Some decent articles appeared in the run up to the long-awaited Comprehensive Spending Review (CSR) which collectively throw light on both the politics and economics of it all. First up, Jonathan Freedland in The Guardian, writing about how Labour really needs to take on the Coalition’s attempt to pin the blame on them for the ‘economic mess’, and that the deficit is all the fault of profligate Labour spending. According to the Budget 2007, the structural deficit stood at just 3% of GDP before the recession struck; now it is 11%. In other words, prior to the recession it was relatively low by historical standards – as Ed Balls pointed out earlier in the summer, Britain went into the recession with ‘the lowest net debt of any large G7 country’, and this is a matter of fact not interpretation. Indeed, using the Treasury’s figures, the accusation that Labour wildly overspent in office just does not add up: public spending during the previous period of Tory rule was higher in all but 4 of the 18 years they were in office than at any point during 1997-2007 (the four years in question being the boom years after the ‘Big Bang’ deregulation of the City, that period satirised by Harry Enfield’s ‘Loadsamoney’, 1988-1991).
This is the basis for the first of Freedland’s two killer points. If Labour’s public spending was so wildly out of control, why did Cameron’s Tories (back in his hug-a-hoodie, quality-of-life days) promise to match Labour’s spending plans almost pound for pound? The answer is that clearly it wasn’t. This means, of course, that the size of the deficit now is largely down to the recession and the fiscal stimulus package that prevented disaster turning into catastrophe. Without it, it is likely that recession would have turned into depression, but somehow the Coalition spin machine has successfully managed to make it appear that the medicine was the disease.
Secondly, it was the banks, and the financial crisis that they brought upon us all, that are largely responsible for the recession. If anyone is in any doubt about the scale of their culpability, they should read John Lanchester’s Whoops! Why everyone owes everyone and no one can pay, which mercilessly excoriates the gargantuan follies of the Lords of Finance. Of course, the Labour government was culpable to the extent they indulged an out of control financial sector with useless light touch deregulation, but hang on, here comes the second of Freedland’s killer blows: the Tories thought even that was too much regulation. They have made the wrong call from start to finish, and now they are trying to distract us all from realising that fact – and getting away with it, aided and abetted by their friends in the Tory press. As Winston Churchill once said, ‘a lie can be half way around the world before the truth has got its boots on,’ and this claim that it was all Labour’s fault is nothing but a bare-faced lie.
Now for the economics. As I said above, the Tories matched Labour’s spending plans until the recession struck, at which point the two parties took markedly divergent economic paths. Labour, under Brown and Darling, followed classic Keynesian theory and government stepped in just as the economy was falling off a cliff. It provided a parachute of sorts, and the fact that the economy had started growing again by the election was a vindication. As Joseph Stiglitz, also in The Guardian, wrote on the eve of the CSR, ‘The Keynesian policies in the aftermath of the Lehman brothers bankruptcy were a triumph of economic theory. In Europe, the US and Asia, the stimulus packages worked.’
He says that for 75 years there has been a contest between economic theories about how best to tackle an economic downturn: in the red corner, advocates of Keynesian stimulus; in the blue corner, those advocating austerity and fiscal consolidation. His conclusion is simple: ‘Thanks to the IMF, multiple experiments have been conducted – for instance, in east Asia in 1997-98 and a little later in Argentina – and almost all come to the same conclusion: the Keynesian prescription works. Austerity converts downturns into recessions, recessions into depressions.’He adds that listening to the financial markets is not a good idea: these are the same markets that got us into the mess that required the stimulus that ballooned the deficit, which these markets now want to cut at a time when the consequences of doing so are probably going to be bigger deficits because of prolonged economic slowdown. Oracles of economic wisdom, these guys are not.
But what does he know, eh? After all, he is only a Nobel Laureate in Economics and George Osbourne is…well, not that good at economics. Anyone who argues that running an economy is just like running your household finances (an analogy he trotted out again in his CSR announcement) has clearly never read an economics book in his life. No, running a fiscal deficit is not like maxing out on your credit card, and no, the economy is not like a household budget. If it were, it simply begs the question as to how economics as a subject has kept going for over two hundred years. What’s the point of it? There’s nothing to it, nothing that Joe Bloggs doesn’t already know. Since we all run our own personal finances, we are all thereby more or less equipped to be economists right? Come to think of it, this means we are all equally equipped to be Chancellor of the Exchequer, which may be how Osbourne got the job.
As I’ve suggested elsewhere in this blog (‘Waltzing to Oblivion’) Ireland knows the truth of what austerity during an economic slow-down means (except for their government, which is piling on the austerity, and the deficit just keeps on growing) and we in Britain will probably find out sooner rather than later. Just how soon that feared double-dip will come can be gauged by the slew of statistics that point to a further downturn in the new year (rising unemployment; retail sales falling for the second month in a row; the housing market falling faster than at anytime since it first slumped and so on – David Blanchflower, who writes a weekly column in The New Statesman, keeps a tab on most of the relevant data). Even more scarily, the smaller devils in the detail point to an even bleaker picture, as Ann Pettifor has shown in another recent article. Among her credentials is that she is one of the few economists who predicted the Credit Crunch (along with David Blanchflower). What she says thus has kudos. Oh, and she points out that cutting government spending is not the same thing as cutting the deficit – just ask the Irish. But what does she know, eh?