Lions led by donkeys: October 20 and the sheer dysfucntion of British politics

Yesterday, around 150,000 people marched through central London to protest against austerity and job cuts.  Similar marches took place in Glasgow and Cardiff.  In almost every respect, the marchers represented everything that is decent about Britain; people cutting through the political and media narratives and responding to the reality of austerity and the direct effect it has on people’s lives.  Many of them would have been public sector workers, forced to implement austerity every day while working desperately against mounting pressures to protect the dignity and wellbeing of those they serve.

And yet, at the heart of the event, there was a  morass of conflict and inconsistency that showed clearly how British democracy has lost its way.   The most obvious was of course Labour leader Ed Miliband addressing the rally; leader of a Party that has promised not only to keep all the coalition’s cuts in place after 2015 but to make additional cuts of its own.  Miliband’s presence was of course a symbol of the relationship between the TUC, who organised the march, and the Labour Party.  The strangeness of this event is not so much the fact that Labour looks increasingly like an echo-chamber for the coalition’s neoliberalism, but that Labour remains largely funded by unions whose members appear to oppose the neoliberal consensus of which Labour is an integral (and, on the basis of Ed Balls’ recent pronouncements, enthusiastic) part.  The relationship between Labour and the unions looks increasingly like a dysfunctional marriage in which the maintenance of appearances and patterns of behaviour has long superseded any sense of common purpose; without that troubled relationship Miliband addressing yesterday’s rally is about as likely a spectacle as Margaret Thatcher addressing a symposium on the benefits of free school milk.

None of this would be so puzzling if there were not a nuanced, evidenced case against austerity economics; indeed, if austerity economics were not failing in its own terms.  As many of us predicted at the outset, cuts and austerity are not reducing the deficit but increasing it; a slower version of what is happening in Greece and Spain is happening here, and all Labour’s economic policies are set to do is to speed the process.  Much of the austerity narrative is astoundingly economically illiterate; every time a Coalition politician solemnly intones banalities about paying down the nation’s credit card, or talking about Labour’s profligate legacy, they are showing their inability to grasp – or at least to articulate – the most basic economics.

A fine example of that illiteracy can be found in comments by Hove MP Mike Weatherley, who was reported a while ago celebrating benefit cuts of £10 million in Brighton and Hove without apparently the slightest inkling that this was £10 million taken out of the local economy – hitting businesses both large and small (although the small ones do not have access to the cheap labour of workfare, pioneered by Labour and implemented with zeal by Tories.

And also note in that piece how Tories continue to  press the lie that housing benefits are paid to those on benefits rather than lining the pockets of landlords, and repeats the lie that those who receive benefits are not working, when that is simpy not the case.  These lies continue to gain traction, and not only do they build on the rhetoric of Labour in office but continue to inform its public positioning.  It’s not as if the language is quite the same as that of the Tory party – which at its recent conference often appeared to be only two gin-and-tonics from labelling the recipients of benefits as “useless eaters” – but is couched in terms of that insidious dog-whistle phrase “hard working families”.  Labour’s rhetoric on benefits is almost a dictionary definition of moral cowardice.

And the technical understanding of how shifts in public expenditure affects economies is increasingly undermining the case for austerity.  One of the stranger aspects of yesterday’s events was a Labour leader addressing a TUC rally from a position that appears to be substantially to the right of the IMF.

The dysfunction we saw yesterday was that of tens of thousands of decent people – people who know that there is an alternative that is better, fairer, more efficient, more grounded – being betrayed and abandoned by the Westminster elite; and by a Labour leadership that really has nothing to offer beyond more of the same.  Yes, Labour politicians do make all sorts of noises about fairness and justice; but they simply appear incapable of understanding that fairness in society depends above all on economic justice, and on reversing the transfer of resources from the poor and vulnerable to the wealthy and owners of property – a transfer that Labour presided over in office, which the Coalition has accelerated and which, rather than the deficit, looks like the rationale for austerity and cuts. Labour’s leadership looks like nothing so much as a First World War general, straight out of Blackadder, whipping up enthusiasm for the big push while the poor bloody infantry try to rationalise away their anticipation of the likely reality.

