Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 28 September 2016

Why was austerity once so popular?

Duncan Weldon asks whatever happened to deficit bias, and why was austerity so popular when it seems to hurt two crucial groups of electors. They are both excellent questions.

First, a quick recap of Duncan’s arguments. The standard view among economists before the financial crisis was that economies were prone to deficit bias: a tendency for government budget deficits and debt (as a share of GDP) to slowly increase. [1] Although there are a number of theories about why deficit bias occurs, several involve voters being at best unconcerned about it, and at worst conniving in it. Such theories are miles away from an electorate giving strong support to a government campaigning on reducing the deficit.

Second, austerity keeps interest rates low. So not only does austerity hit wages and profits, but it also hits those who rely on interest income to supplement their pension, a group who in case you need reminding have a high propensity to vote. Although asset values have gone up as well, many in this group will be reluctant or unable to turn this into income.

I try and answer both questions in this paper. As with many things, I think the answer lies in the financial crisis. Popular concern about government deficits will be much greater if these deficits are at 'record levels', which they inevitably were following the deepest global recession since WWII. A recession initiated by a financial crisis is also likely to see consumers reducing their own borrowing, and so (erroneous) analogies between governments and households resonate. A recession initiated by a financial crisis also makes the public receptive to the potential power of these markets, and therefore to claims by those ‘close to the markets’ that national disaster is just one more large deficit away. Arguments from economists that rational markets would not be concerned about government default when the central bank can create money are met with a widespread belief that the recent crisis shows markets are not necessarily rational. Markets become like a powerful god who can only be appeased by the sacrifices prescribed by its priests.

This is how, in the case of the UK, George Osborne was able to redefine the goal of macroeconomic policy from the normal desire to see higher living standards into the need to reduce the deficit. His motives for doing so may have involved a desire to reduce the size of the state, what I call deficit deceit, but uppermost in his mind was that his strategy was popular. So popular, both among the electorate and the media, that the Labour opposition eventually gave up on arguing that there was an alternative.

A key corollary of all this is that the popular appeal of austerity has a sell by date. Once people have stopped paying off their own excess debt, market panic becomes a more distant memory, and the need to control the government’s deficit seems less compelling. The underlying factors that created deficit bias can resurface. Quite when that sell by date will be depends on particular national circumstances. In the UK the game was up when the country voted for Brexit, but I suspect even without that austerity would not have won the Conservatives two elections. So the popularity of austerity is short term.

As to the political economy question, I think that be a genuine puzzle if austerity was a long term phenomenon. But as it is not we need to bring in (hopefully) short term failures of knowledge and information. I have not noticed campaigns to ‘save our savers’ also arguing for less austerity, and I suspect the reason is because they just do not see the connection. Who makes that connection for them? Here is Chris Dillow complaining that the media just does not do this kind of thing. Central banks should, but for their own reasons rarely do. People may not act in their own self-interest if they do not know what is in their own interest, and in the short term at least this knowledge may not be made available to them.

[1] To preempt the usual MMT comments, this bias relates to economies where monetary policy takes care of output and inflation stabilisation.  


  1. Fine save

    "that the Labour opposition eventually gave up on arguing that there was an alternative"

    is flat false.

    Labour's fiscal policy was right at the 2015 GE. Labour never adopted Osborne's position.

    Only someone wishing to either support Corbyn, or explain away their own inaction/facilitation, would make such a silly claim.

    And no, a foolish quote from Tristram Hunt is not the same thing As Labour's actual fiscal policy.

  2. I noticed Ros Altmann throughout the crisis (until she went into the House of Lords as a Tory) was always calling for a rise in interest rates to save pensioners, or 'Quantitative Easing a disaster for pensions, says Saga' BBC website, 23 August 2012. I heard Martin Lewis say the same thing on interest rates a couple of years ago.

    The 'representatives' of personal savers just seemed confused and thought only in terms of interest rates rising and falling, not about them getting plugged.

    I expect many savers were just waiting for the inflation that the BBC correspondents and their newspapers were telling them for years was just round the corner.

    11:59am on the BBC news channel did Simon Jack and then Ben Thompson wait staring at some City traders' computer screen to get the latest news from the BoE, expecting a rise that never came. Nice work...

  3. It's all about fiscal conservative framing.

    Here's one of the best articles I've read on the subject.

    Framing: Morality Trumps Reason When it Comes to Vampire Squids and Other Blood Suckers by George Lakeoff.

    The mechanism of intimidation is framing, not just the use of words or slogans, but rather the changing of what voters take as right as a matter of principle. Framing is much more than mere language or messaging. A frame is a conceptual structure used to think with. Frames come in hierarchies. At the top of the hierarchies are moral frames. All politics is moral. Politicians support policies because they are right, not wrong. The problem is that there is more than one conception of what is moral. Moreover, voters tend to vote their morality, since it is what defines their identity. Poor conservatives vote against their material interests, but for their moral identity.

