Austerity and the Labour Party

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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:

Picture 37

 

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.”

He adds:

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.

Picture 40

 

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’

http://www.michaelmeacher.info/weblog/2013/03/lessons-for-labour-from-eastleigh/#more-4849

http://www.edballs.co.uk/blog/?p=907

http://www.leftfootforward.org/2013/02/austerity-isnt-working/

http://krugman.blogs.nytimes.com/2013/02/23/austerity-europe-2/

https://think-left.org/2012/10/15/how-to-be-a-deficit-owl/

http://touchstoneblog.org.uk/2013/02/what-does-the-uks-social-recession-look-like/

http://www.childrenengland.org.uk/upload/Perfect%20Storms%20-%20FINAL.pdf

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)

http://www.newstatesman.com/politics/2013/03/john-mcdonnell-interview-how-labour-moving-left

https://think-left.org/2013/02/26/economics-in-crisis-it-needs-a-reformation/

Ed Balls’ 2010 Bloomberg speech – ‘There is an alternative’

 

How to be a Deficit Owl

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First Posted on October 13, 2012 by 

How to be a Deficit Owl by alitteecon

The current economic debate in this country is split between those we can call deficit ‘hawks’ versus those we can call deficit ‘doves’.

The hawks are the austerians who argue government deficits are too high, so we must cut expenditure fast. Government should get out of the way and let the private sector do what it does best. George Osborne and chums are definitely in this category.

The doves argue that the private sector is very weak at the moment, unemployment is high and so we must temporarily increase spending to stimulate the economy. They would agree with the hawks however, that generally, large deficits are bad and so we need a medium term strategy to get the deficit down. Paul Krugman is probably the most famous deficit dove, but over here, economists like Jonathan Portes fall into this category, and also maybe Ed Balls (although he often sounds like a hawk).

The problem for the doves is that their argument is easy to tear down with scaremongering about burdening our grandchildren and Greek-style bankruptcy. Because the doves agree these are medium to long term risks, the hawks win the day because they just use the analogy of government being like a household and having to spend within its means. Most people can relate to this, so while people don’t like austerity, many think there is no other way.

There is another type of deficit bird though – the deficit ‘owl’. The owls reject the idea that we need a medium term strategy for getting the deficit down, arguing that there is never a risk of government insolvency and that government is nothing like a household. In this discussion over at Huffington Post Live, Modern Monetary Theorist Stephanie Kelton (who I think coined the term ‘deficit owl’ and uses @deficitowl as her Twitter handle) discusses her frustration with progressives who argue from the deficit dove viewpoint, and why they will always lose the argument with conservatives. She uses the analogy of fiscal policy being like a thermostat. When the economy is too cold, the thermostat should be turned up; when it is too hot, turn it down.

Anyway, I think the Huff Post vid is a really great demonstration of the difference between the deficit dove viewpoint and the deficit owl view. Both are on the same side of the argument at the moment, but to me the owl position is much more convincing and also has the benefit of being true, while the dove position is a bit of a fudge. We need more owls.

Other posts on Think Left by @alittleecon

The fundamental deceit of “There’s no Money left.” A Little

Labour’s deficit problem.

Cameron and Osborne dwell on Bullshit Mountain, UK