{"id":2324,"date":"2015-07-05T13:08:54","date_gmt":"2015-07-05T03:08:54","guid":{"rendered":"http:\/\/irisherself.com\/blog\/?p=2324"},"modified":"2015-07-05T13:11:52","modified_gmt":"2015-07-05T03:11:52","slug":"the-austerity-delusion","status":"publish","type":"post","link":"https:\/\/irisherself.com\/blog\/the-austerity-delusion\/","title":{"rendered":"The austerity delusion"},"content":{"rendered":"

theguardian.com\/business\/ng-interactive\/2015\/apr\/29\/the-austerity-delusion<\/a>
\nExcellent Guardian article by Paul Krugman<\/p>\n

May 2010, as Britain headed into its last general election, elites all across the western world were gripped by austerity fever, a strange malady that combined extravagant fear with blithe optimism. Every country running significant budget deficits \u2013 as nearly all were in the aftermath of the financial crisis \u2013 was deemed at imminent risk of becoming another Greece unless it immediately began cutting spending and raising taxes. Concerns that imposing such austerity in already depressed economies would deepen their depression and delay recovery were airily dismissed; fiscal probity, we were assured, would inspire business-boosting confidence, and all would be well.<\/p>\n

People holding these beliefs came to be widely known in economic circles as \u201causterians\u201d \u2013 a term coined by the economist Rob Parenteau \u2013 and for a while the austerian ideology swept all before it.
\n
\nBut that was five years ago, and the fever has long since broken. Greece is now seen as it should have been seen from the beginning \u2013 as a unique case, with few lessons for the rest of us. It is impossible for countries such as the US and the UK, which borrow in their own currencies, to experience Greek-style crises, because they cannot run out of money \u2013 they can always print more. Even within the eurozone, borrowing costs plunged once the European Central Bank began to do its job and protect its clients against self-fulfilling panics by standing ready to buy government bonds if necessary. As I write this, Italy and Spain have no trouble raising cash \u2013 they can borrow at the lowest rates in their history, indeed considerably below those in Britain \u2013 and even Portugal\u2019s interest rates are within a whisker of those paid by HM Treasury.<\/p>\n

All of the economic research that allegedly supported the austerity push has been discredited
\nOn the other side of the ledger, the benefits of improved confidence failed to make their promised appearance. Since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF\u2019s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.<\/p>\n

Meanwhile, all of the economic research that allegedly supported the austerity push has been discredited. Widely touted statistical results were, it turned out, based on highly dubious assumptions and procedures \u2013 plus a few outright mistakes \u2013 and evaporated under closer scrutiny.<\/p>\n

It is rare, in the history of economic thought, for debates to get resolved this decisively. The austerian ideology that dominated elite discourse five years ago has collapsed, to the point where hardly anyone still believes it. Hardly anyone, that is, except the coalition that still rules Britain \u2013 and most of the British media.<\/p>\n

I don\u2019t know how many Britons realise the extent to which their economic debate has diverged from the rest of the western world \u2013 the extent to which the UK seems stuck on obsessions that have been mainly laughed out of the discourse elsewhere. George Osborne and David Cameron boast that their policies saved Britain from a Greek-style crisis of soaring interest rates, apparently oblivious to the fact that interest rates are at historic lows all across the western world. The press seizes on Ed Miliband\u2019s failure to mention the budget deficit in a speech as a huge gaffe, a supposed revelation of irresponsibility; meanwhile, Hillary Clinton is talking, seriously, not about budget deficits but about the \u201cfun deficit\u201d facing America\u2019s children.<\/p>\n

Is there some good reason why deficit obsession should still rule in Britain, even as it fades away everywhere else? No. This country is not different. The economics of austerity are the same \u2013 and the intellectual case as bankrupt \u2013 in Britain as everywhere else.<\/p>\n

Chapter one
\nStimulus and its enemies
\nwhen economic crisis struck the advanced economies in 2008, almost every government \u2013 even Germany \u2013 introduced some kind of stimulus programme, increasing spending and\/or cutting taxes. There was no mystery why: it was all about zero.<\/p>\n