The real debate in Britain – and elsewhere in the rich world – is not between political parties in the establishment, but between a political establishment that is united around a neoliberal programme and the people who understand and experience the realities of austerity – who see their livelihoods destroyed, their experience devalued, their votes ignored.  Five million people have walked away from Labour since 1997; quite a lot more will walk away from the Liberal Democrats in 2015.  But the anti-austerity case is not necessarily a left-wing one; its advocates include people like Paul Krugman and Joseph Stiglitz, former Clinton advisers and no socialists; the authors of the Spirit Level, whose programme looks like a traditional centrist social democracy; increasingly the IMF appears to be accepting the anti-austerity logic.

I have written here many times before that a political system based on a main-party consensus that does not reflect wider opinion cannot be a healthy democracy.  Yesterday, in Hyde Park, accompanied by all the accoutrements of the traditional Labour-TUC link, that conflict was manifested in a very obvious way.  There is a very strong, evidenced and clear case against austerity economics, based on fairness and economic justice.  The people who marched yesterday understand that case.  Labour lacks the intellectual and moral courage to articulate it. Those who want real social and economic justice in Britain need to look elsewhere.

Austerity: is Ed Balls being outflanked on the left by the IMF?

Austerity has become the default mode of European – more especially British economic policy; in his speech to the Conservative Party conference last week David Cameron reiterated that there is no “Plan B” and mocked the Labour Party for its alleged tax and spend profligacy – even though the statements of shadow Chancellor Ed Balls appear to lock Labour into an endorsement of austerity that is in many respects more rigorous than that of the Coalition, raising the prospect of deep cuts after 2015 on top of those that the Tories have already made.

Against this background, it has been fascinating to read the assessment of Jonathan Portes, director of the National Institute of Economic and Social Research (NIESR), on his blog Not the Treasury View.  In my view his analysis is desperately important.

Portes’ assessment matters because it goes right to the heart of the theoretical justification for austerity economics.  Portes examines the multiplier – the key theoretical construct that underpins Keynsian economic analysis and explains the effect that changes in Government expenditure have on the economy as a whole.  The fundamental principle is that government and individuals behave in different ways.  Individuals consume and save (and, increasingly in the boom years before the 2008 crash) borrow.  Governments spending goes on procurement, projects, transfer payments (benefits and subsidies), and of course paying public workers.  They also borrow, and repay debt; but at different levels to individuals. Put crudely, a key assumption of Keynsian economics has been that Governments – especially in bad times – spend a higher proportion of their income directly than individuals, especially in an environment where they are borrowing, than individuals, who have a propensity to save or offshore – the wealthier they are, the more likely they are to take demand out of the economy in this way. Thus increasing Government expenditure is, other things being equal, more likely to stimulate economic activity than cutting taxes  – it’s the basic reason why many of us on the left see the Coalition’s economic policy as so utterly disastrous.

The multiplier, then, is the mathematical expression of this relationship.  It’s obviously something that is pretty approximate, based on a mixture of theory and observed effects in a massively complex economic world.  But as a rough rule of thumb it has plenty going for it.

Portes shows that there are three views of the way in which the multiplier operates under austerity.

• First there is the view articulated by the supporters of austerity – that empirical evidence suggests that, far from stimulating activity as Keynsian policy-makers have assumed, increasing government expenditure decreases it.  As Portes argues, this counter-intuitive view was based on a single influential paper by Alesina and Ardagna which emphasised confidence and exchange rate effects; it has the effect of telling politicians whose inclination was to reduce public expenditure what they wanted to hear. Portes concludes that this view was not very credible economically, but hugely influential politically.

• The second view – pretty mainstream among economists, including the IMF  – was that austerity would be damaging but not disastrous. Based on historical evidence it postulated a multiplier of around 0.5 – i.e. a reduction of 1% in public expenditure would lead to a fall in output of around 0.5%

• The third view was exemplified by the writings of Nobel Laureate Paul Krugman and numerous others, and argued that institutional factors meant that the multiplier was likely to be much higher; these economists crucially argued that rather than relying on historical data to understand an economic situation that had few precedents, it was necessary to revisit the macroeconomic theory. Krugman famously and scathingly caricatured the advocates of the first view as “waiting for the confidence fairy”.  They argued that this approach led to the conclusion that the multiplier would be far higher, certainly greater than 1 and possibly as high as 1.7.

