK Debt as % of GDP: steadily growing under austerity
Source: BBC

Seven years on, it’s clear that this is exactly what has happened. Back in 2010, Cameron made a great deal of the supposedly unbearable cost of debt Labour had amassed, a toxic burden being passed on to the future generations. It was approaching the trillion-pound level at that time. Seven years on, it is now projected to reach £1.8 trillion by next March, but curiously the Tories have stopped talking about it.

Despite years of austerity, with constant cuts to essential public services, even the government’s deficit – the amount by which spending exceeds income – is rising again. In June, it was nearly 50% higher than it was in the same month last year. Keynes’s paradox of thrift is being verified with a vengeance: thrift cuts revenue and not just cost, so it can make things worse rather than better.

Anyone reading this piece might feel there’s nothing new in my making this claim. I’ve said it all before, haven’t I? So why am I saying it again now?

Because now we learn that the Tories are not only persisting with their austerity policies in the face of evidence that they aren’t working, but even in the face of evidence that they’re costing them votes. 

Now that’s truly odd. Because if the Tories are anything, they’re an election-winning machine, hypersensitive to any chance to win a vote, or any risk of losing one. It’s quite extraordinary that they’re sticking – for now – to a policy they know might lose them power.

Which leads to a further question. If it isn’t working financially; if it’s costing them votes politically; then why on earth are the Tories continuing to pursue austerity?

Could it really be that they are, ultimately, entirely heartless? Do they truly believe that the poor need to be punished for the offence of being, simply, poor? And the best way of punishing them is to impoverish them further?

I find it hard to believe that any but a few of the Tory leaders are quite that ruthless. Sadly, though, that leaves only one explanation: that they simply can’t see what they’re doing. Which suggests that the Parliamentary Conservative Party has simply lost all contact with reality.

Surely we wouldn’t want to suggest that Tories might be that benighted, would we?

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?

Nicola Sturgeon: another voice raised for a (moderately) radical approach to our problems

Nicola Sturgeon, leader of the Scottish Nationalist Party, speaking in London today, called for an end to austerity policies and described their continuation as “morally unjustifiable and economically unsustainable.”

Nicola Sturgeon of the SNP:
A radicalism so mild it's barely radical. But it's still refreshing to hear

Consensus is attractive when the alternative is conflict, but much less so when it just means conformity. Especially when what we’re conforming to is principally a matter of fashion.

It has been fashionable in the leading economies since the 1970s or 1980s, to proclaim belief in the working of free markets with minimal regulation. That view tended to come in tandem with faith in trickle-down economics: a free market will allow highly entrepreneurial individuals to make a great deal of money; when they spend it, the resultant wealth will trickle down to the rest of society.

Many of the measures that had been put in place to control, in particular, the financial sector were dropped during the time of Thatcher and Reagan. Unleashed, the banks took increasing risks in order to amass unprecedented fortunes, until they took a risk too many and came unstuck in 2008. At which point, people who had spent decades decrying state intervention, turned to the state – more precisely to all taxpayers, including the poorest – to rescue them from the disaster they’d brought down on themselves.

Unfortunately, holding out their hands to the state didn’t mean that these leaders of economic thinking were prepared to dump the ideology which, particularly in its trickle down aspect, had made them inconceivably rich over a generation.

The success of trickle-down was measured by their wealth; its failure by the impoverishment of everyone else. As Will Hutton argues in his insightful piece in today’s Guardian, “wages have fallen, in real terms, by the greatest degree in more than half a century, inequality of income and wealth have risen to desperately high levels that may soon metastasise into a serious economic and social cancer.”

Sadly, in Europe we’ve been driven since the 2008 crash by such carcinogenic thinking. The consensus claims that austerity is the only way out of this crisis: reduce government deficits and debt by slashing public spending, and we shall cure our problems. As Hutton points out, all this is achieving is to create a society in which “millions of workers struggle in a harsh demimonde of temporary jobs and zero-hour contracts.”

And yet these ideas, the new fashion, merely replaced economic thinking which could really explain our problems. The theories of John Maynard Keynes showed that it isn’t by reducing expenditure that a government gets out of economic difficulty, but by making investments. That provides employment which increases the tax take from workers, and it stimulates the economy to grow by increasing demand – which also increases the tax take. So paradoxically, the government may well get its deficit down more quickly by spending more, not less.

But we’ve been living the Reagan-Thatcher consensus. Keynes is out. Austerity and trickle-down are in. And, sadly, conformity to that credo has extended way beyond the traditional conservative parties. Many in the Labour Party, not least Tony Blair and his one-time voice piece Peter Mandelson, who famously – infamously – once declared himself “intensely relaxed about people getting filthy rich.”