Normally, monetary authorities \u2013 the Federal Reserve, the Bank of England \u2013 can respond to a temporary economic downturn by cutting interest rates; this encourages private spending, especially on housing, and sets the stage for recovery. But there\u2019s a limit to how much they can do in that direction. Until recently, the conventional wisdom was that you couldn\u2019t cut interest rates below zero. We now know that this wasn\u2019t quite right, since many European bonds now pay slightly negative interest. Still, there can\u2019t be much room for sub-zero rates. And if cutting rates all the way to zero isn\u2019t enough to cure what ails the economy, the usual remedy for recession falls short.<\/p>\n

So it was in 2008-2009. By late 2008 it was already clear in every major economy that conventional monetary policy, which involves pushing down the interest rate on short-term government debt, was going to be insufficient to fight the financial downdraft. Now what? The textbook answer was and is fiscal expansion: increase government spending both to create jobs directly and to put money in consumers\u2019 pockets; cut taxes to put more money in those pockets.<\/p>\n

But won\u2019t this lead to budget deficits? Yes, and that\u2019s actually a good thing. An economy that is depressed even with zero interest rates is, in effect, an economy in which the public is trying to save more than businesses are willing to invest. In such an economy the government does everyone a service by running deficits and giving frustrated savers a chance to put their money to work. Nor does this borrowing compete with private investment. An economy where interest rates cannot go any lower is an economy awash in desired saving with no place to go, and deficit spending that expands the economy is, if anything, likely to lead to higher private investment than would otherwise materialise.<\/p>\n

It\u2019s true that you can\u2019t run big budget deficits for ever (although you can do it for a long time), because at some point interest payments start to swallow too large a share of the budget. But it\u2019s foolish and destructive to worry about deficits when borrowing is very cheap and the funds you borrow would otherwise go to waste.<\/p>\n

At some point you do want to reverse stimulus. But you don\u2019t want to do it too soon \u2013 specifically, you don\u2019t want to remove fiscal support as long as pedal-to-the-metal monetary policy is still insufficient. Instead, you want to wait until there can be a sort of handoff, in which the central bank offsets the effects of declining spending and rising taxes by keeping rates low. As John Maynard Keynes wrote in 1937: \u201cThe boom, not the slump, is the right time for austerity at the Treasury.\u201d<\/p>\n

All of this is standard macroeconomics. I often encounter people on both the left and the right who imagine that austerity policies were what the textbook said you should do \u2013 that those of us who protested against the turn to austerity were staking out some kind of heterodox, radical position. But the truth is that mainstream, textbook economics not only justified the initial round of post-crisis stimulus, but said that this stimulus should continue until economies had recovered.<\/p>\n

What we got instead, however, was a hard right turn in elite opinion, away from concerns about unemployment and toward a focus on slashing deficits, mainly with spending cuts. Why?<\/p>\n

Conservatives like to use the alleged dangers of debt and deficits as clubs with which to beat the welfare state and justify cuts in benefits
\nPart of the answer is that politicians were catering to a public that doesn\u2019t understand the rationale for deficit spending, that tends to think of the government budget via analogies with family finances. When John Boehner, the Republican leader, opposed US stimulus plans on the grounds that \u201cAmerican families are tightening their belt, but they don\u2019t see government tightening its belt,\u201d economists cringed at the stupidity. But within a few months the very same line was showing up in Barack Obama\u2019s speeches, because his speechwriters found that it resonated with audiences. Similarly, the Labour party felt it necessary to dedicate the very first page of its 2015 general election manifesto to a \u201cBudget Responsibility Lock\u201d, promising to \u201ccut the deficit every year\u201d.<\/p>\n

Let us not, however, be too harsh on the public. Many elite opinion-makers, including people who imagine themselves sophisticated on matters economic, demonstrated at best a higher level of incomprehension, not getting at all the logic of deficit spending in the face of excess desired saving. For example, in the spring of 2009 the Harvard historian and economic commentator Niall Ferguson, talking about the United States, was quite sure what would happen: \u201cThere is going to be, I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realise just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates.\u201d The weeks and months turned into years \u2013 six years, at this point \u2013 and interest rates remain at historic lows.<\/p>\n

