In the US, you no longer hear much from the deficit scolds who loomed so large in the national debate circa 2011. Some commentators and media organisations still try to make budget red ink an issue, but there’s a pleading, even whining, tone to their exhortations.
The day of the austerians has come and gone.
Yet Britain zigged just as the rest of us were zagging. By 2013, austerian doctrine was in ignominious retreat in most of the world — yet at that very moment much of the UK press was declaring that doctrine vindicated. ‘Osborne wins the battle on austerity’, the Financial Times announced in September 2013, and the sentiment was widely echoed.
What was going on? You might think that British debate took a different turn because the British experience was out of line with developments elsewhere — in particular, that Britain’s return to economic growth in 2013 was somehow at odds with the predictions of standard economics. But you would be wrong.
The key point to understand about fiscal policy under Cameron and Osborne is that British austerity, while very real and quite severe, was mostly imposed during the coalition’s first two years in power. Chart 3 shows estimates of our old friend the cyclically adjusted primary balance since 2009.
I’ve included three sources — the IMF, the OECD, and Britain’s own Office of Budget Responsibility — just in case someone wants to argue that any one of these sources is biased. In fact, every one tells the same story: big spending cuts and a large tax rise between 2009 and 2011, not much change thereafter.
Given the fact that the coalition essentially stopped imposing new austerity measures after its first two years, there’s nothing at all surprising about seeing a revival of economic growth in 2013.
Look back at Chart 2, and specifically at what happened to countries that did little if any fiscal tightening. For the most part, their economies grew at between 2 and 4 per cent.
Well, Britain did almost no fiscal tightening in 2014, and grew 2.9 per cent. In other words, it performed pretty much exactly as you should have expected. And the growth of recent years does nothing to change the fact that Britain paid a high price for the austerity of 2010-12.
British economists have no doubt about the economic damage wrought by austerity. The Centre for Macroeconomics in London regularly surveys a panel of leading UK economists on a variety of questions. When it asked whether the coalition’s policies had promoted growth and employment, those disagreeing outnumbered those agreeing four to one.
This isn’t quite the level of unanimity on fiscal policy one finds in the US, where a similar survey of economists found only 2 per cent disagreed with the proposition that the Obama stimulus led to higher output and employment than would have prevailed otherwise, but it’s still an overwhelming consensus.
By this point, some readers will nonetheless be shaking their heads and declaring, “But the economy is booming, and you said that couldn’t happen under austerity.”
But Keynesian logic says that a one-time tightening of fiscal policy will produce a one-time hit to the economy, not a permanent reduction in the growth rate. A return to growth after austerity has been put on hold is not at all surprising.
As I pointed out recently: “If this counts as a policy success, why not try repeatedly hitting yourself in the face for a few minutes? After all, it will feel great when you stop.”
In that case, however, what’s with sophisticated media outlets such as the FT seeming to endorse this crude fallacy? Well, if you actually read that 2013 leader and many similar pieces, you discover that they are very carefully worded. The FT never said outright that the economic case for austerity had been vindicated.
It only declared that Osborne had won the political battle, because the general public doesn’t understand all this business about front-loaded policies, or for that matter the difference between levels and growth rates. One might have expected the press to seek to remedy such confusions, rather than amplify them. But apparently not.
Which brings me, finally, to the role of interests in distorting economic debate.
As Oxford’s Simon Wren-Lewis noted, on the very same day that the Centre for Macroeconomics revealed that the great majority of British economists disagree with the proposition that austerity is good for growth, the ‘Telegraph’ published on its front page a letter from 100 business leaders declaring the opposite.
Why does big business love austerity and hate Keynesian economics? After all, you might expect corporate leaders to want policies that produce strong sales and hence strong profits.
I’ve already suggested one answer: scare talk about debt and deficits is often used as a cover for a very different agenda, namely an attempt to reduce the overall size of government and especially spending on social insurance. This has been transparently obvious in the US, where many supposed deficit-reduction plans just happen to include sharp cuts in tax rates on corporations and the wealthy even as they take away health care and nutritional aid for the poor.
But it’s also a fairly obvious motivation in the UK, if not so crudely expressed. The “primary purpose” of austerity, the ‘Telegraph’ admitted in 2013, “is to shrink the size of government spending” — or, as Cameron put it in a speech later that year, to make the state “leaner ... not just now, but permanently”.
Beyond that lies a point made most strongly in the US by Mike Konczal of the Roosevelt Institute: business interests dislike Keynesian economics because it threatens their political bargaining power. Business leaders love the idea that the health of the economy depends on confidence, which in turn — or so they argue — requires making them happy.
In the US there were, until the recent take-off in job growth, many speeches and opinion pieces arguing that President Obama’s anti-business rhetoric — which only existed in the right’s imagination, but never mind — was holding back recovery. The message was clear: don’t criticise big business, or the economy will suffer.
If the political opposition won’t challenge the coalition’s bad economics, who will?
But this kind of argument loses its force if one acknowledges that job creation can be achieved through deliberate policy, that deficit spending, not buttering up business leaders, is the way to revive a depressed economy. So business interests are strongly inclined to reject standard macroeconomics and insist that boosting confidence — which is to say, keeping them happy — is the only way to go.
Still, all these motivations are the same in the US as they are in Britain. Why are the US’s austerians on the run, while Britain’s still rule the debate?
It has been astonishing, from a US perspective, to witness the limpness of Labour’s response to the austerity push. Britain’s opposition has been amazingly willing to accept claims that budget deficits are the biggest economic issue facing the nation, and has made hardly any effort to challenge the extremely dubious proposition that fiscal policy under Blair and Brown was deeply irresponsible — or even the nonsensical proposition that this supposed fiscal irresponsibility caused the crisis of 2008-09.
Why this weakness? In part it may reflect the fact that the crisis occurred on Labour’s watch; American liberals should count themselves fortunate that Lehman Brothers didn’t fall a year later, with Democrats holding the White House.
More broadly, the whole European centre-left seems stuck in a kind of reflexive cringe, unable to stand up for its own ideas. In this respect Britain seems much closer to Europe than it is to America.
The closest parallel I can give from my side of the Atlantic is the erstwhile weakness of Democrats on foreign policy — their apparent inability back in 2003 or so to take a stand against obviously terrible ideas like the invasion of Iraq. If the political opposition won’t challenge the coalition’s bad economics, who will?
You might be tempted to say that this is all water under the bridge, given that the coalition, whatever it may claim, effectively called a halt to fiscal tightening midway through its term. But this story isn’t over.
Cameron is campaigning largely on a spurious claim to have “rescued” the British economy — and promising, if he stays in power, to continue making substantial cuts in the years ahead. Labour, sad to say, are echoing that position.
So both major parties are in effect promising a new round of austerity that might well hold back a recovery that has, so far, come nowhere near to making up the ground lost during the recession and the initial phase of austerity.
For whatever the politics, the economics of austerity are no different in Britain from what they are in the rest of the advanced world.
Harsh austerity in depressed economies isn’t necessary, and does major damage when it is imposed. That was true of Britain five years ago — and it’s still true today.
