Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday 6 April 2016

The financial crisis, austerity and the drift from the centre

John Quiggin starts a recent post on Crooked Timber (more below) with the warning ‘Amateur political analysis ahead’, and that applies even more to what follows. I start with the UK, but then broaden the discussion out.

A recent piece by Steve Richards for The Independent has some similarities to a recent post of mine trying to explain the popularity of Corbyn and Sanders. His byline is “The financial crash of 2008 made it impossible for both parties to exist united in their current forms”. On Corbyn his argument is similar to my own. He writes

During Labour’s astonishing leadership contest, Corbyn pitched his message solely against the background of the financial crash. At the beginning of each speech he proclaimed that the 2008 crisis was not caused by “firefighters, nurses, street cleaners, but by deregulation and sheer levels of greed”. As a climactic he declared: “I want a civilised society where everyone cares for everyone else. Enough of free market economics! Enough of being told austerity works!”

In contrast some Labour MPs

were thrilled when Labour’s acting leader Harriet Harman declared her support for Osborne’s proposed welfare cuts immediately after the party’s election defeat. They argued this was a sign of a ‘responsible’ opposition showing Labour had learned its lessons about being ‘profligate’ in the run-up to the 2008 crash. If those MPs had retained that early position, they would have been to the right of Duncan Smith - who resigned over welfare cuts - and to the right of those Conservative MPs who rebelled against the cuts to tax credits on the working poor last autumn.

I would add that those MPs standing against Corbyn failed to place at centre stage the contradiction and injustice of how a crisis caused by the financial sector should lead to a reduction in the size of the state.

His account of the problems on the right, and how that too stems from the financial crisis, is as follows:

The row over the recent Budget, Duncan Smith’s resignation and the revolt over welfare cuts also has its roots in the financial crash. Osborne’s economic policy was shaped by what happened in 2008. After initially pretending to support Labour’s spending plans, he made deficit reduction his defining mission, missing his target in the last parliament and now resolved to reach a surplus in this one. But a significant number of Conservative MPs will not tolerate the spending cuts required for Osborne to keep to his chosen course. In effect they are rebelling against his highly contentious interpretation of what needed to be done after 2008.

There are two obvious points here. First, the much more serious divisions within the Conservatives appear to be over Europe, which also appear completely unconnected to the financial crisis. Second, which I will return to at the end, is the extent to which the financial crisis and austerity are linked.

To think about this further, and broaden it beyond the UK, I want to bring in John Quiggin’s ‘amateaur political analysis’. He writes

There are three major political forces in contemporary politics in developed countries: tribalism, neoliberalism and leftism (defined in more detail below). Until recently, the party system involved competition between different versions of neoliberalism. Since the Global Financial Crisis, neoliberals have remained in power almost everywhere, but can no longer command the electoral support needed to marginalise both tribalists and leftists at the same time. So, we are seeing the emergence of a three-party system, which is inherently unstable because of the Condorcet problem and for other reasons.

On neoliberalism he says

Neoliberalism is mostly used to mean one thing in the US (former liberals who have embraced some version of Third Way politics, most notably Bill Clinton) and something related, but different, everywhere else (market liberals dedicated to dismantling the social democratic welfare state, most notably Margaret Thatcher).

Later on

The difference between the two versions turns essentially on whether [globalised capitalism, dominated by the financial sector] requires destruction of the welfare state or merely “reform”.

This would place the majority of Labour party MPs as neoliberal using the US definition. We could describe the Republican establishment as neoliberals of the UK Conservative kind. Quiggin argues that the financial crisis discredited neoliberalism in both its forms (also the starting point of my post). In the US

Trump has shown that the tribalist vote can be mobilised more successfully if it is unmoored from the Wall Street agenda of orthodox rightwing Republicans like Cruz

Tribalism is “politics based on affirmation of some group identity against others”. We could make a similar argument about the rise of the ‘further right’ in Europe, and UKIP in the UK.

The final link is to spell out why the global financial crisis should lead to an increase in tribalism. The standard account is to blame the high unemployment (Eurozone) or lower real wages (UK, US) that followed the crisis, and how this can be easily blamed on immigration or those perceived to be living off the state. We could perhaps go further. Those in the Republican and Conservative parties (and their supporters) are happy to use and even encourage this tribalism as scapegoats to deflect criticism away from the financial sector and austerity policies. For some that works, but not always, and the tribalism can become detached from traditional right wing parties.

