Monday, 23 September 2013

The scandal of the austerity deception

I have been on holiday somewhere with understandably limited internet access, so I missed this post from assistant editor of the Daily Telegraph, Jeremy Warner. Forget most of the text, which comments on some recent posts by Paul Krugman and myself, and head to the last two paragraphs. The penultimate starts with this:
“In the end, you are either a big-state person, or a small-state person, and what big-state people hate about austerity is that its primary purpose is to shrink the size of government spending.”
And the final paragraph starts:
“The bottom line is that you can only really make serious inroads into the size of the state during an economic crisis. This may be pro-cyclical, but there is never any appetite for it in the good times; it can only be done in the bad.”
There is the old joke that there are just two kinds of people in the world, those who think there are two kinds of people and those who don't. The trouble with following an ideology is that you tend to make this ‘with us or against us’ division on what is seen as fundamental. In these terms I am a non-person, because I have no idea what the ideal size of the state should be (although I suspect within an ideology that defines itself by the virtues of a small state that makes me ‘one of them’). For me the intellectual case against austerity has nothing to do with the size of the state. The key argument I and others are making for those who want a smaller state is that it is folly to try to achieve it in a recession when interest rates are at the zero lower bound.

The problem for ‘small state people’ like Warner is that “there is never any appetite for it in the good times”. I can only interpret this as meaning that in good times people appear to be quite content with the size of the state they have, and will not elect a government which aims to reduce the size of the state. So why are things different in a crisis? Do people’s preferences over the size of the state relative to GDP really change when we are in recession? Or could it be that in the current crisis people are told that government debt is ‘out of control’, and that a reduction in government spending is necessary to bring the nation’s finances to order. Cuts in government spending are being justified by the need to reduce debt and not because of the virtues of a small state.

Reducing the size of the state temporarily to reduce debt, and reducing it permanently are rather different things. There is apparently no appetite for the latter, so why not push for the former as a way of achieving the latter? As a political ruse it sounds very clever, and it is currently working in the Eurozone, US and UK. But it remains a ruse: a giant deception played on electorates across the globe.

So no wonder Jeremy Warner is tired of the austerity debate. As he says “if you attempt to rip big chunks of government demand out of the economy, it is bound to have negative short term consequences.” Seeing the government you support trying to avoid making this admission must be painful. It would have been much more honest to say that the loss of output was worth it for the long term benefits that a small state would (allegedly) bring, but that is not the argument that governments are making – instead it was all about a ‘debt crisis’. This becomes even more painful when the intellectual basis for the debt crisis argument falls away.


Surely this deception is scandalous. The Telegraph played a major role in the MPs expenses affair. Many UK MPs had been overinflating their expenses because they believed their salaries were unjustifiably low because the public never had the appetite to increase them. So the end justified the means. The Telegraph quite rightly exposed this practice, and those MPs were held to account. Yet in financial terms the cost of the austerity deception is infinitely greater. To some the end (a smaller state) justifies both the cost (percentages of output lost) and the means (telling people it is all about a debt crisis). Yet it involves deceiving electorates around the world, which is why no government politician is ever going to be as honest as Jeremy Warner has been.

39 comments:

  1. It was always the explanation that made sense.

    If you assume that the objective of the government was to fix the economy, then you have to assume they are all incapable idiots surrounded by advisors who are also stupid.

    If you assume that the objective of the government was to reduce the size of the state, then pretty much everything they've done makes sense.

    Given that reducing the size of the state has been Tory and Liberal policy for years, whilst in opposition, it's not surprising that it is their policy now, even if they do not state it baldly.

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  2. Quote: The problem for ‘small state people’ like Warner is that “there is never any appetite for it in the good times”

    It could also be said that there is never any appetite for significant debt repayments in the good times. If fighting debt really was the 'small-state' believer's main objective, why in the good times do they prioritise tax cuts? It looks like greed is their main motivation.

    Surely they have things back to front: stimulatory tax cuts should be made in busts, and debt repayments made in booms... well, only if their aim is stability and not electoral power to push an ideology based on personal self-interest. Why does nobody seem to want a win-win solution?

