The consequences of austerity
The Financial Times (as reported by Leftfootforward) set out a series of graphs which indicate the negative effect of austerity policies on the GDP of various European economies. The graph reproduced below shows clearly the negative correlation:
Paul Krugman creates his own similar graph in the NY Times and writes that the graphs show that “… the greater the tightening between 2009 and 2012, according to the International Monetary Fund, the bigger the fall in output.”
In normal life, a result like this would be considered overwhelming confirmation of the proposition that austerity has large negative impacts. Yes, you can concoct elaborate stories about how it could be wrong; but it’s really reaching. It seems safe to say that what we have here is a case in which rival theories made different predictions, the predictions of one theory proved completely wrong while those of the other were totally vindicated — but in which adherents of the failed theory, for political and ideological reasons, refuse to accept the facts.
So what exactly does Paul Krugman mean?
He means that the ‘experiment’, conducted by Deficit Hawks such as George Osborne.. in implementing the remedies proposed by Neoclassical economics… has been shown to be completely wrong… but, for political and ideological reasons, the Hawks refuse to accept the facts.
Furthermore, he argues that the Deficit Doves, the Neo-Keynesians such as himself and Ed Balls, have been shown to be vindicated.
This is the case up to a point… but the problem is that the Deficit Doves are saying that whilst in the short term, the economy needs a Keynesian fiscal stimulus, in the medium to long term, the Deficit Hawks’ medicine of cuts will be necessary.
Hence, we have the Labour shadow cabinet only criticizing Osborne and the Coalition for cutting too hard and too fast rather than completely rejecting the fundamental argument for ‘austerity’ measures. This is a profoundly weak argument but I would argue that it is also bad economics … and leads to policy decisions which in no way reflect the views of the grassroots LP.
As Michael Meacher writes:
What Labour needs now to make clear beyond any doubt is that the Osborne massacre of the innocent isn’t inevitable and that killing a few less and doing it in a slower and more kindly fashion is no answer either. The only way to deal with the deficit in the pit of a deepening recession is through a huge programme of public investment where it is sorely needed – social housing, improved infrastructure, low-carbon economy – funded by quantitative easing (instead of throwing the money at the banks), taxation of the ultra-rich (who caused the recession and have contributed nothing to remedying it), instructing RBS and Lloyds (after all, we own them) to prioritise lending to to major agreed manufacturing projects, or borrowing at rock-bottom interest rates to generate a million jobs within 2 years.
Michael Meacher is a Deficit owl, not a Deficit Dove.
The Neo-Keynesian approach accepts that cuts in government spending will need to be made in the medium to long term. Hence, the Labour leadership does not sufficiently vigorously oppose the Tory/LD cuts and privatisation of public services. This adds another layer of incomprehensibility because it is not simply that austerity fails to make macro-economic sense but there is also no doubt that the cuts and privatization of public services will ultimately increase costs to the state (not to mention the human costs).
This is amply demonstrated by Matt Dykes who writes:
… beyond the acute economic problems, the UK is also in the midst of a very real ‘social recession’. As with the economy, the double whammy of crisis and austerity is plunging public services across the country into a vicious circle of decline.
He reproduces a ‘useful pictorial representation’ published in ‘Perfect Storms’ by Children England, which demonstrates how the economic crisis and government cuts impact on the provision of children’s services by local authorities and community groups alike.
It is clear from this diagram just how disastrous ‘the government’s needless and self-defeating cult of austerity’ is for children’s services, and how the cuts are storing up future problems … doubtless this same picture could be extrapolated across the whole of public services.
So why are there still many ‘senior figures from the discredited New Labour network (such as Patrick Diamond, former adviser to Blair-Brown, in the Guardian today) who continue to repeat the mantra of ‘financial discipline’ – as if we hadn’t had a bellyfull of this already from Osborne (and with 70% of cuts still to come) – yet with nothing but an imminent triple dip recession to show for it. They show lip service to a growth strategy without giving any idea how it might seriously be achieved, since merely tweaking the Osborne cuts agenda – cutting less far, less fast – is just a recipe for economic decline, but a bit more slowly than the Tories?’ (Michael Meacher)
John McDonnell MP, suggests that “The Labour leadership comes from a neo-liberal background. They served their apprenticeship deep in the heart of New Labour and they’re looking to come back as New Labour mark two, slightly reformed but not challenging the system itself.” He argues that it is the role of Labour’s left to make issues “safe” for the party’s leadership. “If you make an issue safe, Ed Miliband will shift. Whether it’s Murdoch, banks, welfare or benefits But I don’t think they’ll just shift cynically, they’ll shift on to the terrain that is then safe, and you can have a proper discussion then.”