This account is neat as it seems to fit the current POTUS election. It could also supply the missing ingredient from Steve Richards’ account if the divisions over Europe on the right in the UK are tribal in Quiggin’s sense. However I think I would like to reframe this account in a slightly different way. Think of two separate one dimensional continuums: one economic, with neoliberal at one end and statist at the other, and the other something like identity. Identity can take many forms. It can be national identity (nationalism at one end and internationalism at the other), or race, or religion, or culture, or class.

Identity politics is stronger on the right, particularly since the left moved away from being the party of the working class. For the political right identity in terms of class can work happily with neoliberalism, but identity in terms of the nation state, culture and perhaps race less so. Neoliberalism tends to favour a more internationalist outlook (e.g. free movement of labour, low tariffs etc). When neoliberalism is discredited, this potential contradiction on the right becomes more evident. This is emphasised when politicians on the right use identity politics to deflect attention from the consequences of neoliberalism.

Why do I prefer this framing? First, in the case of the role of the state, I think it is artificial to make a division between those who are neoliberal and those who are not. I prefer to see neoliberalism as an extreme point or range on a continuum. Only when you do this can you see that there are the tensions on the right as well as the left over neoliberalism, which is the point that Steve Richards makes. (See here for a rather amusing example.) A right wing identification in terms of class does not inevitably imply a belief in neoliberalism. Second, I think an emphasis on identity has always been strong on the right, so it is a little misleading to see it as only something that the right uses in an instrumental way. Third, seeing identity in its various forms as a continuum can explain continuing debates on the left on this issue: here is an example I read only yesterday.

None of this detracts from the basic point that Quiggin makes: the apparent drift from the political centre ground is a consequence, for both left and right, of the financial crisis. I would add that what today counts as the centre in economic terms, which is pretty neoliberal, is rather different from what was thought of as centre ground politics before the 1990s. Now some of those on the left would like to think that this collapse of the centre was an inevitable consequence of the financial crisis. I am less sure about that. On its own, that crisis might have shifted the centre on economic issues to be a bit less neoliberal, and that might have been that.

One interesting question for me is how much the current situation has been magnified by austerity. If a larger fiscal stimulus had been put in place in 2009, and we had not shifted to austerity in 2010, would the political fragmentation we are now seeing have still occurred? If the answer is no, to what extent was austerity an inevitable political consequence of the financial crisis, or did it owe much more to opportunism by neoliberals on the right, using popular concern about the deficit as a means by which to achieve a smaller state? Why did we have austerity in this recession and not in earlier recessions? I think these are questions a lot more people on the right as well as the left should be asking.


  1. Australia confirms your argument. We had a successful stimulus and the result was to entrench neoliberalism

  2. The idea of "tribalism" seems to agree very well with the psychological concept of "Right Wing Authoritarianism" coined by Robert Altemeyer.

  3. It seems to me that the problem you have with this sort of analysis is disentangling particular events like the 2008 crisis from secular trends.

    There are a number of important trends that I'm thinking of here: demography; automation/AI and globalisation. You could say that the latter two are encompassed within the idea of neoliberalism but that is arguable.

    The changes precipitated by these trends are already substantial and are likely to be very much more so in the future. It's arguable that demography is sending us into a lower aggregate demand economy and that automation has, and will, have a profound impact on work and the idea of employment.

    Looked at from this perspective the 2008 crisis was certainly that and perhaps cathartic but against some of these other trends does it account for that much economically or indeed politically?

    To me one of the main effects of the 2008 crisis was the disclosure of egregious venality and I suspect I'm not alone.Most people do not, I suspect, understand the idea of austerity and neither can its effects be calibrated in the way you suggest and if policy had been different (less austerity) I for one would doubt any effect.

  4. "One of the reasons I wrote my book on conservatism, I now realize in retrospect, was not to contest these Rawlsian or more radical arguments about difference and pluralization. It was instead to try and take a step back, to show how the landscape in which these liberal arguments were occurring had been shaped, deeply shaped, by conservatism, often in ways liberals did not understand. Where academic liberals and leftists had accepted the simple distinction between economic and social conservatives—as did I, for a very long time—and had believed that the social conservatives were driven by moral questions, I wanted to show that conservatism was, yes, a deeply moral and ideological praxis, only that it rotated around a different set of principles from the ones liberals seemed to think the right held dear. The real axis of rotation, I claimed, was domination and hierarchy, particularly in the private realms of power, and it was that axis that united social conservatives, economic conservatives, and national security conservatives...To be clear: domination and hierarchy are not, to my mind, non-moral issues, neither for the left nor the right. They’re deeply moral. Only they are also part of a social and material practice. We cannot and should not separate the moral from the economic in conservatism any more than we would in socialism. While I believe my account can help us understand conservatism across the ages, it would be nice to think that it is also suited to explain the right today, not only in the Age of Trump but also in the Age of Bernie. Increasingly, we’ve seen, these questions of social domination are coming to the fore. As the left begins to move into a position where it can not only get a clear view of its enemies but also to take aim at them—both the hard right revanchism of the GOP and the soft neoliberalism of the Democrats—my hope is that a generation of academic political theorists, who learned their trade against the backdrop of a mistaken view of conservatism, might now begin to see the conflicts of the day in a different light."