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    1. Bill Clinton is one politician who did just that, but G W Bush forgot to put the surplus in the lockbox.

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  3. What a shame, Simon, that you weren't teaching economics at Oxford when Osborne studied there. No wait, that's right Osborne did not study economics, he studied history.

    It seems to me that the Govt and the Telegraph are impervious to factual arguments. As good as this one is.

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  4. I think it's more about class politics than the size of the state as such. Certain areas of spending - those that favour an aging Conservative electorate, are protected, even though they are actually the areas where most money is spent and which are increasing the fastest. Austerity is mainly about beating up on the poor and trying to reduce the number of public employees, since they are a reserve of support for Labour.

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    1. I agree this is a possible alternative story. It would be interesting to think of a variety of ways we could test between the two. You might, for example, count reductions in the defense budget as indicating a belief in a smaller state rather than reflecting class politics. Reducing child benefits for the better off might be another example.

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    2. Jonathan is certainly right about the U.S. No politician, except for a select few, really wants to cut defense. While they have no qualms about kicking people off food stamps and various other spending on the poor.

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    3. @Prof Wren-Lewis

      'You might ... count reductions in the defense budget as indicating a belief in a smaller state rather than reflecting class politics.'

      I've seen the opposite argument made by Kalecki, Baran and Sweezy and others; i.e. that military spending is more attractive to capitalists, and hence to conservative governments, because unlike other forms of spending, it does not compete with private investment or subsidise workers' leisure.

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    4. ^that is to say, that military spending reflects class politics. But yes, on that basis, we might look at changes in military spending as a way of distinguishing between the two explanations. I have a feeling though, that both are probably true to differing extents, at different times. Conservatives, particularly backbenchers, have complained about recent defence cuts in spite of all their austerity rhetoric (http://www.bbc.co.uk/news/uk-politics-24098329)

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  5. Simon, you are entirely right. The vast majority of the British newspaper coverage of the economy and austerity is laughably ill informed, and often appears to be deliberately misleading. Is there a single serious economist who doesn't think "austerity" was rather foolish? Even Besley looked mighty sheepish in front of Summers at Kings' valedictory gathering.

    Recent studies from the RSS have proven how poorly informed the average Brit is of basic empirical facts about their country. Warner and much of the press are to blame. They lie continuously, and are proud of putting more weight on anecdote than data. They spend far more time talking about "personalities" than about facts or hard policy. Most of their coverage is little more than biased gossip. It's hardly surprising the public mistrusts journalists almost as much as politicians.

    As a consequence much of the traditional newspaper industry is dying. Young people, particularly highly educated readers, are far less likely to read papers than their parents. Circulations are in free fall (over 10% a year), and with the exception of the FT, none of the traditional broadsheets have found a profitable online model.

    The reality is that the Telegraph is unlikely to exist in 10 years time. You are providing a vital public service by helping send them on their way.

    Might I suggest you start a regular series of posts entitled: why oh why can't we have a better press corps? Alternatively Warner would make a great contestant for DeLong's stupidest man alive competition.

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    1. I’m no fan of Warner. However my answer to your question “Is there a single serious economist who doesn't think "austerity" was rather foolish?” is a resounding “yes”.


      Most of the department of economics at Harvard has been promoting austerity for the last few years, in particular Rogoff, Reinhart, Niall Ferguson, and most famously Alesina, inventor of the most ludicrous austerity argument ever, namely “expansionary austerity”.


      Plus there are numerous IMF and OECD authors who have promoted so called “fiscal consolidation” even if the effect is a bit “austere”. Plus the Australian government seems to be hell bent on balancing its budget regardless of the consequences for unemployment.


      These authors have perhaps quietened down a bit over the last 12 months, but I suspect they are still mumbling austere messages into the ear of anyone who will.

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    2. Might I suggest you start a regular series of posts entitled: why oh why can't we have a better press corps?