Portes quotes from the latest IMF Bulletin which shows that the Fund is moving much closer to the third view – and points out the policy implications: first that the assumptions used by the OBR to feed into UK economic policy were way too optimistic (and its puzzlement over why things have not gone as it predicted misplaced); and that the impact of fiscal expansionism, the obverse of austerity, will be all the greater.  In other words – the bang for each buck of extra Government spending appears to be greater than many have assumed.

There are a number of conclusions that I draw from this.

• First – as Portes notes – there is the utter contradiction of using fiscal contraction as a means of restoring stability to economies after the 2008 blowout.  The feedback problem – that austerity is trashing tax revenues to the point where more austerity becomes necessary to achieve deficit reduction – is already savagely at work in the Greece, Spain and Portugal and is happening in the UK too.  The effect of the IMF’s shift in position is essentially to knock the legs out from underneath radical austerity.  Portes points to the contradiction between the aim of long-term stability and austerity’s effect of short-term upheaval and instability is crucial.

• Second, in shifting its position, the IMF is actually – if probably not explicity – responding to one of the fundamental Marxist critiques of capitalism, that the growth of capital requires, among other things, buoyant consumer demand to allow capital to expand.  Crises of demand could in the past be assuaged by things like colonial expansion and the monetization and privatisation of common assets, but the scope for doing that no longer really exists.  The IMF understands what politicians – with their ideological hostility to the state and their apparent desire to pursue regressive policies that transfer wealth from poor to rich – apparently do not; that economic stability in a capitalist society is dependent on people buying things (indeed, one can argue that the transfer of wealth from people who predominantly spend to those who accumulate has its own multiplier effect).  The IMF’s tone sounds rather like that of Keynes, whose mission was not to abolish capitalism but to save it from itself.  There are long term arguments about whether capitalism based on mass consumption is sustainable (my own view is that it isn’t) but the point is that on capitalism’s own terms the evidence against Plan A is becoming overwhelming.

• Third, as I have argued before, there is a huge failure on the social democratic left to challenge the austerity narrative with one that is altogether more grounded and evidenced.  The failure of the British Labour Party is salutary in this respect.  Ed Balls is far from being a stupid man, and is certainly one whose technical understanding of economics far outstrips that of George Osborne.  But he has become part of a political consensus that is simply unwilling to challenge the fundamentals of austerity, and to argue that even measured against the aim of achieving stable capitalism it simply isn’t working.

For me, one of the most frightening aspect of the politics of the right in general and of the UK Coalition in particular is the way in which ideology repeatedly triumphs over evidence – a major theme of the three weeks of party conferences that have just finished.  Is there anyone left in the political mainstream who is prepared to champion an evidence-based critique of austerity?

Solving the puzzle of gullibility

A great little post from nobel laureate Paul Krugman on his New York Times blog today asks why the pundit class are so gullible:

Looking at the House budget proposal, in all its ludicrousness, makes me wonder about an enduring puzzle: the gullibility of so much of our pundit class.

In the time I’ve been writing for the Times, I’ve watched my colleagues in the commentariat, en masse, agree that:

George Bush is a nice, moderate guy, who will work in a bipartisan way.

George Bush is a heroic leader, who has risen to the occasion.

The case for invading Iraq is overwhelming; only a fool or a Frenchman could fail to be persuaded by Colin Powell.

John McCain is an independent-thinking maverick.

Paul Ryan is an honest, deeply serious thinker who really cares about the deficit.

The tax cut deal paved the way for a new phase of bipartisanship.

The Ryan plan sets a new standard of seriousness.

In each case, any educated citizen with internet access could quickly see overwhelming evidence that these things weren’t true. And you would think that people would learn something from the repeated failure of these kinds of consensus.

And yet LinusCharlie Brown keeps trying to kick that football, over and over again.