    Corey Robin blog, 'A Very Brief Intellectual Autobiography', 4 April 2016.

  5. Austerity has undoubtedly sharpened tensions and accelerated fragmentation but the problems with neoliberalism and the links with identity politics go much deeper. I’m canvassing regularly ahead of the May elections, in the working-class multi-cultural wards of my city constituency and the doorstep conversations, particularly with those who say “we always used to be Labour but …” confirm this.

    First, changes in the labour market have brought great insecurity. Sectors like construction have long had this problem but it has got much worse, with people not knowing day to day how much they will earn or how long the work will last. Worse, the social insurance support system no longer supports. A painter-decorator I spoke to told me he that he had just been dismissed by a contractor who no longer needed him and now had no income because he was technically self-employed so not eligible for job seekers allowance. Another man said he had at one time been left without income for seven months after taking custody of his son after a relationship breakdown made it impossible to work his previous hours, which the job centre deemed ‘voluntary’ departure. Minimum wage legislation doesn’t help if you’re self-employed on piece rates. After the crash, many employers took the opportunity to cut rates or lengthen days and were unscrupulous in using migrant labour to undercut and enforce this, which inevitably breeds resentment. Anyone joining a union would just find there was no work for them next day.

    Second, the housing crisis is damaging community relationships. Try explaining to someone that migrants are not taking social housing when he has heard otherwise, and when he has been living with his son in a small room in his mother’s flat while the council refuses even to recognise that he is a resident of the city so will not consider his housing application. Social house building fell from over 150,000 units in the 1970s to little over 30,000 by the time Thatcher had finished, was even worse under New Labour and no better since. Of course there are tensions.

    Third, people feel often treated with contempt by both officials and let down by politicians, particularly those they feel were elected to help them. People understand budgets are tight when set by Westminster but they expect their representatives to be open, accessible and not make promises they don’t deliver on, even on very local matters like parking or playgroups. Canvassing just before an election can bring the anger out but I find people appreciate being listened to, rather than just ticked off on a list so that the data point can be recorded. I find that those with Labour backgrounds but now disillusioned often like much of what Corbyn says, at least on matters like tax or austerity, but are not yet convinced that he can really change the party or defeat the government.

    So yes, austerity makes matters much worse but the issues we face go a lot deeper than just tweaking the macroeconomic tiller.

    1. Hello Lyn, nice to have met you at the meeting, Framing the debate. My feelings are that we need to be blatantly honest with people, we have not been served well by those that remained silent about the Neo-Liberal agenda.

      If we don't control the money supply we can't control the economy. That is a difficult concept both for people to understand and to get into the public domain. Hence the need to explain it at every opportunity, and not to be frightened about it.

      This little video from MMT is one of my favourites:

    2. Mervyn, Thanks. The Bristol event was encouraging in showing how many people beyond those who have long taken an interest in economics are now doing so. John McDonnell is to be congratulated for taking an initiative that is opening this up.

      I agree that we need to control the money supply but my comment here was to point out that does not suffice. Even if we were creating an appropriate supply of money, we could still fail to build enough houses, still have too many people working in poorly paid precarious jobs, still have local issues from deindustrialisation or urban decay, still have discrimination at work, etc.

      My main reservation about MMT is not its theoretical position on money creation but how too many (not all) of its proponents seem to believe that our economic problems can be reduced to the money supply.

      (Simon, thanks for your contribution to the Bristol event. Please post your slides as they would be useful to help explain macromedia to others.)

  6. Reply to SWL's main post:

    "Now some of those on the left would like to think that this collapse of the centre was an inevitable consequence of the financial crisis."

    Not really. Those of us on the left know that the centre doesn't exist, so we know that 'centre-left' really means 'right' and we expect financial crises to happen when both major parties go in that direction and de-regulate the market as a result.

    The current situation is caused by people pretending that the centre of politics exists when it clearly doesn't.

    The Democrats moved to the right under Clinton and that forced the Republicans to the extreme right as we are now seeing. The same thing happened to the UK under Blair and we got Osbourne.

    If you want genuine improvement in the situation you need to reject the concept of the centre and denounce those who pretend to be on it.