      Because Upton Sinclair nailed it. After all, who own the newspapers? Big corporations!! So austerity serves their, and fellow elites, interest.

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    3. Phil,
      Agreed. There you have it. The 'right wing press - which I confess to having read and whose toxins I imbibed for years - is the mouthpiece of the Austerian Creed, the religion of the 1%.

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    4. Anon:
      When was the last time a newspaper offered a full-throated defense of unions? The NYT ran a piece about BdB the other day basically harping on the fact that he once supported the Sandinistas. The next time the NYT refers to "Tailgunner" Ted Cruz as a McCarthy-ite/Father Coughlin-like figure will be the first.

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  6. I read Warner's article a few days ago - he is the same man who said that Krugman has “Satanic intent” (Krugman blog May 25, 2012 'The Antichrist Cometh' on Warner's 'Superstar economist Paul Krugman wants us to change course, but his solutions are simplistic', Telegraph 24 May 2012).

    When you look at the size of journalists' salaries I think it is fair to say that it is not only MPs' expenses which are an issue.

    I wonder what the comparison of academics' wages to those of 'economic' journalists looks like, and how much this sort of newspaper article is driven by the fear that state-funded academics on the blogosphere are collectively now giving a better service for more moderate rates of pay than are the panoply of hacks?

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  7. I think it is not unlikely that the debt argument is being used as a cover for a Tory agenda to permanently pull back the state - especially its redistributive properties. Large government means high taxes and comes at the expense of business according to this thinking (which unfortunately is legitimised by much English political economy). Recession and the "consequences" of Labour's failed policies gave them the political opportunity to do this. But what were the Liberals thinking? Also in the Eurozone I do not think reducing the size of the state is the end game. In Teutonic Europe there is a dislike for historical reasons of debt and deficits which are monetised and undermine central bank independence as well as a popular dislike of bailing out poorly performing economies. But this has nothing to do with govt/GNP ratios if expenditure can be funded by taxes rather than borrowing.

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    1. Until recently I had hoped that LibDem support for austerity was a panic reaction to the Greek debt crisis, and so would be possible to change as it became clear that there was no problem funding UK debt. Unfortunately it appears I was being too charitable: see http://mainlymacro.blogspot.co.uk/2013/08/bringing-economics-back-into-fiscal.html

      On Europe I take your point, but how do you explain the reaction to France: http://mainlymacro.blogspot.co.uk/2013/09/france-and-commission.html

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    2. I think the answer to that question lies in your blog:

      "With these remarks, together with its insistence that various Eurozone countries undertake certain ‘reforms’, the Commission appears to be doing its best to create a de facto fiscal union. "

      The end game for the European Union is surely closer political and economic union, there is not a particular love for small government anywhere on the continent. Optimal currency arguments done to death by US economists are trite and show a lack of interest in European history: before the Euro, the countries that did best were in the greater Deutschmark area, not the ones that devalued or inflated their currencies through independent macro policy. French foreign and security policy prerogatives are closely tied to the European project; that is where they see peace and prosperity in the long term best secured. But before fiscal union, monetary union must not be let to unravel. Monetary union over the expanded EU, however, is surely unlikely, let alone fiscal union. A two speed approach looks increasingly likely. It is in France's interest in the meantime to stay in and play the rules of the game if it wants to be a part of , and play a role in shaping, fiscal union later. Still, why the Commission wants spending cuts rather than tax rises in France is unclear. My only guess is that it has something to do with fiscal harmonisation.

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  8. You can't "shrink the state" unless you're committed to some form of genocide, for the people are the state. I think this is something that is often overlooked by those who profess a desire to "shrink the state".

    What the likes of Warner want to "shrink" is the democratic control that people have over the institutions that form the state, they want to restrict access to health and education, and all the other necessities that form free men and women.

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  9. "The problem for ‘small state people’ like Warner is that “there is never any appetite for it in the good times”. I can only interpret this as meaning that in good times people appear to be quite content with the size of the state they have, and will not elect a government which aims to reduce the size of the state."

