Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday 21 January 2016

The dead hand of austerity; left and right

Those who care to see know the real damage that austerity has had on people’s lives. From those needing care who now get so little, to those waiting longer for hospital treatment, and those whose homes might not have been flooded without the cuts from 2011. There is nothing unusual about the UK in this respect: austerity (cuts in spending that are either mistimed or unnecessary) causes harm, wherever it is imposed. But the political cost has also been huge.

This is true in the Eurozone, but in this post I want to focus on the UK. The cost on the left could not be greater. Austerity and the reaction to it were central to Labour losing the election. The Conservatives managed to pin the blame for Osborne’s austerity on Labour, and as the recent Beckett report acknowledges (rather tellingly): “Whether implicitly or explicitly (opinion and evidence differ somewhat), it was decided not to concentrate on countering the myth … ” It was also central in the revolution of the ranks that happened subsequently.

Austerity is a trap for the left as long as they refuse to challenge it. You cannot say that you will spend more doing worthwhile things, and when (inevitably) asked how you will pay for it try and change the subject. Voters may not be experts on economics, but they can sense weakness and vulnerability. If instead you restrict yourself to changes at the margin, you appear to be ‘just the same’.

I think many of those on the centre left still do not see this trap. There are some problems you cannot triangulate around, but have to tackle head on. Here is a recent example from Rachel Reeves. Much of what she proposes, when she talks about securing the necessary investment in flood defences for example, makes total sense, but it also tends to cost money. Rather than confront Osborne’s unnecessary cuts, she talks about a failure “to demonstrate that we understood that dealing with the deficit and controlling public spending are the precondition of effective progressive government.”

The urge to move on, and not talk about the dry subject of the public finances, is quite understandable and not confined to the parliamentary Labour party. Here is Mariana Mazzucato giving a brief summary of her excellent innovation agenda for Labour (or indeed any political party that is not hamstrung by a neoliberal romantic view that technical advance is all down to the entrepreneur and the state just gets in the way, a view completely destroyed by her excellent book). I was struck by the juxtaposition of the following two sentences:

“Likewise, it is time to move on from the debate over austerity to a new conversation about how to build smart, mutually beneficial public-private partnerships to fuel decades of growth.
For starters, we must invest in education, human capital, technology, and research.”

But of course it becomes so difficult to achieve that investment when the dead hand of austerity is demanding cuts from everything it touches.

That dead hand is not just left handed, but touches the reformist right just as it does the left. Some regard David Cameron’s speeches that talk about reducing the causes of poverty and social deprivation as just window dressing, but I agree with Raphael Bahr that these come from a genuine desire on his part to be remembered as a socially reforming prime minister. Yet as a result of austerity such speeches seem ridiculous now, and will only be disregarded by history: meaningless when set aside the reality of the poverty and harm caused by government actions. Here is a self explanatory chart from the IFS.

There were genuine hopes on all sides that Universal Credit (UC) might achieve the aim of simplifying the benefit system, and thereby reduce the number who fail to claim benefits they are entitled to and need. But as a result of austerity, and those cuts to tax credit that the Chancellor was forced to postpone, UC will now be seen as a way of cutting benefits and will be either extremely unpopular and/or be quickly killed. It would be useful to be able to assess what aspects of the health reform brought in by the coalition worked and which did not, but I suspect all that will be lost in the chaos caused by underfunding.

So the dead hand of austerity kills hope of reform from both left and right. The years of austerity will be seen as wasted years, when no new progress was achieved and plenty that had been achieved in the past setback. Recovery from recessions need not be like this, and indeed has not been like this in the past. They can be a time of renewal and reform: if not from a credit squeezed private sector then at least from government. And it could have been like that again, because there was absolutely no necessity to embark on austerity in the depth of a recession.

Those on the right may say well at least we are getting a smaller state. But attempts to force people to in effect spend less on health, education, justice and even a welfare state, are not durable for more than a decade or two. It will be a hollow victory.

In the US and most of Europe the obsession with austerity is coming to an end. It is still killing Greece and holding back Germany, but elsewhere deficit targets are either being achieved through growth or quietly ignored. Yet in the UK that dead hand continues, seen or unseen, to dominate policy and debate. And with its architect set to become Prince Minister and large parts of the opposition still too timid to challenge it, it looks like another five wasted years lie ahead for us.


