Steering the ship towards the austerity iceberg

23rd June 2010

Today I gave my verdict on the budget in the Guardian. Click here to see it on the guardian site or read my article below:

“When a small Canadian cruise ship hit an iceberg in 2007, its 154 passengers were nonchalant. Initial reports suggested only a small hole was punched into the hull and so they refused to panic. Twenty hours later the ship “had sunk beneath the waves”.

Today the public and particularly the Liberal Democrats appear nonchalant as George Osborne steers the ship of state straight towards the Austerity Iceberg. The foolhardy captain of this ship has recruited the most vulnerable sectors of society – children, mothers and the elderly – to act as his crew – while removing their life boats.

It’s horrible to watch – for a number of reasons. Not only because it is gross cowardice to place the weak and vulnerable in the frontline in this way. But also because the “iceberg” towards which Osborne is steering Britain is not a lone one. European countries are hell-bent on synchronising austerity across the eurozone. Icebergs are popping up everywhere. And like the chancellor, all the OECD economies cutting back on public spending hope to compensate by increasing exports – into shrinking markets.

China and Japan are set to follow suit, and are aggressively increasing exports. Last month, the rise in China’s exports was the highest in six years. One has to ask about the quality of advice the chancellor is getting from Mervyn King and Treasury mandarins, if he has been led to believe that Britain’s terminally declining manufacturing sector can compete with China. That exports can help substitute for the collapse in public investment that will now follow the collapse in private investment – itself a function of Britain’s malfunctioning banking system.

The huge increase in VAT to 20% will clobber the poor and hit the high street. But it will also hit the services sector on which the economy has becoming increasingly reliant: financial services, advertising, public relations, design and management consultancy.

Watch as the ballast of high-end private-sector jobs, as well as public-sector jobs, are thrown overboard just as the ship steers straight for the iceberg. These jobs will not be saved by the chancellor’s concessions on corporation tax. We know, because of research undertaken by the IMF.

Those high priests of neoliberalism have found that corporate tax incentives are the least effective of all possible fiscal stimulus measures examined. According to their research, stimulus equivalent to 1% of GDP comprised of corporate tax cuts show up as an increase in GDP of just 0.5% of GDP over five years. By contrast, government investment yields the highest return, up to 4.5% of GDP over five years.

Their key conclusions are worth quoting more fully: “There is a robust finding across all models that fiscal policy can have sizeable output multipliers, particularly for spending and targeted transfers.”

The authors’ sole caveat is that the fiscal stimulus should last years, not decades. But if fiscal stimulus has not worked even over that timescale, then a “somewhat more comprehensive socialisation of investment” would be on the agenda.

Watch out as, in a year or two, taxpayers are once more called upon to bail out the sinking ship – and expected to “comprehensively socialise investment”.

Published in the Guardian, comment is free, 23rd of June 2010.

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4 comments to Steering the ship towards the austerity iceberg

  • Dr L Brownstein

    Ann, spot on as usual. Unfortunately, I am not surprised. When Osborne said that unless deep fiscal cuts were made, the economy would travel down the road to ruin, he made no effort to provide evidence for this seemingly hyperbolic statement, indeed, he gave the impression that the situation he alluded to was a given. Nothing could be further from the truth. In fact, the truth behind part of the budget may be darker than many think.

    Osborne is supported by people like Mark Littlewood, who contends that libraries serve no real social purpose, social welfare should be trimmed back dramatically, the arts and cultural pursuits should be self-financing, and the like. Before his public disgrace, Laws, in front of an audience of Whitehall workers largely in their 20s and 30s, asserted that his savage proposals would send shockwaves through Whitehall. Did he think that these relatively young government administrators were somehow responsible for the country’s fiancial plight and that they ought therfore to somehow pull their socks up? His was a disgraceful performance.