Well, I’d be relaxed about it too, if getting filthy rich didn’t always happen on the backs of a lot of poor people getting a great deal poorer.

To stand for a different set of ideas, for Keynesian ideas, is regarded by the proponents of austerity as a dangerous reversion to old-style, wildly left-wing socialism. Which is odd, since whatever Keynes was, he wasn’t a socialist. He wanted capitalism better managed, as does Hutton.

Calling for better management of our capitalist economy is dangerously radical? 

Seriously?

Keynes: hardly a left-wing firebrand
But we need his approach back, and that has to come from the Left

Fortunately the conformity to this dire consensus hasn’t been total. Every now and then a voice speaks out against these failed and failing views. And, recently, sometimes those voices have been heard.

I spoke yesterday about Alexis Tsipras in Greece. Succeed or fail, at least he’s trying a different approach in a country driven to despair by the previous policy of austerity.

Now Nicola Sturgeon has also spoken out. She, like many of us, feels there’s nothing tremendously inspiring about a Labour Party promising to do the same as the Tories, but a bit less, and a bit less fast.

And yet what she’s proposing isn’t that radical: an increase in spending of £180bn over five years of a parliament. That represents less than two years of running the English NHS, spread over five. Not exactly revolutionary: like Hutton, like Keynes, she just wants capitalism to behave more fairly.

But compared to everyone else calling for more cuts, isn’t it refreshing?

How sad that it has to come from a party whose main aim is the independence of Scotland. That the great party of the left in England, the Labour Party, didn’t beat her to it.

Ed Milliband, Ed Balls: come on, if Sturgeon can do it, surely you too can speak out for a real alternative to the failed policies of the Tories?

Should we fear Tsipras bearing gifts?

Beware of Greeks bearing gifts, the old saying has it. Though what Virgil actually wrote – timeo Danaos et dona ferentes – translates more closely as “I fear the Greeks even when they bear gifts.”

The Greeks brought us a gift on Sunday, and it’s certainly dangerous. Will Alexis Tsipras, the new Prime Minister, succeed in his bid to free his compatriots of the scourge of austerity while staying in the EU and even the Eurozone? Or will he throw the whole continent into instability and further crisis?

Tsipras of Syriza: bearing a gift, to be feared – or welcomed?

We simply don’t know. But one thing we learned from the weekend election is that if you create sufficient despair in a people, with a prospect only of more suffering ahead, they will ultimately vote for a change whatever the risks may be. Again and again, I’ve heard Greek voters telling journalists, “in winter, I can’t afford to heat.” 

Why would anyone put up with that indefinitely?

And it would indeed be indefinite. There’s no prospect of Greek recovery yet. The economy has shrunk by a quarter since the international financial collapse of 2008. It is growing now if you ignore the burden of debt repayment, but in the case of Greece, that’s not something you can ignore. The austerity Greeks have suffered for five years has only led to a crippling debt mountain which is beginning to fall due for payment, promising only more dreary pain ahead.

The answer proposed by the EU and the previous Greek government is more austerity. More, in other words, of precisely the same remedy that has failed so far and led to the despair so many feel. More of a remedy which we’ve known, since Keynes, isn’t going to work.

He called it the paradox of thrift. When in debt, the standard reasoning goes, you need to save money to pay off what you owe. That works fine at the level of the individual. But at the level of a nation, it’s a disaster. If we’re all spending less, the economy contracts. People lose their jobs. They stop paying taxes. Government revenues fall. Debts climb.

That’s what’s happened in Greece. It’s happened in Britain too. We’ve had five years of austerity policies. The health service is screaming in pain. Social care has been cut massively at a time when people hope it might take some of the strain off the NHS. Libraries are closing. The education service, for which the government likes to claim all sorts of success, is failing to turn out skilled labour so that the building industry isn’t able to gear up to the challenges ahead – and the housing crisis intensifies.

Meanwhile, the poor are being put to the rack like their Greek counterparts. The unemployed and sick, naturally, but even the working poor whose praises the government likes to sing: tax credits for low earners have been eliminated, assistance for young children gone, assistance from local authorities cut back as those authorities are starved of funding.

Meanwhile, as Polly Toynbee points out, at the opposite end of scale, the top 1% of earners, have done well from austerity – just like their counterparts in Greece. In the run up to the election on 7 May, the Conservative Party is explicitly promising more of the same: cuts that will take state spending down to the level of the 1930s, but £7 billion of tax cuts for the wealthiest.

So what gift have the Greeks given us? A model. An example we might care to follow. An illustration of the fact that one can say no, demand that the wealthy nations help the poorer with a more open hand, and that even within a nation, the rich can shoulder more of the burden to free the poor from some of the suffering.