It wouldn’t take long to pull together a similar list for the UK:

• We are facing an unprecedented level of public debt, necessitating severe cuts in public expenditure;

• Public expenditure was allowed to run out of control in the by NuLabour and we now have to pay for Gordon Brown’s profligacy;

• Cutting people’s benefits will encourage them into work;

• Public servants are highly-paid feather-bedded wasters who can expect to move from cosy jobs-for-life into early retirement on gold-plated pensions;

• Bureaucracy is a public-sector phenomenon;

• Health and safety legislation has proliferated to the point where it is undermining the competitiveness of the British economy, and is preventing British people from enjoying their traditional pastimes;

• Mass immigration has destroyed jobs and lowered pay;

• Privatisation and competition lead to greater efficiency and productivity;

• Political correctness has gone mad;

• The Liberal Democrats are a left-of-centre party exercising a profound influence on government, protecting the vulnerable;

In all of these cases, ten minutes with Google will be enough to dispel the myths.  Yet they persist – despite the fact that in many cases they directly conflict with the day-to-day realities of life.  Of course, much of it has to do with a mass media that has a distinct social and ideological agenda, and in the BBC a public service broadcaster that has lost sight of its responsibilities.  And it’s easy to cry “false consciousness” and to disappear up the fundament of cod Marxism, and the reality is much more subtle than that; it’s a mix of ideology and the way in which political discourse has become disengaged from daily reality.

And that detachment lies at the heart of what looks to me like a real crisis of democratic legitimacy, when political discourse loses its grounding in day-to-day reality and those with wealth and power both promote and exploit that.

The four big lies of Osborneomics

1.   The deficit is so big that we are in an economic emergency and we must take immediate action to reduce it – but the current deficit is, by the standards of the last two hundred years, not particularly large and is actually rather smaller than that run by the British economy for most of the nineteenth century.  Because Britain’s public debt matures later than that of most other Western economies – certainly than that of the oft-quoted Greece – the comparison with other economies is not valid; ironically enough it is the much-maligned Gordon Brown’s management of debt repayment as Chancellor that has put us in this beneficial position.  The deficit is a problem if it is allowed to continue, but as Keynes explained, the best way out of it is stimulus to create employment, not to take £80bn out of the economy.  Comparisons with the family housekeeping are, as Keynes pointed out, economically illiterate. Government funding doesn’t work like that. And Cameron gave the game away when he said that even when the deficit had been dealt with (fat chance) public expenditure would remain constrained.  There are plenty of eminent economists – from Nobel Laureate Paul Krugman on the centre-left to the doyen of British monetarism and one of Margaret Thatcher’s favourite economists, Samuel Brittan, on the right -  who claim that the current policy is madness. This is about ideology, not economics.

2.   Labour’s profligate spending took us to the edge of bankruptcy – complete nonsense. The problem we face is not a spending crisis, but a tax revenue problem.  Within the parameters of market capitalism (which I don’t really accept, but that’s another story) Labour actually did a rather good job, but the endemic failures of the system are bigger than the attempts of competent individuals to manage it. The basic problem arises from the more than £40bn that was sunk into bailing out the banks, brought low by speculators, and the economic shock that followed it, which , according to many economists, has resulted in a hit of between 10% and 15% to GDP – and as a result of which tax revenues have fallen of a cliff. Not only do cuts mean that the poor and vulnerable are made to pay for the bankers’ delinquency – while the bankers continue to pay themselves large bonuses (£7bn this year, or the equivalent of the cuts to the welfare budget announced yesterday), but the economic fact is that Osborne has got it the wrong way round – public expenditure cuts, which take demand out of the economy, will reduce the tax base further while increasing welfare spending.  A Tobin Tax on international financial transactions – most of which are speculative – would slash the deficit overnight.  There is an international appetite for it.  But the bankers would howl, and they’re in charge.  Which brings us on to …

3.   The newly liberated private sector will create the hundreds of thousands of jobs needed to offset those lost in the cuts – which is even more ludicrous than the last one.  The historical evidence is obvious and overwhelming – every time a Government has indulged in cuts of this magnitiude, it has tipped the economy into depression.  While the much-maligned Brown and Darling were trying desperately to manage the crisis in the least painful manner possible, with a deftness that was lauded around the world, Ireland embarked on precisely the course that Osborne is following now.  Four emergency budgets later, the Irish economy is on its knees.  And it’s the same whenever slash and burn economics is tried.  It happened in Britain in the 1920s and 1930s, in New Zealand in the 1980s, in Ireland now.  No economy in the world, even in boom times, has succeeded in creating jobs at the rate that Osborne is forecasting in the UK in the next few years, least of all one that has taken £80bn of demand out of the economy.  It’s sheer economic illiteracy.