    Yet there is another quite obvious interpretation, which is that in good times voters think they can *afford* a bigger state. In other words, they don't necessarily want a bigger state on principle, but just as a luxury.

    And then, in tighter times, they feel the need to cut back a bit, just as they do in their private lives.

    There is much less "ruse" here than you seem to think. Politicians are people, too, and they are people who are pretty good at reading the instincts of the average voter. That's how they get elected, after all.

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    1. But Warner wants a smaller state permanently, and not just while the recession lasts. So the hope must be that, come the recovery, the foundations of a smaller state are established, and any attempts to go back to having this luxury can be resisted. But if what you say is true, why are the arguments for cutting spending focused on the need for debt reduction, rather than the need for a smaller state?

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    2. Jon nice to see that you are alive..couple ppl asked me and i am how should i know.
      You are being ricardian here assuming people internalise it...seems unlikely to me.

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    3. If, as you imply, people really do view "government" as a commodity like any other service they purchase, then therein lies a big part of the problem in communicating with them about these issues.

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  10. Simon, with al' due respect, most likely Governments understood the long term growth trend changed: if growth in 5 years is 2%/y would you mind paying 2%/y taxes? What if growth was 5%/y? Gross is writing of the New Normal, I invite you to please.

    Politically (most economists don't study it :)) a big state is needed to manage a demanding country where citizen interaction requires increased regulation or intervention. The State exists as an expression of societal contracts.

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    1. Or in Adam Smith's term, to "police" the economy. Here's a reasonable example:
      http://english.ahram.org.eg/NewsContent/3/12/82348/Business/Economy/Egyptian-government-mulls-setting-prices-of-fruit-.aspx

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  11. “There is never any appetite for it [cutting the size of the state] in the good times” is simply untrue.

    For example, Bill Clinton cut the US Govt's share of GDP by nearly 4% during 8yrs in office.

    http://www.cato.org/blog/king-fiscal-squeeze-isbill-clinton

    You are far too polite about Warner, his contribution to the debate is a huge net negative.

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  12. These guys can talk the talk about cutting the size of the state, but where are they with the NSA and GCHQ revelations? Leaping to the defense of intrusive government, naturally.

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  13. In case it is of interest, I have summarised the Warner post into seven statements which I think get across his line of reasoning more clearly than the original article.

    1. Paul Krugman and Simon Wren-Lewis are polemicists with an agenda.
    2. It looks like austerity was right, because growth has returned in Britain, but those two were never going to accept this.
    3. Admittedly Wren-Lewis’ argument that the inevitable eventual return of growth doesn’t mean that austerity hasn’t done any harm is logical. But he can never prove that it was austerity that made this depression so bad and so long.
    4. Anyway, most supporters of austerity never said it wouldn’t hurt growth. Although George Osborne did say that, before he was in office. And the OBR always recognised that it would hurt growth.
    5. Krugman and Wren-Lewis are arguing from an ideological position. Wren-Lewis has even argued that there was nothing wrong with the fiscal approach of the last Labour government, and this isn’t credible.
    6. But in the end we’re all ideological: we either want a big or a small state. Krugman clearly wants a big one, because he defends France’s tax rises.
    7. No-one ever wants to cut the size of the state when times are good, so we’ve got to do it during a crisis, even though it might make the crisis worse.

    Nowhere in his article does he present the Cameron / Osborne case that high debt will be catastrophic and we have to deal with it now. The question that this leaves hanging is whether it is acceptable for a government to present false reasons for pursuing a policy that it believes is right because it is worried that its people will not accept its real reasons.

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    1. 2. It looks like austerity was right, because growth has returned in Britain, but those two were never going to accept this.


      We'll wait for more than a quarter. Even if there was growth for a quarter, it's not going to last.

      7. No-one ever wants to cut the size of the state when times are good, so we’ve got to do it during a crisis, even though it might make the crisis worse.

      What exactly are you looking to shrink? And what you advocate makes no sense. You're advocating for needless suffering. How noble of you.