But we’re told to fear the Greeks with their gifts. Certainly, there’s no guarantee Tsipras will be able to pull off his trick. And if the move to question the received wisdom of the self-serving Right is limited to the south of the continent – perhaps Spain and Portugal alongside Greece – while the wealthier North holds firm, there’s little likelihood that the movement will lead on to success.

But if the rest of us also learn to say no, and if we find leaders prepared to say no with us, the election of Tsipras may turn into a turning point that can transform our lives throughout Europe.

In which case we should all welcome the gifts the Greeks are bearing. Even if they are a little fearsome.

What we need today: the wisdom of Solomon

It’s enthralling to see the increasingly frequent and bad-tempered spats between George Osborne, British Chancellor of the Exchequer, and his opposite number and would-be successor Ed Balls, Finance spokesman for the Opposition Labour Party. 

Ed Balls isn’t much liked, and it’s not just down to his name. His opponents find him insufferable. He doesn’t suffer fools gladly and ‘fools’ in his book seems to embrace anyone who disagrees with him. In the long run, that suggests the non-fools probably come down to just one person.

He also has the unbearable defect of having been proved right. He said the present government’s policies would take Britain back into recession without doing much to reduce government debt. Since that’s exactly what’s happened, it’s not surprising Osborne is becoming increasingly shrill in his denunciations of Balls. It’s horrible to have someone saying ‘I told you so’ even if he doesn’t say it out loud. Particularly if it’s true. 

But Osborne has even bigger problems

This is a government that prides itself on its Christian credentials. So let’s open our Bibles and take a look at the opening chapters of the First Book of Kings. 

This is the story of Solomon, that paragon of wisdom down the ages. And what marked his reign? Why, a massive programme of public works. The temple, first of all. Seven years in the building. The palace too, which took almost twice as long, but, hey, he was funding the project, he needed something special.

King Solomon at the opening of the temple.
Iconic King and paragon of wealth, wisdom and Keynesian economics

It didn’t stop there either. There were other major construction jobs in Jerusalem and also in other cities, such as Hazor, Megiddo and Hezer, as 1 Kings 9 makes clear. And 1 Kings 8 tells us that for the opening of the temple, Solomon sacrificed 22,000 oxen and 120,000 sheep. In what was a small population by modern standards, the impact on demand and prices in the agricultural sector must have been substantial.

In other words, Solomon was a Keynesian three millennia before Keynes.

But this investment programme, and all the benefits it brought to the Israelite economy, had to be financed somehow. He had to turn to the banks.

In Solomon’s time that meant the Phoenicians, wily traders who'd enriched themselves by Mediterranean commerce. Like his father David, Solomon cultivated good relations with Hiram King of Tyre. Hiram provided the wood, the stone, the gold for all that splendid construction work. Israel must have been an attractive investment, particularly as Assyria to the North and Egypt to the South were having a bad time politically which negatively impacted their credit rating. Hiram saw a literally God-sent opportunity in Solomon and extended easy terms.

Not easy enough, though. Solomon hit difficulties. Hiram foreclosed and Solomon had to hand over some extensive real estate in Israel, evaluated by him as 20 ‘cities’ though, judging by Hiram’s reaction, they were probably little more than villages (I Kings 13). In the end, Solomon had to come up with 120 talents of gold as well.

In passing, it’s interesting that at the time ‘talent’ was a term in the financial sector. We don't see much of it these days.

But the real measure of Solomon’s failure was the price paid for it by his son, Rehoboam. When he came to the throne, the people appealed to him to reduce a burden of taxation they saw as intolerable. Against the advice of his leading counsellors, he replied (1 Kings 12) ‘And now whereas my father did lade you with a heavy yoke, I will add to your yoke; my father hath chastised you with whips, but I will chastise you with scorpions.’

A remorseless, unbending mindset. Like austerity heaped on austerity. Making the poor pay for the profligacy of the rich. It worked no better then than it’s working today. The rebellion that followed left Rehoboam with only a rump of his father’s kingdom to rule and ended his flamboyant ambitions.

What he’d needed was a moderate programme of reflationary investment in infrastructure coupled with careful control of public expenditure, reducing its level over a period of years without choking off the potential for growth. That’s the prescription favoured by Ed Balls.

And isn’t it obvious that the book of Kings is saying the same? Solomon did well to stimulate the economy but shouldn’t have let things get out of hand. When they turned sour, the disastrous reaction was to slam on the brakes far too brutally. That’s what Rehoboam did and what Osborne’s doing.

George Osborne, even the Bible’s against you. Having a go at Ed Balls might sound like a smart move, but what if he has God in his corner? Are you sure it's wise?