    All language activates frames in the brain. Conservative language activates conservative frames, which activate conservative moral worldviews in the brains of those who hear the language. The more those frames are activated, the stronger the conservative moral views get in people’s brains.

  4. The game was up before Brexit Simon. Discursive shifts are generally gradual and are the result of discursive interventions. You helped to change the weather, as did Piketty, Wilkinson & Pickett and Stieglitz. Similarly politicians took up the baton and took anti-austerity into the mainsteam, see Sturgeon, Sanders and Corbyn.
    I agree that there's an element of war weariness involved, but the question remains, how do we stop such calamitous decision-making from re-occurring? I rather think it comes back to your Swabian Housewife analogy. Oh and politicians who are worth the candle.

  5. How about racism & ethnocentricity? Government spending helps whom (besides military spending)? Why, it's just redistribution from the hard-working whites to the less-hard-working non-whites & immigrants. So austerity = reduced spending = fewer of my tax dollars/pounds to the unworthy.

    1. Sorry - typo:

      "...your "General" theory of austerity .."

      (as in "The General Theory of Employment, Interest and Money"..)

  6. Austerity is not a choice but a necessity when your government can't borrow (or only at prohibitive rates). That was the case of Greece as an extreme, but also of Ireland, Portugal, Italy, and Spain.

    But SWL believes with religious fervour that any country can
    save itself if it has its own currency and a subservient central bank.

    But he has pointed in an earlier blog post that even in his opinion it may only work if both politicians and central bank are willing to accept the danger of considerable inflation (otherwise they will have to return to austerity to remain able to borrow).

    Of course, if you believes with SWL and an unbelievable amount
    of economists (normal people don't) that inflation is the cure, not the disease, that will not deter you.

    But that means that politicians and the media have to convince
    the public that inflation is acceptable.

    That will be hard because, as Robert Shiller showed twenty years ago,public attitudes are against inflation almost the world over:
    The difference of attitudes of Americans and Germans (who are supposed to be hysterical about inflations) are minimal.

    If voters had been asked to decide between austerity or ncreasing public debt with the risk of inflation, it seems quite likely the results would have been the same in the last two British elections.

    1. You will not find anything of the above in what I've actually written. Please read this:

    2. Prof. Wren-Lewis,

      I have read your paper.

      Its intellectual level is best described by this dialogue:

      If standard macroeconomics is followed, you would never have austerity. - What, never?
      - Well hardly ever.

      And your "Genaral" theory of austerity ends with the belief in a world-spanning conspiracy: The world over, politicians, banks and dependent financial experts are supposed to have intentionally deceived voters to believe that austerity was a good thing. Now, deceit is always intentional. In other words you say they were all aware that austerity could have been prevented.

      I am amazed that you and an institution of Oxford University had the audacity to publish something so far divorced from reality.

  7. I suggest a few additional factors for the initial popularity of austerity, with specific reference to the UK.

    1) There was a belief that money was not always being well spent by government, at a time when personal finances were being squeezed. Backed by tabloid stories, Osborne succeeded in generating resentment at spending on the ‘undeserving poor’, living off hard-working taxpayers. Conveniently, those initially targeted by welfare cuts are much less inclined to vote in elections. The MPs’ expenses scandal didn’t help.

    2) The expansion of public spending under New Labour provided a cushion, allowing first-term coalition austerity to be imposed without an unacceptable impact on many voters. This has not been sustainable into the second Tory term, with resistance to cuts in working tax credits and disability payments, and a worsening NHS funding crisis.

    3) Austerity also played to the sense that “the world is out of control”, with the financial crash and the inability of western powers to manage global crises (notably that in the Middle East with its associated issues of terrorism and refugees). This sense of powerlessness was cleverly exploited by Leave campaigners in the Brexit referendum. It underlay the 2010 panic that Britain could become Greece and default, even though that was never on the cards. It was not so much the rise in public debt as the sense that it was out of control that created an opening for austerity politics.

  8. Does your last sentence not, perhaps inadvertantly, bit quote profoundly, completely demolish the entire rational markets argument?

  9. We need to argue directly for the need to educate voters that the currency issuer is the mirror image of the currency users, so their accounting statements are complementary rather than similar. Government deficits are non-government income and government debt is non-government net financial wealth in aggregate.

  10. I agree with Lyn Eynon's comments, but I think that there's another factor.

    There were an assumption that the cuts wouldn't hurt. When services began to be closed, or benefits withdrawn, suddenly opinion shifted.

    I've seen a few articles recently arguing that any economic slowdown is worthwhile for the freedom that Brexit will give. If things do sour, I wonder if we'll see a shift in opinion away from leaving the EU.

  11. This is not a comment on Britain, I'm in the US. However, I'm for austerity and my reason is I've never seen anything the government has done competently. As an example let's take the one program that all statist gush over, social security. It started around 1936 with a 2% tax. That tax is currently 12.25% and a 25 yr old enrolled can expect to receive 80% of what she contributed over her lifetime. Why have them do more?


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