Beyond these economic misconceptions, there were political reasons why many influential players opposed fiscal stimulus even in the face of a deeply depressed economy. Conservatives like to use the alleged dangers of debt and deficits as clubs with which to beat the welfare state and justify cuts in benefits; suggestions that higher spending might actually be beneficial are definitely not welcome. Meanwhile, centrist politicians and pundits often try to demonstrate how serious and statesmanlike they are by calling for hard choices and sacrifice (by other people). Even Barack Obama\u2019s first inaugural address, given in the face of a plunging economy, largely consisted of hard-choices boilerplate. As a result, centrists were almost as uncomfortable with the notion of fiscal stimulus as the hard right.<\/p>\n

In a way, the remarkable thing about economic policy in 2008-2009 was the fact that the case for fiscal stimulus made any headway at all against the forces of incomprehension and vested interests demanding harsher and harsher austerity. The best explanation of this temporary and limited success I\u2019ve seen comes from the political scientist Henry Farrell, writing with the economist John Quiggin. Farrell and Quiggin note that Keynesian economists were intellectually prepared for the possibility of crisis, in a way that free-market fundamentalists weren\u2019t, and that they were also relatively media-savvy. So they got their take on the appropriate policy response out much more quickly than the other side, creating \u201cthe appearance of a new apparent consensus among expert economists\u201d in favour of fiscal stimulus.<\/p>\n

If this is right, there was inevitably going to be a growing backlash \u2013 a turn against stimulus and toward austerity \u2013 once the shock of the crisis wore off. Indeed, there were signs of such a backlash by the early fall of 2009. But the real turning point came at the end of that year, when Greece hit the wall. As a result, the year of Britain\u2019s last general election was also the year of austerity.<\/p>\n

Chapter two
\nThe austerity moment
\nfrom the beginning, there were plenty of people strongly inclined to oppose fiscal stimulus and demand austerity. But they had a problem: their dire warnings about the consequences of deficit spending kept not coming true. Some of them were quite open about their frustration with the refusal of markets to deliver the disasters they expected and wanted. Alan Greenspan, the former chairman of the Federal Reserve, in 2010: \u201cInflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.\u201d<\/p>\n

But he had an answer: \u201cGrowing analogies to Greece set the stage for a serious response.\u201d Greece was the disaster austerians were looking for. In September 2009 Greece\u2019s long-term borrowing costs were only 1.3 percentage points higher than Germany\u2019s; by September 2010 that gap had increased sevenfold. Suddenly, austerians had a concrete demonstration of the dangers they had been warning about. A hard turn away from Keynesian policies could now be justified as an urgent defensive measure, lest your country abruptly turn into another Greece.<\/p>\n

Still, what about the depressed state of western economies? The post-crisis recession bottomed out in the middle of 2009, and in most countries a recovery was under way, but output and employment were still far below normal. Wouldn\u2019t a turn to austerity threaten the still-fragile upturn?<\/p>\n

Not according to many policymakers, who engaged in one of history\u2019s most remarkable displays of collective wishful thinking. Standard macroeconomics said that cutting spending in a depressed economy, with no room to offset these cuts by reducing interest rates that were already near zero, would indeed deepen the slump. But policymakers at the European Commission, the European Central Bank, and in the British government that took power in May 2010 eagerly seized on economic research that claimed to show the opposite.<\/p>\n

The doctrine of \u201cexpansionary austerity\u201d is largely associated with work by Alberto Alesina, an economist at Harvard. Alesina used statistical techniques that supposedly identified all large fiscal policy changes in advanced countries between 1970 and 2007, and claimed to find evidence that spending cuts, in particular, were often \u201cassociated with economic expansions rather than recessions\u201d. The reason, he and those who seized on his work suggested, was that spending cuts create confidence, and that the positive effects of this increase in confidence trump the direct negative effects of reduced spending.<\/p>\n

Greece was the disaster austerians were looking for
\nThis may sound too good to be true \u2013 and it was. But policymakers knew what they wanted to hear, so it was, as Business Week put it, \u201cAlesina\u2019s hour\u201d. The doctrine of expansionary austerity quickly became orthodoxy in much of Europe. \u201cThe idea that austerity measures could trigger stagnation is incorrect,\u201d declared Jean-Claude Trichet, then the president of the European Central Bank, because \u201cconfidence-inspiring policies will foster and not hamper economic recovery\u201d.<\/p>\n

Besides, everybody knew that terrible things would happen if debt went above 90% of GDP.<\/p>\n