  1. "In the US and most of Europe the obsession with austerity is coming to an end." Alas, not in the Eurozone. In Italy real GDP is still 9% BELOW 2007, the government and the EU pretend +0.8% in 2015 to be a recovery, and fiscal expansion is out of question as meaningless budget deficit targets are the only thing which matters...

    1. There is no "obsession with austerity". The term itself is misleading. Real austerity would mean everyone would have to cut its income but the top 10% are even increasing it. So there is no austerity there is just redistribution and its absolutely necessary within the monetary system. To end it we would need a monetary reform. And i see another great depression and maybe a WW3 before that.

    2. There is no "obsession with austerity". The term itself is misleading. It would mean that everyone has to suffer but the top 10% are profiting from it. So it is pure redistribution and it will not stop as long as we dont distribute money in a fair way.

  2. Are you in a parallel universe? UK PSBR is way off course this financial year. Surely you should be celebrating rather than hand-wringing. As I've asked before, precisely what level of Public Sector Debt as % of GDP would you think a UK government should target? A figure please? 90%? 100% 150% And for how many years?

  3. "elsewhere deficit targets are either being achieved through growth or quietly ignored"

    Hold on.

    Are you really claiming that Osborne has stuck to his deficit targets and hasn't quietly ignored them? Is there not rather a lot of evidence of his talking very tough on the deficit, but in fact running a much looser fiscal policy than the rhetoric justifies? How many of his deficit targets has he actually met?

    And if we are looking at international comparisons since 2010, which countries have run a larger deficit than the UK?

    The idea that the UK is a land of extremely tight fiscal policy, whilst everywhere else has adopted a more relaxed attitude, is just ridiculous.

    As for the proposition that people will buy into the General Theory if we explain it to them really, really forcefully, and that there was and is no need for any rhetoric about fiscal rectitude for a political party in a democracy, luckily for you we are currently running a great big UK experiment testing that proposition.

    Good luck with that.

    1. Countless times SWL has replied to you by advising you to read the article again more carefully, and this is yet another of those occasions. Read the last short paragraph you refer to again.
      The "elsewhere" refers to elsewhere (other than the US and Germany) in Europe. His very next sentence begins by then addressing the situation in the UK (There's a clue in the turn of phrase "Yet in the UK...")
      So none of your hasty, predicable sniping applies, again. Are you that desperate to be seen to be insightful and correct, so trying to show up SWL to be naive/wrong/ shortsighted* (delete as appropriate), that you don't bother to read or think about what he's actually saying? Most of you comments exude a completely misplaced air of superiority...of possessing a clearer insight of things which are just so obvious to you, which SWL just doesn't get for whatever reason ( naivety usually isn't it?). Yet you can't even properly read and interpret his articles, which are written in plain English.

    2. "The "elsewhere" refers to elsewhere (other than the US and Germany) in Europe."

      I see, and so returning to my point, which of those countries "elsewhere" are you claiming is running a looser fiscal policy as a matter of fact than the UK?

      Looking down the 2015 table, which I have helpfully reproduced for you, which country in 2015 in Europe has a higher deficit?

      Perhaps it is reading comprehension skills which are your special skill set, and not numbers?

      Oh and,

      "elsewhere (other than the US and Germany) in Europe."

      my reading abilities tell me that makes no sense if you think about it for a moment. I apologise for the no doubt misplaced air of superiority.

    3. Apology accepted, and full marks for evasion...what about the "are you really claiming Osborne..." concerning the UK, because you misread and misunderstood the difficult bit where SWL wrote, (after mentioning Europe and the USA), "Yet in the UK...
      That was my point, not about other countries running a looser fiscal policy, if again you can read my above reply. SWL has to respond to that one for you.
      Sure, I put the bracket in the wrong place...should have gone after US, but a word of advice...the last person's reading abilities you want trust are your own, for they are frequently wrong.

    4. Simon as always the knight in shining armour galloping to succour poor slighted SWL who can never be wrong no matter how far he divorces himself from common sense or reality.

  4. Don't give up. The IEA and others on the right persisted for years before their message became dominant. Critics of austerity will need even more persistence because the press is biased, most people think "common sense" shows a government budget is like a family's.
    All this makes it vital for people who understand the truth about this to be willing to speak out and be counted.