  7. Yet again, your happy tale of how it was only Corbyn who put front and center the claim that it was not Labour that caused the financial crash, and that austerity was not the right approach just isn't, you know, true. Here is Yvette Cooper at the time

    Examples of that could be multiplied many times. Cooper being a trained economist and not an idiot. Same story told by Balls pre-election.

    Corbyn, by sharp contrast, proposed lots of crackpot things on "People's QE" and "Tax Gaps" which indicated that more spending could be achieved without running a looser fiscal policy. These (bluntly) stupid free lunch ideas have now been dropped, but he was elected on a false prospectus. (Though tax gaps has inevitably come back this week as a simple cure all, with Corbyn's barmy proposals to return the British Virgin Islands to being a colony).

    The problem with your apparent enthusiasm for the red in tooth and claw left of Corbyn and McDonnell and their forceful refusal to compromise with the electorate's (mistaken) views on economics is that these characters have a quite different agenda from your own. One thing it is not about is winning an election. They also come with some pretty unpleasant baggage (the IRA, Hamas, Hezbollah, Putin, Stop The War).

    All that said, across Europe we do see the same phenomenon of tribalism (eg Front National), 'radical' left (eg Syriza) and 'neoliberalism' (an unhappy near meaningless term but Cameron and Osborne are who you mean). These have squeezed what used to be the center (which in the US seems to be still holding out - Clinton will be President I assume.)

    It is a terrible tragedy that faith has been lost in the kind of social democracy that someone like Cooper represents in the UK. Some of those who are seemingly cheering this on, and lending aid to its opponents, should know better.

  8. Maybe thought patterns have not finished changing after the financial crisis, nor politicians emerged to articulate the changes. I think historically eight years is not a long time?

  9. Good piece, as usual. What most interests me is your last paragraph: the great recession was largely unforeseen, even by those who attribute it to "sheer levels of greed", and it's still a subject for research to what extent national regulatory failure contributed in detail to the global systemic breakdown. However almost all reasonable macroeconomists quickly agreed on policy using a 70 year-old theory: huge monetary stimulus and large fiscal stimulus, leaving any inflationary consequences for policy in the very long run.

    Corbyn doesn't need to rubbish free-market economics to support his policies; deriving "austerity" from economic theory was always a non-sequitur

  10. ' or did it owe much more to opportunism by neoliberals on the right, using popular concern about the deficit as a means by which to achieve a smaller state? Why did we have austerity in this recession and not in earlier recessions? I think these are questions a lot more people on the right as well as the left should be asking.'
    That's the question I've been mulling over since President Bush stated that markets are not functioning correctly (or something similar to that) immediately after the crash became apparent and the austerity line of defence/deflection was pulled out by neoliberals and so soon after Bush's statement.
    If it was opportunism it appears to have developed both quickly and brought with it media macro almost as quickly as quickly that support had considerable depth. The response was quick and people got on message equally quickly. I've oft wondered if some were not as surprised by the financial collapse as it immediately apparent.

  11. Australia supports the argument about the amplifying effect of austerity. We had a successful stimulus, which briefly raised talk of a new social democracy and so on. But within a very short time, that went away and we are back to neoliberalism (predominantly in the US sense)

  12. I think there is analogy with the emerging attitude towards hedge funds. These charge extremely high fees and clearly put the interests of the people who run them ahead of the clients. But as long as the financial markets produced generous returns, people were prepared to accept thi.
    Similarly, we have all known that what might be called the Davos class take good care of themselves fiirst. But as long as they could convincingly argue that they knew what hey were doing this aroused little anger. Better to have a small share of prosperity than all of poverty. The financial crisis destroyed this belief. Not only did those in charge allow it to develop, they have responded to it by taking care of themselves at the expense of everybody else.

  13. "In contrast (to Corbyn) some Labour MPs… to the right of Duncan Smith".

    Thank you for your speaking contribution last night in Bristol. I wish that there could have been more time for questions on the restoration of 'new economics'. Many good queries were raised, but not those vital for Labour's real success.

    It was good to hear from Ann Pettifpr on what we should and could be doing for people and planet, and more from yourself on data-rebuttal of 'mediamacro' support given since 2010 to the atrocious fraud worked against Labour and the electorate in now successive general elections.

    My question would have been on what still is missing from the economic and political debate, in short the serious address of our universal subjection to conflict-of-interest. If description and explanation of our recent history go no further than 'Tory wickedness' and 'media bias', and implicitly 'voter stupidity', then we will be doomed to continue under the rule of inequality and insecurity.

    From John McDonnell's personal record of sceptical economic positivity we can take encouragement, vital the readiness to admit fault in Labour's past, and vital the re-framing of Labour's offer as for 'full employment', but IF we are to escape under-employment and worse mis-employment, really to save people and planet, we need more.