Growth in a Time of Debt, the now-infamous 2010 paper by Carmen Reinhart and Kenneth Rogoff of Harvard University that claimed that 90% debt is a critical threshold, arguably played much less of a direct role in the turn to austerity than Alesina\u2019s work. After all, austerians didn\u2019t need Reinhart and Rogoff to provide dire scenarios about what could happen if deficits weren\u2019t reined in \u2013 they had the Greek crisis for that. At most, the Reinhart and Rogoff paper provided a backup bogeyman, an answer to those who kept pointing out that nothing like the Greek story seemed to be happening to countries that borrowed in their own currencies: even if interest rates were low, austerians could point to Reinhart and Rogoff and declare that high debt is very, very bad.<\/p>\n

What Reinhart and Rogoff did bring to the austerity camp was academic cachet. Their 2009 book This Time is Different, which brought a vast array of historical data to bear on the subject of economic crises, was widely celebrated by both policymakers and economists \u2013 myself included \u2013 for its prescient warnings that we were at risk of a major crisis and that recovery from that crisis was likely to be slow. So they brought a lot of prestige to the austerity push when they were perceived as weighing in on that side of the policy debate. (They now claim that they did no such thing, but they did nothing to correct that impression at the time.)<\/p>\n

When the coalition government came to power, then, all the pieces were in place for policymakers who were already inclined to push for austerity. Fiscal retrenchment could be presented as urgently needed to avert a Greek-style strike by bond buyers. \u201cGreece stands as a warning of what happens to countries that lose their credibility, or whose governments pretend that difficult decisions can somehow be avoided,\u201d declared David Cameron soon after taking office. It could also be presented as urgently needed to stop debt, already almost 80% of GDP, from crossing the 90% red line. In a 2010 speech laying out his plan to eliminate the deficit, Osborne cited Reinhart and Rogoff by name, while declaring that \u201csoaring government debt … is very likely to trigger the next crisis.\u201d Concerns about delaying recovery could be waved away with an appeal to positive effects on confidence. Economists who objected to any or all of these lines of argument were simply ignored.<\/p>\n

But that was, as I said, five years ago.<\/p>\n

Chapter three
\nDecline and fall of the austerity cult
\nto understand what happened to austerianism, it helps to start with two charts.<\/p>\n

The first chart shows interest rates on the bonds of a selection of advanced countries as of mid-April 2015. What you can see right away is that Greece remains unique, more than five years after it was heralded as an object lesson for all nations. Everyone else is paying very low interest rates by historical standards. This includes the United States, where the co-chairs of a debt commission created by President Obama confidently warned that crisis loomed within two years unless their recommendations were adopted; that was four years ago. It includes Spain and Italy, which faced a financial panic in 2011-2012, but saw that panic subside \u2013 despite debt that continued to rise \u2013 once the European Central Bank began doing its job as lender of last resort. It includes France, which many commentators singled out as the next domino to fall, yet can now borrow long-term for less than 0.5%. And it includes Japan, which has debt more than twice its gross domestic product yet pays even less.<\/p>\n

The Greek exception
\n10-year interest rates as of 14 April 2015<\/p>\n

Chart 1 Source: Bloomberg<\/p>\n

Back in 2010 some economists argued that fears of a Greek-style funding crisis were vastly overblown \u2013 I referred to the myth of the \u201cinvisible bond vigilantes\u201d. Well, those bond vigilantes have stayed invisible. For countries such as the UK, the US, and Japan that borrow in their own currencies, it\u2019s hard to even see how the predicted crises could happen. Such countries cannot, after all, run out of money, and if worries about solvency weakened their currencies, this would actually help their economies in a time of weak growth and low inflation.<\/p>\n

Chart 2 takes a bit more explaining. A couple of years after the great turn towards austerity, a number of economists realised that the austerians were performing what amounted to a great natural experiment. Historically, large cuts in government spending have usually occurred either in overheated economies suffering from inflation or in the aftermath of wars, as nations demobilise. Neither kind of episode offers much guidance on what to expect from the kind of spending cuts \u2013 imposed on already depressed economies \u2013 that the austerians were advocating. But after 2009, in a generalised economic depression, some countries chose (or were forced) to impose severe austerity, while others did not. So what happened?<\/p>\n

Austerity and growth 2009-13
\nMore austere countries have a lower rate of GDP growth<\/p>\n