4.   We’re all in this together – the most pernicious lie of all.  As the institute of Fiscal Studies has demonstrated, the effect of Gideon’s budget is deeply, profoundly regressive – the poorest and most vulnerable people on benefits will lose 10 per cent of their income.  Women, who represent the majority of workers in the public sector, will be hit particularly hard, as will families with children.  And yesterday’s announcements are only the start – the 30% cuts in local government funding will mean the evisceration of front line services like care for the elderly, home helps, children’s services, social work – areas which have not exactly boomed on New Labour’s watch. (The idea that New Labour promoted a benefits culture is frankly risible – the evidence base shows overwhelmingly shows that inequality widened dramatically after 1997, not least due to benefit cuts). Meanwhile, tax breaks for private schools are untouched.  Corporate taxation is reduced, and the Coalition – while referring to benefit cheats as “muggers” – does nothing to deal with big tax avoidance.  Vodafone owes £6bn tax from asset deals – Osborne looks the other way and it gets written off.  Most of all, the cuts in housing benefits will effectively mean an economic cleansing of parts of London in particular.  The return of Shirley Porter’s housing policy – with Liberal Democrats cheering on from the sidelines – is one of the most obnoxious pieces of social engineering even the British Conservative Party has ever proposed.  It takes us into territory normally associated with the rantings of Geert Wilders.

In other words – dishonest, wrong and economically illiterate, based on the belief that you can soften up the electorate with tabloid prejudice and the sonorous repetition of the claim that there is no alternative.

The psychopathology of fantasy economics

Here’s a fascinating Op-Ed piece by Paul Krugman in the New York Times, about the current vogue for fiscal austerity.

Krugman argues that the wave of Government budget-cutting has no rational economic basis.  He points to two factors – fear of speculators and a belief that confidence will bring recovery.  He mocks both.

Here in the UK we’ve had the fascinating spectacle of the ludicrously-named Office of Budget Responsibility claiming that although more than half a million jobs will go as a result of public spending cuts, more than two million will be created over the lifetime of the Parliament as confidence returns and the state gets off the backs of the productive sectors of the economy.

It’s fantasy.  There’s some sensible analysis here but the facts are simple; even in the boom times the private sector was creating jobs at a fraction of that rate and cuts in public spending hit the private sector too – after all the people who build roads and schools, supply hospitals and staff school canteens and even provide bureaucrats with pens to push are all in the private sector.   What’s going to happen to these jobs?  In what way is the removal of the allegedly dead hand of the state going to benefit these people?

It’s government by wishful thinking.  George Osborne may like to present himself as a realist, but actually his outlook is indistinguishable from Mr Micawber, hoping against hope that something will turn up.  His evidence base is about as solid.

But of course it’s what the Tories and their Lib-Dem useful idiots want to believe.  After everything that has happened, after bankers’ crashes and speculative commodity and housing bubbles booming and busting, it’s pure moonshine.  Krugman points out that there is no evidential basis for the claim that shrinking the state will increase confidence, and plenty of evidence for the opposite.  The denial is astonishing.

The denial about the deficit is most striking of all.  There is no more devious con-trick than Osborne comparing the UK deficit with Greece; the debt is a smaller proportion of GDP, it matures over a longer period, and the claim that we’re next is about as plausible as Krugman’s attack of the bond vigilantes.

The only rational explanation for the economic policies of the coalition is that they are driven by the purest ideology – it goes beyond the 1980s because these people seem to be entirely lacking in Margaret Thatcher’s unerring instinct for picking the fights she knew she could win and leaving well alone the things where she was on to a loser (it was when she lost that instinct over the Poll Tax that her downfall came).

It’s a truism of political life that hubris and delusion set in for most Governments late in their life – in this one it’s happened after a matter of weeks.  If the outcome were not bound to be so desperately damaging in terms of our society, it would almost be worth it to see the excuses they deploy as the double dip turns into a plunge.