    I would argue that to live all of us in-conscience we need genuine liberation, our freedom mutually-guaranteed as on-going, fear and corruption banished by conditional income-equality, our personal and collective viability and vitality assured - to the greatest extent possible - by duly well-informed agreement on secure equal partnership.

    IF to survive and prosper - if at least to deserve such - we must SHARE an understanding that is truly SHAREABLE as to viable operative meaning for 'democracy'. We then can join in acknowledgement of absolute need to make democracy real, at last to heed the warning, 'divided we fall'. Our grasp of democracy has to be FULLY shareable, transmissible, within and across ALL borders, including those of age and accident of birth.

    That fabled state of communism, on Earth as in the ideal our 'contributions as able, our consumption according to need', will be reached only as shared and only if we wish it. Our peace and prosperity will maintained only if our children wish it, from their own near-universal grasp of the choice ever to be made between sham and real democracy, the latter demanding agreed on-going equality of votes in the market as well as at the polling station.

    Eyes tend to glaze or narrow at the mention of equality, hands to check wallets in pockets. Thoughts rise almost visibly of hard-won 'independence', of differentials and pensions and maybe tax-sheltered savings, of elderly parents and children perhaps now or one-day in difficulty, of the many calls on our charity and any privilege in the shaping of affairs. To discuss democracy - and representation versus corruption - has been made taboo.

    I recall meeting a Christian student of economics when nearly half-a-century ago I was switching to study medicine. When next met, some twelve or more years later, he was teaching I think the history of economics. Of equal partnership he had no knowledge, and in discussion apparently no interest.

    Is that how it is, still, in academia? Moral sentiments an after-thought?

    Is Osborne alone in chasing the wrong deficit?

    Who decides 'non-starters'?

    Should we be apologising for 'egalitarianism', the brotherhood of Man?

    Can academia really be no more 'helpful' than either staying in the ivory tower or coming out to side with simply the lesser of two known follies. How much longer can we risk self-excuse with 'difficulty in data-handling', and then with 'impossibility of sharing', the possibility dismissed of general public or even leadership comprehension, of evolution?

  14. "Or did it owe much more to opportunism by neoliberals on the right, using popular concern about the deficit as a means by which to achieve a smaller state?"

    I think this would get my vote.

    Compounded by Labour's pathetic responses to this false concern about the deficit.

  15. Professor Wren-Lewis, here are the links I promised to supply you with.

    The first is a document headed up by Nicholas Ridley in 1977, So called research Paper, the interesting part though lies in the confidential annex section, where they describe how the pick targets and use contract labour to break through picket lines.

    The next is Margaret Thatcher's secret 1982 cabinet papers, "the longer term options", released under the 30 year rule in 2012, This follows on from Ridley's document and shows the process of how they intended to dismantle public services such as health, schools etc., also explains how to circumvent public resistance.

    Hope I am not teaching Granny how to suck eggs, but to view this document please click on SHOW IMAGES.

    Excellent event in Bristol, may there be many more of them.

  16. Thanks to Mervyn Hyde for these windows into the soul of corruption, revelatory for some.

    Sadly, in a society made politically and economically amblyopic by hypocrisy and moral atomisation, to boot blinkered by functional streaming, and anyway entrapped by fears for career and income and family, few will see these documents, still fewer will see their significance, and hardly a one will have the courage to speak for liberation as necessary of all.

    Our politicians and commentators and academics 'do what they can' (either 'simply' within a limited intellectual compass, or 'realistically' within own limits of prudence), but without even secret advocacy - so without public hearing and eventual understanding - of the positive, the case from Reason and Care for our equal partnership (for real rather than sham democracy), even the bravest must suffer the fate so far of all prophets and all philosophers, of even the most revered, their hints and tips for our survival and fulfilment made mockery of by what we may think of as 'our Establishment', in the end - the bitter end - by ourselves.

    Until as economists and citizens we together find the insight and courage to commend and argue policy from the perspective of real democracy, the uses we make of apparent freedom will remain trivial relative to past and present and impending casualty-rates, those rates owed in large measure to the rule of inequality and insecurity, of fear and corruption. By the educationally deprived and / or dim Tory-Lite, no reproach truly as to principle can be sustained against the educationally dumbed and / or clever Tory, as we all should know, as we everyday see.

    How much longer before 'conflict of interest' becomes - as surely due - the prime target for political elimination towards 'economic efficiency'? Must we go to the edge, or over? Into WWIII, or plainer barbarism, or 'just' eco-catastrophe?


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