Chart 2 Source: IMF<\/p>\n

In Chart 2, each dot represents the experience of an advanced economy from 2009 to 2013, the last year of major spending cuts. The horizontal axis shows a widely used measure of austerity \u2013 the average annual change in the cyclically adjusted primary surplus, an estimate of what the difference between taxes and non-interest spending would be if the economy were at full employment. As you move further right on the graph, in other words, austerity becomes more severe. You can quibble with the details of this measure, but the basic result \u2013 harsh austerity in Ireland, Spain, and Portugal, incredibly harsh austerity in Greece \u2013 is surely right.<\/p>\n

Meanwhile, the vertical axis shows the annual rate of economic growth over the same period. The negative correlation is, of course, strong and obvious \u2013 and not at all what the austerians had asserted would happen.<\/p>\n

Again, some economists argued from the beginning that all the talk of expansionary austerity was foolish \u2013 back in 2010 I dubbed it belief in the \u201cconfidence fairy\u201d, a term that seems to have stuck. But why did the alleged statistical evidence \u2013 from Alesina, among others \u2013 that spending cuts were often good for growth prove so misleading?<\/p>\n

The answer, it turned out, was that it wasn\u2019t very good statistical work. A review by the IMF found that the methods Alesina used in an attempt to identify examples of sharp austerity produced many misidentifications. For example, in 2000 Finland\u2019s budget deficit dropped sharply thanks to a stock market boom, which caused a surge in government revenue \u2013 but Alesina mistakenly identified this as a major austerity programme. When the IMF laboriously put together a new database of austerity measures derived from actual changes in spending and tax rates, it found that austerity has a consistently negative effect on growth.<\/p>\n

Yet even the IMF\u2019s analysis fell short \u2013 as the institution itself eventually acknowledged. I\u2019ve already explained why: most historical episodes of austerity took place under conditions very different from those confronting western economies in 2010. For example, when Canada began a major fiscal retrenchment in the mid-1990s, interest rates were high, so the Bank of Canada could offset fiscal austerity with sharp rate cuts \u2013 not a useful model of the likely results of austerity in economies where interest rates were already very low. In 2010 and 2011, IMF projections of the effects of austerity programmes assumed that those effects would be similar to the historical average. But a 2013 paper co-authored by the organisation\u2019s chief economist concluded that under post-crisis conditions the true effect had turned out to be nearly three times as large as expected.<\/p>\n

So much, then, for invisible bond vigilantes and faith in the confidence fairy. What about the backup bogeyman, the Reinhart-Rogoff claim that there was a red line for debt at 90% of GDP?<\/p>\n

Well, in early 2013 researchers at the University of Massachusetts examined the data behind the Reinhart-Rogoff work. They found that the results were partly driven by a spreadsheet error. More important, the results weren\u2019t at all robust: using standard statistical procedures rather than the rather odd approach Reinhart and Rogoff used, or adding a few more years of data, caused the 90% cliff to vanish. What was left was a modest negative correlation between debt and growth, and there was good reason to believe that in general slow growth causes high debt, not the other way around.<\/p>\n

By about two years ago, then, the entire edifice of austerian economics had crumbled. Events had utterly failed to play out as the austerians predicted, while the academic research that allegedly supported the doctrine had withered under scrutiny. Hardly anyone has admitted being wrong \u2013 hardly anyone ever does, on any subject \u2013 but quite a few prominent austerians now deny having said what they did, in fact, say. The doctrine that ruled the world in 2010 has more or less vanished from the scene.<\/p>\n

Except in Britain.<\/p>\n

Chapter four
\nA distinctly British delusion
\nin the US, you no longer hear much from the deficit scolds who loomed so large in the national debate circa 2011. Some commentators and media organisations still try to make budget red ink an issue, but there\u2019s a pleading, even whining, tone to their exhortations. The day of the austerians has come and gone.<\/p>\n

Yet Britain zigged just as the rest of us were zagging. By 2013, austerian doctrine was in ignominious retreat in most of the world \u2013 yet at that very moment much of the UK press was declaring that doctrine vindicated. \u201cOsborne wins the battle on austerity,\u201d the Financial Times announced in September 2013, and the sentiment was widely echoed. What was going on? You might think that British debate took a different turn because the British experience was out of line with developments elsewhere \u2013 in particular, that Britain\u2019s return to economic growth in 2013 was somehow at odds with the predictions of standard economics. But you would be wrong.<\/p>\n

