Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 15 March 2018

No spring in the UK air


I was not going to write anything about the non-event of Hammond’s Spring statement, in part because I confess I am tired of writing about the Conservative party’s hopeless macroeconomic policy. It is like being forced to second mark all the fails from a first year economics exam. There is a danger that if you keep on writing things like ‘the government is not like a household’ and ‘pro-cyclical policy is a mistake’ your writing becomes illegible or you start writing everything in capital letters. I can sense Chris Dillow is also running out of patience, 

So this time I will ignore macroeconomics and write instead about political economy and distribution. The political economy of modern Conservatism is extreme laissez faire in the following sense. The belief is that if you let businessmen (they are usually men) get on with things, and take away red tape, regulations, and reduce taxes, all will be well. There is no need to help with public sector investment and R&D initiatives, or worry about rent extraction: the private sector can always do things better itself. The public sector does not support the private sector, but just gets in the way. An obvious consequence is that the Chancellor is reduced to a glorified bookkeeper, and political success comes with balancing the books and shrinking the state

The results of this approach have been disastrous. This laissez faire experiment took place in the most favourable of circumstances: a recovery from a very deep recession which if history is any guide should have seen rapid growth. The result has been the slowest recovery for as long as anyone can remember. This chart from the Resolution Foundation shows this clearly.


The economic approach of those on the right of politics has therefore failed, and failed big. 

Perhaps it has been unlucky. Perhaps for some as yet unexplained reason the financial crisis has doomed the subsequent recovery. Perhaps the tepid recovery is a consequence of the particular mistakes of austerity and Brexit rather than a reflection of the overall laissez faire approach. That debate has begun in progressive circles, but in the mainstream media and among Conservative politicians we still hear talk of ‘strong and stable’. It is as if everyone is living in a postmodern world where the economy can be whatever government politicians wish it to be.

I have talked in the past about how this fiction of a strong economy can be sustained despite being obviously false. I argued that this deceit won the Conservatives the 2015 election. But I think there is another factor I have not mentioned before, and that is how the burden of austerity has been spread.

This chart from the IFS tells us all we need to know. On the horizontal axis are income deciles, with the richer to the right. On the vertical axis is the loss (or small gain) as a result of fiscal measures. The grey line shows what happened under the Coalition government. Austerity hit the poor most, but the richest also lost income. Austerity under a Conservative government, either already under way or (mostly) planned, hits the poor most and actually slightly benefits the ‘almost rich’.

We can say quite clearly, and without caveats, that the poor have born the brunt of austerity in terms of income gains or losses. In that sense we have not, and nor will we be, all in this together. Jonathan Portes estimates these changes will increase child poverty by 1.5 million over the next 5 years. Since Margaret Thatcher, Conservative governments have been and continue to be regressive (transferring money from the poor to the rich) and have increased poverty.

This chart also tells us how we can have political commentators talking about the end of austerity. Political commentators are secure in the upper half of the income distribution. For them, austerity has indeed come to an end. But for those who are working class, poor or left behind austerity is very far from over. No wonder they say “that’s your GDP, not ours” when real wages have been steadily falling yet political commentators let government politicians get away with talking about a strong economy.

Austerity has hit and will continue to hit those who can least bear it, but it has had very little impact on your average Conservative party member, or your average political commentator working for the BBC. This government has not just continued where Mrs Thatcher left off in dividing this country by class, but it has also divided it by age and divided it once again over Brexit. We may have just had the spring statement, but the country is still in the winter of its discontent.   

5 comments:

  1. I agree completely with what you say here but the failure to tackle major issues is an indictment that could be laid at the feet of both major parties.

    Like you I see the state as an integral component of the structure in economic terms. Morally I believe its bias should be support and not punishment.

    Whilst I think the Conservatives are, as you say, delusional, the Labour party cannot acquit itself of a Panglossian view which skates over the implications of spending programmes. The economy faces major issues in the next generation (indeed is already facing some) in terms of demographics; AI/automation; the cost of energy and climate change and both major parties show no inclination to demonstrate how they will meet these challenges.

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  2. How do you explain the rejection of standard macroeconomics by a Chancellor with a degree (at least in part) in Economics from one of our finest universities ? Admittedly, it's a long time since he graduated, but surely there must be people in the Treasury to bring him up to speed, and remind him of concepts such as the zero lower bound and counter-cylical policy?

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  3. The Tories tell us the sun is shining outside, when in fact it's raining cats and dogs.

    The idea that the market drives the economy has become a standing joke, but the Tories still enthusiastical peddle this myth because a one trick pony has no more cards to play.

    The real question about Neo-Liberal dogma is not whether these people actually believe their own hyperbole, but why they are pursuing it?