This fits with part of Ed Balls’ 2010 Bloomberg speech, in which he emphasizes the lesson that ‘.. it’s not enough to be right if you don’t win the argument. For – as Keynes found in 1925 and 1931 and Alan Walters found in 1990 – being right in the long run and well-judged by history is no great comfort.’ (A video clip of this speech is included below the references – well worth watching in the light of the last 2.5y of Osbornomics.)
John McDonnell is spot on. The role of the left, both within and without the LP, must be to educate, agitate and organise to make it ‘safe’ enough for the Labour leadership to adopt measures such as direct government investment into the real economy to create jobs, houses, restore the welfare state and mitigate climate change. As Michael Meacher concludes:
‘Take your pick – more Osborne, more New Labour, or something the voters of Eastleigh might well have gone for rather than UKIP.’
What we need is a Labour leadership team full of Deficit Owls!
Economics in crisis – it needs a ‘Reformation’
The number of calls to the NSPCC’s child neglect line doubled between 2009/10 and 2011/12
From 2009/10 to 2010/11, the number of children in need increased by 42,400, with an 8 per cent increase in child protection plans.
Since 2007, there has been a 9 per cent increase in the number of looked after children.
By 2015, there will be 115,000 more children living in families with four or more vulnerabilities (defined by the Cabinet Office)
Ed Balls’ 2010 Bloomberg speech – ‘There is an alternative’
Very well written post, Sue.
I cannot see the UK on that graph. We are Europeans, no?
The graph should really specify that it is the eurozone rather than the EU – hence, no UK, Norway, Sweden and so on.
Yes, that was my conclusion for the omission of the UK.
Sorry, but have you even considered the possibility of endogenity? It seems fairly reasonable to suggest that the countries facing the largest gdp falls have responded by cutting the most.
I imagine that you may be correct that a degree of endogenity may be influencing the results.. but I think it would be unlikely to affect the gross results. Certainly Paul Krugman did not seem to think so.
Well, that may very well be true. Hell, I even agree with the general point: I don’t see how cutting spending cannot reduce gdp (even if it sometimes swamped by other increases). But I think we have to conceed that it’s guesswork and not hard evidence.
Krugman notwithstanding, and these days its hard to put much weight on his testimony.
Krugman certainly questioned how the ‘austerity’ measures were determined which is why he did his own calculation. Clearly, as a scientifically rigorous study, this approach leaves a lot to be desired.. but it is always so with ‘social sciences’. But just you say, how can cutting spending not reduce GDP?
Great article and quotes from M.Meacher. Hits the nail on the head with Labour’s neo-liberal love affair. I fear they will do anything to get power and stay in power, like shifting even further to the right. They believe getting a moral backbone would destroy their chances of re-election.
A left-wing site with some MMT knowledge – wonderful!
Now all I need is a left-wing party with MMT knowledge….
Don’t we just! In the meantime, we need to try and make MMT safe (and unavoidable) for the LP. I live in dread of Balls committing to Osborne’s spending limits (as proposed by Black Labour, Mandelson et al). My hope is that he holds fire until the rest of Osborne’s cuts are brought in and there is a popular backlash. IMO the reality is that we are poised between a dangerous right wing undemocratic state and a left wing one… there is little room for a ‘middle bloody way’!
It’s not just in the UK that the political left is incapable of doing much more than aping (with small variations) the policies of the political right. It’s a worldwide phenomenon, as Bill Mitchell (Australian economics Prof.) has pointed out ad nausiam for years. See:
That apart, the above Think Left article is a litany of leftie economic illiteracy, which makes me vomit about as violently as “rightie” economic illiteracy. Though doubtless the article will be an EMOTIONAL thrill for lefties, as is evident from some of the above comments.
For example in that inflation has been well over the 2% target for a long time, “austerity” actually makes sense. That is, how do you deal with inflation other than cutting demand – which in turn exacerbates unemployment? Solve the latter problem, and you’ get a Nobel Prize, but I’m prepared to bet a large amount of money that you won’t solve it.