    The view that has taken hold is that it is public spending that is at the core of the country’s roubles, not the fact that the public purse bailed out the banks and got nothing in return. At the core of this attitude is a kind of Puritanical philistinism undergirded by the intention to avoid the redistribution of economic and political power at all costs. In other words, to retain and indeed to reinforce the ecomonic and political status quo. That the general public did not vote for that and do not want it is an irritating irrelevance. Even the more liberal Lib-Dems (though some Lib-Dems are Tories in disguise, like Laws) seem have been suborned to this “nasty” ideological position. And, unless he is playing some kind of long game, Vince Cable appears to be one of them.

    We are experiencing a right-wing backlash against the welfare state. The irony is that it was right-wing ideology that failed the country in the first place. The deficit is being used a smoke-screen to do what even Thatcher could not do – roll back the state and further financially entrench those who already have more than any normal person actually needs. Deficit economics is not a science-based policy. It is an ideology of power and privilege.

    The mainstream media, with notable individual exceptions, have missed this. For example, the Institute for Fiscal Studies is lauded by Channel 4 news as great in every respect. What the channel misses is that every data analysis proceeds on the basis of certain assumptions, many of which are left unstated – such analysis is not and can not be neutral.

    But this is not the most egregious error on the part of Channel 4 news. It is their lack of appreciation of the disjuncture between data analysis and policy prescriptions or proscriptions that are either claimed to follow from the analysis or are so implied. Even assuming that the analysis of the data provided by the IFS is as neutral as it is possible to get, it does not follow that the social policies that they sometimes advocate are an inevitable, direct consequence of their analysis. Channel 4 news has bought into the prevailing deficit propaganda. The fact that school meals were on the cutting agenda is an indication of how biased this deficit agenda is.

    It is not neutral. It will not be evenly distributed. It is not even necessary. And you do not have to be a Keynesian to appreciate this.

    Economics is a social science where there are still competing schools. There is no overall consensus such as is found in physics or parts of biology. And value judgments form an ineluctable part of any social scientific endeavor. But this does not mean that “anything goes”. All economic principles can be assessed in respect of the evidence that is available. That there may be no single answer to a given problem does not mean that all answers are equally viable. Some are clearly better than others. The deficit cutting agenda, so beloved by right-wing European politicians and their relatively well-off supporters, is not one of the better ones. The fact that what evidence there is not being transparently employed with respect to what are considered to be its policy implications shows more clearly than anything else that economics is less like applied physics than applied ecology; and applied ecology has the edge on it.

    Underlying all this is a confusion/conflation of two things. One is that of the status of a person qua social role and that of the status of a person qua human being. While it is undoubtedly true that some social roles are more important than others, no human being qua human being is more important than another. For example, a physicist is more important at CERN than an economist. It does not follow from this that one sort of person is more important than another. It is this distinction that is being conflated, if not confused, in discussions of the deficit by certain advocates. Of course, if pointed out, such a conflation would be denied. And put baldly like this, we would all feel impelled to deny it. But some of the economic proposals being put forward by the coalition easily admit this kind of interpretation, whatever gloss is placed on it.

  • Brecon Quaddy

    “But it will also hit the services sector on which the economy has becoming increasingly reliant: financial services, advertising, public relations, design and management consultancy.”

    Er, isn’t that the sector on which the Guardian has become increasingly dependent for advertising revenue?

  • RE Mant

    Keynesians always consider economic downturns after the fact to be the result of Scrooges, or some other villainy, but it is very hard to see how they can be caused by this when clearly there is always an overabundance of money and credit. Likewise, it is hard to see how banks can profit from a restriction of spending, when they clearly profited from overspending, and have had the value of their assets reduced by deflation. They may well weather the situation better than the average citizen, but they neither caused the problem nor will profit from the austerity.

  • Dr L Brownstein

    Choate on VAT.

    Anyone with half a heart views VAT as a regressive tax. But Choate has gone that extra mile to argue that, really, it isn’t as bad as we might think. His comments, made on a BBC1 program on the budget, made my jaw drop. Put concisely, his argument is this: if we take into account the spender’s lifestyle, then we can see that VAT the effect of the VAT increase is not as pernicious to those on lower incomes as it might at first appear. Eh?

    This is because those with larger incomes purchase more expensive items and those on smaller incomes will spend anyway and will spend on less expensive items, so VAT affects them less.

    This leaves me speechless.

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