    The connection between Atlantic Bridge and ALEC in fact expose exactly what the real agenda is and that the great conspiracy theory is no longer a theory but borne out of these associations.

    This is the basis of all the Tories lies and why they contiually smear Jeremy Corbyn: https://meanwhileinbudapest.com/2016/12/15/the-3-layers-of-authoritarian-thinking/

    The solution to everything, is to make money work in the interest of people, and to relegate the 1% to the dustbin of history.

    People create the wealth, not the rich, put those energies to use serving everybodies interests and as change occurs adapt to meet the new challenge.



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  4. «But for those who are working class, poor or left behind austerity is very far from over. No wonder they say “that’s your GDP, not ours” when real wages have been steadily falling»

    It is very good that these things get noticed even by some establishment Economists. In some of their offline books establishment a few more people like V Cable and J Key have also recognized these issues and in particular the centrality of the property bubble to UK politics and its political economy.

    «yet political commentators let government politicians get away with talking about a strong economy.»

    I have long noticed that economic news are always reported from the point of view of investors, and property and share prices have been booming (until a couple months ago).
    People who bought with a £10,000-£20,000 deposit in 2001 a £100,000-£200,000 property in the south-east or London are collecting today capital gains of £20,000-£40,000 per year, a truly fantastic rate of return, pretty much government sponsored and guaranteed.

    So there is a strong economy overall, as testified by high imports and widespread southern upper-middle class prosperity and spending, because monetary policy is extremely expansive.
    But monetary policy looseness is targeted to the benefit of property and business owners, and fiscal policy tightness is targeted to be endured by low-wage workers and those unable to work.

    «This government has not just continued where Mrs Thatcher left off in dividing this country by class, but it has also divided it by age and divided it once again over Brexit.»

    And by region too: south-east and London vs. everybody else. And there is a considerable overlap among the categories "southern", "middle-aged and older", "landowning" and "upper-middle class", "right-wing leaver", and that overlap is called "toryism".

    For people in those tory "masters class" categories the past 35-40 years, including the years since 2010, have been amazingly good, of surging living standards and carefree spending; the "servant class" categories haven't had it so good, but they haven't mattered much.

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  5. «This laissez faire experiment took place in the most favourable of circumstances: a recovery from a very deep recession which if history is any guide should have seen rapid growth.»

    Following on from my previous comment: there has been no "laissez-faire" as to property and share prices, they have been pushed up massively, as G Osborne has declared explicitly, by massively loose debt policy, as well as hundreds of billions of free money handed out to financial corporations, this is F Coppola on just RBS:

    http://www.coppolacomment.com/2018/01/the-carillion-whitewash.html
    Rescuing it cost the U.K. Government £45bn, and RBS has lost a further £58bn since. Nearly ten years after the crisis, it is still in majority public ownership.

    It is the usual formula: tender socialism for the affluent and rich, harsh market discipline for the servant classes.

    «The result has been the slowest recovery for as long as anyone can remember. This chart from the Resolution Foundation shows this clearly.»

    Your graphs do not fully convey the extent of the problem. In another blog I found a graph if commercial and industrial electricity consumption by region in the UK 2005-2015:

    https://blissex.files.wordpress.com/2018/02/dataelectrukfallbyregion2005to2015.png

    Such an enormous fall, and in particular for the poorest regions is unprecedented. For comparison I have looked at the same for various regions of Italy, a troubled yet still sputtering economy, and there is a similar pattern, then I looked at several developed and developing countries, and eastern europoan ones, and there are some ominous patterns in per-capita electricity consumption:

    https://blissex.files.wordpress.com/2018/02/dataelectreuothersconsperhead1960to2015.png

    Usually per-capita electricity consumption is a good proxy for real GDP per capita, and that for the UK has fallen dramatically since 2004-2005 (well before the great financial recession) much the same as those of Spain, Greece, Italy, that are deeply troubled economies. It is interesting to play around with these two interactive Graphs from Google/Worldbank:

    https://www.google.co.uk/publicdata/explore?ds=d5bncppjof8f9_&met_y=eg_use_elec_kh_pc&idim=country:DEU:ITA:GBR:FRA:ESP:GRC:CHN:JPN:KOR:MYS:THA:BRA:MEX:URY:TUR:IRL:SGP:IND:ISR

    https://www.google.co.uk/publicdata/explore?ds=d5bncppjof8f9_&met_y=eg_use_elec_kh_pc&idim=country:BLR:BGR:CZE:KAZ:LVA::HUN:LTU:MDA:POL:ROU:RUS:SVN:UKR:GBR

    In particular notice that at the same time that China's per capita electricity consumption doubled its growth rate following WTO entry, that of most developed countries stalled or fell significantly.

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