Dangerous
voices are what the British Prime Minister called those who criticised
austerity in a speech
on Thursday. In response one of those dangerous voices, Martin Wolf, became shrill
in Friday’s FT ($). After noting the observation
by Jonathan Portes that public investment could currently be financed very cheaply
because UK long term real interest rates are so low, he writes “it is
impossible to believe that the government cannot find investments .... that do
not earn more than the real cost of funds. Not only the economy, but the
government itself is virtually certain to be better off if it undertook such
investments and if it were to do its accounting in a rational way. No sane
institution analyses its decisions on the basis of cash flows, annual
borrowings and its debt stock. Yet government is the longest-lived agent in the
economy. This does not even deserve the label primitive. It is simply
ridiculous.”
Ridiculous
it is, but as a piece of spin, the focus on reducing debt works as long as the Euro crisis lasts. I was puzzled at
first by the phrase ‘dangerous voices’ in the Prime Minister’s speech. Why
focus on the act of saying, rather than the content (as in ‘dangerous advice’
for example). Maybe it is just a little Freudian. They are dangerous voices,
not because the advice they offer is dangerous, but because they offer a
persuasive alternative to the dominant macroeconomic spin. Let’s start with
that spin.
It is
good politics to say
that “there, but for austerity, go us”. I doubt very much that the government
actually believes what it says, but the spin is too good to abandon. Why can I claim
that the government does not believe what it says? Because, if debt was the
constraint, the government would have tried balanced budget fiscal expansion. Balanced
budget fiscal expansion is the growth plan that does not conflict with (and
probably helps) the debt problem. Sure, long term supply side reform is good
too, but we need demand stimulus now. See, for example, Ian Mulheirn here,
or indeed
the IMF. I’ve explained
the logic many times, and Pontus Rendahl gives a nice theoretical account of
why this works (and a new model) here.
If the
government really believed that the markets would not let them borrow to
expand, but wanted to do something nevertheless, then this is the obvious way
out. So why have they not taken it? One answer (there are others)
is that the short term lack of growth in the economy, and rising unemployment,
is not actually a big problem for the government (or at least the major part of
it). It is consistent with their five year strategy. The prime aim of this
strategy is to shrink the size of the state, and the need to reduce debt
provides an obvious public justification for this. Balanced budget expansion
goes in the wrong direction, at least for a time.
But the
government wants to get re-elected. Here the calculation might be as follows.
First, the recession has not hit the Conservative’s political base hard, so in
the short term there is no overwhelming internal pressure to change policy. Second,
by the time of the next election in 2015, economic growth will have
returned, and the macroeconomic spin will be “we said it would be hard, but
growth shows the policy has been successful”. Some economists will complain
about the output gap, but that will get lost in argument over what the size of
the output gap really is. Others will point
to average growth over five years, but then the well tested line
about clearing up the mess we were left will come back into play.
In
terms of macroeconomic spin, I think it is a pretty good strategy. Good spin is
simple, and plays off real events. So the line “we have to reduce debt quickly
because otherwise we will be like Greece, or Spain” works, while the response
“but the Eurozone is special because member countries do not have their own
central bank” is too technical to be an effective counter. In contrast the argument that
Wolf and Portes put forward above – why not invest when it’s so cheap to borrow
– is effective, which is why it is dangerous. So of course is “austerity is
stifling growth”, as long as growth is negative or negligible. However, come
2015, the spin “we have done the hard work and the strategy has worked” will
accord with (relatively) strong growth, while talk of output gaps and lost
capacity will have less resonance. True, unemployment will still be high, but
not many of the unemployed are Conservative voters, and the immunising spin
about lack of willingness to work can be quite effective.[1]
Will the strategy, and the
associated spin, work? The risk that growth will not be respectable in 2014
must be low: by then consumers and firms should have adjusted their
borrowing and wealth sufficiently such that growth can resume. If there is a chance that it might not be, I
expect to see some measures in next year’s budget that do not conflict with the
overriding ideological objective, such as incentives for firms to bring forward
investment. The fact that the main fiscal mandate involves a rolling five year horizon means there is always room for such measures.
The Office for Budget Responsibility,
that very positive innovation by the current government, will in all likelihood
be pointing to the need for continuing austerity, because the earlier absence
of growth will have (or appear to have) reduced capacity through hysteresis
effects. I suspect that this was not in the original game plan. However I also
doubt that it will be a fatal flaw either. Indeed, while austerity may be
becoming unpopular now, do not be surprised
to hear the following bit of spin in 2015: “Austerity laid the foundation for
our current growth, so we need to stick with it to ensure growth continues”.
As you can see, I think the connection
between macroeconomic spin and macroeconomic reality is pretty tenuous. Please
someone convince me that I’m being too cynical.
[1]
Some argue that the “Labour isn’t working” advert in the 1979 election was
effective. However high unemployment did not prevent Mrs Thatcher being re-elected.
Perhaps unemployment is more of a problem for Labour than Conservative
governments?