  5. Replies
    1. You mean that the number recorded as unemployed is down.
      Self-employment is up...and up. Part-time work is up. OK, so some part-timers have become full-timers; but.
      Wages lag inflation, self-employed pay is lower and lower, as more window cleaners means lower window cleaning rates.
      Land of milk and honey?
      The milk is canned, the honey is syrup.
      Cheapskate UK.

  6. On the Parliament channel Philip Cowley, while talking about 'The British General Election of 2015' which he has co-authored, said that he believes that the share of the vote between the Tories and Labour had settled by 2011.

    When in the Beckett report she cites immigration and welfare as problems that the Labour had with many in the electorate, it is hard not to believe that these were secondary responses due to the Party's failure to deal with its ambivalence towards austerity.

  7. "Some regard David Cameron’s speeches that talk about reducing the causes of poverty and social deprivation as just window dressing, but I agree with Raphael Bahr that these come from a genuine desire on his part to be remembered as a socially reforming prime minister."

    Let's be fair. Cameron is a PR man to the core. It's window dressing.

  8. Any thoughts on this 'change the framing' attempt:

    How the government's super platinum credit card works

    What is needed is to frame the debate in real terms. I still see this as not enough. "Deficit targets" should not be mentioned.

  9. The quote from Marina Mazzucato is particularly depressing in its rote praise of public private partnerships.

    Working in an international institution which has been directed to focus on PPPs, a few years ago I enquired among colleagues for examples of successful achieving PPPs - not just signed contracts and champagne but positive evaluated outcomes.

    Dead silence.

    I really do believe that the public-private partnership meme will prove to have been one of the greatest scams that a part of the private sector have ever pulled on the public purse. Only today The Guardian has an article highlighting how the privatisation of bus services in the UK has resulted in a direct transfer of subsidy from government to dividends, leaving passengers waiting for the bus that never comes.

    Note, this is not a diatribe against fullbodied privatisation - that can work - but against the outsourcing of regulated or public goods to the private sector in the belief that 'efficiency' and 'competition'(pretty much guaranteed to be absent) will compensate for the additional cost of private capital. It almost never does.

  10. Kindly explain how austerity is holding back Germany - they practically have full employment. What's missing?

    1. Not much good having "full" employment (even at low wages) if you cannot sell all the goods you COULD make, because everyone else is waist-high in the brown austerity stuff.
      Full employment [sic] (like ours?) is not much use if poverty levels are the highest they have been since re-unification (and getting worse).
      Energy poverty is high (some 17% are in energy poverty).
      Powerhouse of the EU, and all that.

  11. If you are a chancellor who believes the state is too big and that (basically) you should fend for yourself, then the narrative about 'Labour's mess' is a great one. You might even agree that austerity is a self-defeating economic policy and ease up on it, whilst maintaining your narrative, in order to play the longer game of a shrunken state. Wake up, Mediamacro!!

    1. The state may well be too big. But giving contracts to loads of inexperienced contractors and having to either take the work back, or give it to someone else, is not the way forward. I forget how many "private" health companies have dumped the contracts now. One a week?
      All that is happening is that admin is duplicated, or triplicated (!), Oh, and the pensions are handed around as well....(no ex-NHS staff are leaving the NHS pension by the matter what the private health companies are "offering", nobody is THAT stupid).
      The state may well be directly employing less, but it is indirectly employing far more.
      It's getting bigger by getting smaller.

  12. A good post. The follow-on question is how best to challenge austerity.

    It's not easy to explain on a doorstep 'why the national debt is not like a credit card' but we can counter 'Living within our means' with 'Investing for our future'. The public investment shortfall is becoming ever more visible in flood defences, transport, schools, care, etc. This argument can be won. People recognise that both individuals and businesses need to invest even if this means debt, as long as the long-term benefits are visible. We need to explain that is also true for governments.

    1. The MEANS of getting the argument/facts across does not exist. The "free" press is a captive organisation, captured by those who tell us austerity is the only game in town. The internet?
      I think you will find that if it becomes a hindrance to those in power, it will cease to be so very rapidly.
      Furthermore, the restriction on unions political campaigning prior to an election exist, and then there is the problem of unions funding labour. If each member is forced to write a letter confirming their political donation or the unions forced to contact each member to ask for same, then it is game over for the labour party.