Austerity in the UK
\nCyclically adjusted primary balance, percent of GDP<\/p>\n

Chart 3 Source: IMF, OECD, and OBR<\/p>\n

The key point to understand about fiscal policy under Cameron and Osborne is that British austerity, while very real and quite severe, was mostly imposed during the coalition\u2019s first two years in power. Chart 3 shows estimates of our old friend the cyclically adjusted primary balance since 2009. I\u2019ve included three sources \u2013 the IMF, the OECD, and Britain\u2019s own Office of Budget Responsibility \u2013 just in case someone wants to argue that any one of these sources is biased. In fact, every one tells the same story: big spending cuts and a large tax rise between 2009 and 2011, not much change thereafter.<\/p>\n

Given the fact that the coalition essentially stopped imposing new austerity measures after its first two years, there\u2019s nothing at all surprising about seeing a revival of economic growth in 2013.<\/p>\n

Look back at Chart 2, and specifically at what happened to countries that did little if any fiscal tightening. For the most part, their economies grew at between 2 and 4%. Well, Britain did almost no fiscal tightening in 2014, and grew 2.9%. In other words, it performed pretty much exactly as you should have expected. And the growth of recent years does nothing to change the fact that Britain paid a high price for the austerity of 2010-2012.<\/p>\n

British economists have no doubt about the economic damage wrought by austerity. The Centre for Macroeconomics in London regularly surveys a panel of leading UK economists on a variety of questions. When it asked whether the coalition\u2019s policies had promoted growth and employment, those disagreeing outnumbered those agreeing four to one. This isn\u2019t quite the level of unanimity on fiscal policy one finds in the US, where a similar survey of economists found only 2% disagreed with the proposition that the Obama stimulus led to higher output and employment than would have prevailed otherwise, but it\u2019s still an overwhelming consensus.<\/p>\n

By this point, some readers will nonetheless be shaking their heads and declaring, \u201cBut the economy is booming, and you said that couldn\u2019t happen under austerity.\u201d But Keynesian logic says that a one-time tightening of fiscal policy will produce a one-time hit to the economy, not a permanent reduction in the growth rate. A return to growth after austerity has been put on hold is not at all surprising. As I pointed out recently: \u201cIf this counts as a policy success, why not try repeatedly hitting yourself in the face for a few minutes? After all, it will feel great when you stop.\u201d<\/p>\n

In that case, however, what\u2019s with sophisticated media outlets such as the FT seeming to endorse this crude fallacy? Well, if you actually read that 2013 leader and many similar pieces, you discover that they are very carefully worded. The FT never said outright that the economic case for austerity had been vindicated. It only declared that Osborne had won the political battle, because the general public doesn\u2019t understand all this business about front-loaded policies, or for that matter the difference between levels and growth rates. One might have expected the press to seek to remedy such confusions, rather than amplify them. But apparently not.<\/p>\n

Which brings me, finally, to the role of interests in distorting economic debate.<\/p>\n

As Oxford\u2019s Simon Wren-Lewis noted, on the very same day that the Centre for Macroeconomics revealed that the great majority of British economists disagree with the proposition that austerity is good for growth, the Telegraph published on its front page a letter from 100 business leaders declaring the opposite. Why does big business love austerity and hate Keynesian economics? After all, you might expect corporate leaders to want policies that produce strong sales and hence strong profits.<\/p>\n

I\u2019ve already suggested one answer: scare talk about debt and deficits is often used as a cover for a very different agenda, namely an attempt to reduce the overall size of government and especially spending on social insurance. This has been transparently obvious in the United States, where many supposed deficit-reduction plans just happen to include sharp cuts in tax rates on corporations and the wealthy even as they take away healthcare and nutritional aid for the poor. But it\u2019s also a fairly obvious motivation in the UK, if not so crudely expressed. The \u201cprimary purpose\u201d of austerity, the Telegraph admitted in 2013, \u201cis to shrink the size of government spending\u201d \u2013 or, as Cameron put it in a speech later that year, to make the state \u201cleaner … not just now, but permanently\u201d.<\/p>\n