The article also gets economics hopelessly confused with politics when it claims that those famous “cuts” are some sort of economic problem. If a right of centre party is elected to power, they can be expected to cut public spending can’t they? Or are you saying you’re opposed to democracy?
As long as the relevant government boosts demand (as far as that is consistent with acceptable inflation) to compensate for “the cuts”, there won’t be a net effect on employment.
All quite simple stuff, but way beyond the comprehension of the average leftie.
Dear Ralph Musgrave
If I cut through the uncomplimentary rudeness of your comment and the lack of explanation of your objections to the post, I believe that it is the advocating a jobs guarantee (JG), within the public sector, which lies at the heart of your criticisms of MMT.
‘Modern Monetary Realism and Guaranteed Jobs’ and the comments thread offers a fairly clear explanation of your position which (I hesitate to guess) puts you in the bottom right-hand quadrant of the political compass… a libertarian/free market position
This being so, it is hardly surprising that you disagree with the post (but vomiting .. really?)
I repost Dan Kervick’s comment from ‘Modern Monetary Realism and Guaranteed Jobs’- because it is so well expressed and represents the position of Think Left in the bottom left hand quadrant of the political compass. However, the comments from Neil Wilson are equally quotable:
What aggravates me about neoliberal economics is that it presents its particular aims as the only priority, without explaining why it should be put ahead of everything else. Hence, Musgrave strongly implies that inflation MUST-MUST-MUST be kept below 2%, and therefore it makes sense that economic policy i.e. austerity is shaped with this first and foremost in mind.
But what he never explains is why that’s okay. He never explains why negatively impacting employment is an acceptable price to pay just to slow inflation down. Yes, inflation can be insidious, and if it can be contained by reasonable means it should be, but at ANY cost?
All neolib policy (including the often-unstated aim of keeping unemployment high to keep people in the workforce competing with each other and not with the employers) is structured around that aim. If that is the only way to make sense of it, then no, it doesn’t really make sense at all, not without a stronger case being made for low inflation being the number one target. As far as I can see, the only reason for it is that it allows the rich, who have stockpiled large quantities of money, to sit on it for very long periods of time without it losing much value.
(And on that subject, how’s this for a bit of ‘outside-the-box’ theory? There is a reasonable case to be made IN FAVOUR of inflation at five per cent or more, so long as it goes hand-in-hand with a minimum wage always adjusted to reflect it – higher inflation forces the rich to spend more of their money more regularly, keeping the national cash-circulation going more freely.)
Agreed 🙂 History ought to be reporting, with horror, the unbelievable levels of totally unnecessary unemployment across the EU. In a recent presentation, Bill Mitchell indicated 73% of Greek 16-20y olds cannot find a job! In any event, inflation should not be a problem whilst there is so much wasted productive potential.
Surely you are the Ralph Musgrave who blogs as Ralphonomics (“cheeky or provocative”) and is a member of the far right British National Party? No wonder you feel sick reading this leftist blog. Surely there are many other fine right-wing blogs out there more suited to your world-view, particularly in the USA. Did you get here by mistake?
The problem with most economists such as yourself is that they speak in dogmatic terms of certain cause and effect, e.g. when you say above that “..there won’t be a net effect on employment”, there is actually no scientific data to support your statement, is there? It’s just a strong theoretical belief on your part, that somehow others must believe in also, or be called lacking in comprehension. This belief is called faith. Mr Osborne has faith – watch him talking. But he has no wisdom.
As you know, Ralph, most Economics just isn’t a science, particularly mainstream economics as destroyed by Steve Keen in his book ‘Debunking Economics etc’.
Also, there’s nothing wrong in being EMOTIONAL about things that matter. If economists got EMOTIONAL about the underpinning morality of their subject (like the fine Bill Mitchell) the world would be a better place.
Thanks Brian.. so my guess about Ralph Musgrave was in the right direction but possibly not ‘right’ enough!
Pingback: Labour Biding Time – Wisdom or Caution? | Think Left
Pingback: Milk Snatching, Free School Meals and an Artful Dodger. | Think Left
Pingback: Like heterodox economists, Semmelweis was ignored… | Think Left
Pingback: Austerity Uncovered | Think Left
Pingback: We need a Reformation in Economics – The salutary story of Semmelweiss | Think Left