    2. I'm not yet ready to bury myself in a nihilist hole of despair. Of course we're up against obstacles but don't give up.

      Nobody thought Jeremy Corbyn would become Labour leader. He did so because the party had been beaten but not broken. Pessimism of the intellect is necessary but we also need optimism of the will.

  13. Let me offer that we do not have the analysis or language to speak authoritatively against the "how are you going to pay for it?" problem.

    The analysis we need to have commonly available is the ROI on public spending and investment. For instance in the USA the history of transportation investment is that it generates a mid-teens ROI, a number that trumps all costs of financing I am aware of, at any time in the business cycle. (Yet we cannot seem to do it here even now.)

    The language we need is along the lines of "The return on this spending is high. It makes us wealthier. To not pursue this project is to choose to gradually make ourselves poorer. Properly analyzed, this spending is self-financing, choose any initial financing you like." Etc.

    I, too, was saddened to hear Mazzucato surrender to say we need private financing for public assets. I had thought she had thought these issues of public ROI through, but evidently not. She's done terrific work on the history of public investment, but may not have the chops to say what their yields were. That's what need. If we have the yields in hand, which are high, we can tell the privatizers to sit down, as even now, their yields are on the order of just a few percent at the margin.

    Without winning the terms of the debate I fear I will be living in a low growth world the rest of my life. Please help.


  14. Would be interested in your policy prescriptions for Brazil as a live example of whether fiscal, monetary or or a mix of policies could work to alleviate the situation.

  15. There used to be a straightforward cyclical process for British governments:

    1. Electorate favours a right wing party that will reduce their taxes.

    2. Right wing party wins election and enacts policies that, while reducing taxes, massively favour the rich.

    3. Electorate eventually realises that the right wing party’s policies are doing them more harm than good, and that they are tanking the economy.

    4. Electorate rejects the right wing party and votes in a left wing party.

    5. Left wing party struggles to enact their policies given that country was in such a bad state when they gained office.

    6. Left wing policies lead to some recovery of the economy, mainly by using higher taxes.

    7. Right wing party and rich people eventually decide that they now wish to regain political power, since the economy has recovered to a degree that they can exploit it again.

    8. Rich people use their vast wealth to manipulate various economic levers so that inflation increases.

    9. Right wing party accuses left wing party of causing the inflation and claims that they will fix the economy and lower the electorate’s taxes.

    10. Repeat step 1.

    The problem with the cycle is that it is skewed in favour of the right, so there will then be a gradual and somewhat unconscious movement in that direction. This culminated in New Labour claiming to be of the centre, when they were really just another right wing party, albeit one with an identity crisis.

    Since the electorate is now aware that the terms ‘centre-left’, ‘centre’, and ‘centre-right’ really mean ‘right’, and that the 2008 crash was caused by New Labour continuing the right’s rich-favouring policies of reducing market regulations, they are struggling to see how they can elect a truly left wing government that can have even a small positive effect on the country.

    The Scots tried to do this by electing the anti-austerity SNP, but this then resulted in the English electorate prefering the Conservatives over a possible New Labour/SNP coalition, and so this drove the country toward even more right-wing behaviours.

    Hopefully, a sufficient number of people will realise that the press’s current hammering of Labour’s efforts to be a true left-wing party are a sign of how far we’ve moved to the extreme right, and that we desperately need to reverse direction both economically and ideologically if we want to have the chance to live in a halfway decent country.

    1. NAH... The moronic problem with the left wing is that they talk "raise the rate" when so many pay 0%. Its total foolery. Obama and Hilary in USA are both victims to it. They talk "hedge fund loop holes" at 10-20% when real estate guys have been pay 0% (and passing it on through trusts) for generations. Stupidity + "higher rates" is not a good election strategy. What is "income tax"? I love income. Why not a 1% asset tax, and half all income taxes?

    2. Your comment seems to indicate that you think that Obama and Clinton are centre-left politicians, since that is what they claim to be (but to be honest, it's difficult to work out what the main point of your comment actually is, and how it relates to mine). The point of my comment was that people who claim to be of the centre are really on the right in terms of their behaviours and policies, hence they may talk big on things like tax loop-holes, but will never get around to addressing the structural problems that created them in the first place.