      Nowhere in his article does he present the Cameron / Osborne case that high debt will be catastrophic and we have to deal with it now.

      Except they're(Cameron/Osborne) lying. Debt to GDP has been a lot higher in the past and the world didn't end.

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    2. Don't get me wrong Phil, I was spelling out the argument to show that it was weak. I agree that the Cameron / Osborne position is dishonest, and you don't even need to oppose austerity to see that. Even Warner seems to agree, although he doesn't broach the subject. The difference is, he believes it's fine to lie to the people because they don't know what's good for them.

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    3. Don't get me wrong Phil, I was spelling out the argument to show that it was weak. I agree that the Cameron / Osborne position is dishonest, and you don't even need to oppose austerity to see that. Even Warner seems to agree, although he doesn't broach the subject. The difference is, he believes it's fine to lie to the people because they don't know what's good for them.

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  14. In US/UK the austerity debate is about small state vs big state.
    But in euroland the underlying reason for austerity is different: creditor nations don't want to take on (more) risks for debtor nations. If the debtor nations don't like this and want to be free, they should leave the eurozone.
    There is a third debate: nobody will deny fiscal stimulus will keep the economy going, but what is the long term outcome? Isn't it just kicking the can down the road? Nobody knows. Japan is the best example of the fiscal stimulus road, and it's still uncertain how it will end for them.
    And there is a fourth debate: how much private and public debt can economies cope with, without becoming unstable?

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    1. there is fifth debate: eurozone debtor nations have a competitiveness problem, in particular compared to low wage countries outside eurozone. Fiscal stimulus doesn't solve this, increasing wages to stimulate demand in debtor countries will make this worse, increasing wages in creditor countries will not solve debtor nations competitiveness problem compared to rest of world, and they cannot devaluate in eurozone.
      If they stay in eurozone, all they can do is internal devaluation. Fiscal stimulus can soften blow, but creditor nations don't want to take on more risks. But they have little choice, in the end the austerity debate is smoke and mirrors, public debt is rising in eurozone and will continue to rise.

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  15. The main reason the gov needs to perform deficit spending is to increase the money supply. In other words it needs to conduct monetary policy because the current monetary policy mechanism employed by the central bank isn't working properly.

    To create an effective mechanism the CB can directly interact with the public in a non debt based manner so that monetary policy isnt tied to the performance of the credit markets.

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  16. See "We Shall Overwhelm" by David Cay Johnston in The American Prospect. Johnson is a tax attorney.


    “Social movements that explicitly defend the interests of the rich and the almost-rich have been a recurring feature of American politics,” Isaac William Martin, a sociologist at the University of California, San Diego, reminds us in his new book, Rich People’s Movements: Grassroots Campaigns to Untax the One Percent. “Such movements shook the American polity before the Obama era, before the Reagan era, and before Barry Goldwater ran for president—before, even, the New Deal.”

    With meticulous research, Martin shows how the modern Tea Party grew from decades of efforts by American oligarchs to de-tax themselves. They relied on cranks, rogues, and a few scholars to polish the most effective ideological marketing pitches. Their goal was selling the notion that if the rich bear less of the burden of government, all of us will somehow end up better off.

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  17. Krugman's recent column where he openly called the austerians "liars" (because, he claimed, they were deliberately hiding their true motives) seemed over the top to me. Having read Jeremy Warner's antidemocratic screed above I think Krugman was actually spot on.

    Because another way of putting Warner's point is "only in a recession can we scare the rubes enough for them to vote against their own interests."

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    1. We have democracy when the people rule. So, to reduce the size of the government is to reduce the power of the people.

      No who would be in favor of this: Oligarchs of course.

      Failure of the great unwashed to understand this has always been the problem in modern democracies. It doesn't take much to scare them into voting against their own interests.

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  19. The ultimate scandal of the 'small government' people is that they NEVER, EVER specify what part of the government is the part that is too big, because to do so would give their game away. When they say 'small government', what they mean is 'cut my taxes'. I'm Alright, Jack has not gone away, at all.

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