      The problem is that the terms ‘left’ and ‘right’ create an image of a line on a chart that has a middle, and hence people think that an objective central point of politics actually exists. The fundamental argument between those on the (genuine) left and those on the right is about whether the centre of politics can actually exist. The left claim that it can’t, while the right claim that we can find it through surveying the general population and using statistics to find out what the majority believes.

      Politicians want to win the most votes and they assume that most people must be somewhere in the centre, so they then commission surveys to find out what these people want and tailor policies to suit them. The problem is that people who claim to be in the centre are really on the right, so the policies gradually move further and further in that direction. This results in both major parties of a country becoming right-wing ideologues, but where one of them is slightly less extreme than the other.

  16. You write :"securing the necessary investment in flood defenses for example, makes total sense, but it also tends to cost money". However, you could take an advice from the Dutch who know that having to address sea defenses is inevitable, not matter what, no matter if you have the money or not. The alternative is wet shoes.

    1. In this country it is very few wet shoes.
      In Holland it would be very wet shoes, and knees.
      Nobody cares for others now, especially if they're far away (not in the same town)

  17. Great article Simon.
    A separate issue:
    What are your top 3 tips for a PPE finalist preparing for a Macro exam

  18. Excellent analysis of the problem/ dilemma but I am not too clear about what a Rachel Reeves should be saying when asked where is the money going to come from. When you talk about investment otherwise intelligent people will tell you that you can't spend money you don't have and then talk of the evils of deficits and the dangers of inflation.
    Economists particularly those of a progressive inclination seem to be chary of pointing out that sovereign governments do not need to cover all their expenditure from taxation and that whether a deficit is good bad depends on the overall economic context

    1. The government spends first, then receives induced tax from the spending.

      Cost of spending is the real resources in the nation.

  19. The other problem with this is Tony Yates etc calling for monetary policy and negative interest rates.

    Because of course taxing banks really does help the economy. They don't just put it on the price of a loan at all. The charge to the banks would go on the cost of a loan, not to savers.

    Because ... national savings and Gilts.

    Eventually people will realise that monetary policy and the rule of the central bank is the biggest ongoing conjuring show in the country - outshining even the mighty Derren Brown.

  20. The money should come from the Bank of England marking up the spending accounts of the government and the government running a larger deficit to spend it--preferably on worthwhile projects. That would stimulate the economy without adding more debt. When the indicators move toward full capacity, full employment, reduce the deficits and reduce the amount of the new money.

    1. It always does. Government spending works by crediting bank accounts (aka creating money at keystroke) and taxes debit bank accounts (aka deleting money)

      Inflation is due to the *flow* of spending.

      You add £1mn of currency and take away £1mn of bonds. In accounting terms that is swapping one central bank liability for another. And that means nothing changes in asset terms. They are both pieces of paper issued by the state with no intrinsic value. The only.value backing Sterling is the tax bill that can only be settled in Sterling.

      In income terms, it is mildly deflationary since it eliminates the government spending on the bond interest.

      The problem is that people have been mentally conditioned by clever politicians to think that the government has some sort of debt, when really the analogy between bonds and currency should be the one between your deposit account and your current account at the bank. They are both stores of money, but one of them pays slightly higher interest than the other.

      If the UK 'Debt Management Office' was renamed 'Fixed Term Savings' and allocated as a division of National Savings where it belongs, then the reality would come to light. People are saving with the government rather than the banks.

      Then we could get beyond the deficit hysteria which is being whipped up so that ideologues can execute their devious plan.

    2. Random - where can I read more about your interpretation? It makes a lot of sense.

    3. Unknown,

  21. It is an astounding coup d'etat that an economic crisis caused by neo-liberal economic ideas has been the greatest justification for neo-liberal economic policy.

    Astounding and depressing in equal measure.

    As far as I can see, George Osborne is the worst UK chancellor for at least two generations. I have no doubt that history will not judge him kindly. Or his boss.

    However, by then it will be far too late for the ones who suffer now.


    1. “History is a set of lies agreed upon.”
      ― Napoléon Bonaparte


      “You show me a capitalist, and I'll show you a bloodsucker”
      ― Malcolm X

  22. Actually,George is the worst Chancellor since Alec Douglas-Home who admitted that he needed matchsticks to do his sums. No, wait; George is worse still.


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