Beyond that lies a point made most strongly in the US by Mike Konczal of the Roosevelt Institute: business interests dislike Keynesian economics because it threatens their political bargaining power. Business leaders love the idea that the health of the economy depends on confidence, which in turn \u2013 or so they argue \u2013 requires making them happy. In the US there were, until the recent takeoff in job growth, many speeches and opinion pieces arguing that President Obama\u2019s anti-business rhetoric \u2013 which only existed in the right\u2019s imagination, but never mind \u2013 was holding back recovery. The message was clear: don\u2019t criticise big business, or the economy will suffer.<\/p>\n

If the political opposition won\u2019t challenge the coalition\u2019s bad economics, who will?
\nBut this kind of argument loses its force if one acknowledges that job creation can be achieved through deliberate policy, that deficit spending, not buttering up business leaders, is the way to revive a depressed economy. So business interests are strongly inclined to reject standard macroeconomics and insist that boosting confidence \u2013 which is to say, keeping them happy \u2013 is the only way to go.<\/p>\n

Still, all these motivations are the same in the United States as they are in Britain. Why are the US\u2019s austerians on the run, while Britain\u2019s still rule the debate?<\/p>\n

It has been astonishing, from a US perspective, to witness the limpness of Labour\u2019s response to the austerity push. Britain\u2019s opposition has been amazingly willing to accept claims that budget deficits are the biggest economic issue facing the nation, and has made hardly any effort to challenge the extremely dubious proposition that fiscal policy under Blair and Brown was deeply irresponsible \u2013 or even the nonsensical proposition that this supposed fiscal irresponsibility caused the crisis of 2008-2009.<\/p>\n

Why this weakness? In part it may reflect the fact that the crisis occurred on Labour\u2019s watch; American liberals should count themselves fortunate that Lehman Brothers didn\u2019t fall a year later, with Democrats holding the White House. More broadly, the whole European centre-left seems stuck in a kind of reflexive cringe, unable to stand up for its own ideas. In this respect Britain seems much closer to Europe than it is to America.<\/p>\n

The closest parallel I can give from my side of the Atlantic is the erstwhile weakness of Democrats on foreign policy \u2013 their apparent inability back in 2003 or so to take a stand against obviously terrible ideas like the invasion of Iraq. If the political opposition won\u2019t challenge the coalition\u2019s bad economics, who will?<\/p>\n

You might be tempted to say that this is all water under the bridge, given that the coalition, whatever it may claim, effectively called a halt to fiscal tightening midway through its term. But this story isn\u2019t over. Cameron is campaigning largely on a spurious claim to have \u201crescued\u201d the British economy \u2013 and promising, if he stays in power, to continue making substantial cuts in the years ahead. Labour, sad to say, are echoing that position. So both major parties are in effect promising a new round of austerity that might well hold back a recovery that has, so far, come nowhere near to making up the ground lost during the recession and the initial phase of austerity.<\/p>\n

For whatever the politics, the economics of austerity are no different in Britain from what they are in the rest of the advanced world. Harsh austerity in depressed economies isn\u2019t necessary, and does major damage when it is imposed. That was true of Britain five years ago \u2013 and it\u2019s still true today.<\/p>\n

Follow the Long Read on Twitter: @gdnlongread<\/p>\n","protected":false},"excerpt":{"rendered":"

theguardian.com\/business\/ng-interactive\/2015\/apr\/29\/the-austerity-delusion Excellent Guardian article by Paul Krugman May 2010, as Britain headed into its last general election, elites all across the western world were gripped by austerity fever, a strange malady that combined extravagant fear with blithe optimism. Every country running significant budget deficits \u2013 as nearly all were in the aftermath of the financial […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[22,16,26],"class_list":["post-2324","post","type-post","status-publish","format-standard","hentry","category-stuff-that-matters","tag-collective-delusions","tag-performance-philosophy","tag-the-naked-emperor"],"_links":{"self":[{"href":"https:\/\/irisherself.com\/blog\/wp-json\/wp\/v2\/posts\/2324","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/irisherself.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/irisherself.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/irisherself.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/irisherself.com\/blog\/wp-json\/wp\/v2\/comments?post=2324"}],"version-history":[{"count":4,"href":"https:\/\/irisherself.com\/blog\/wp-json\/wp\/v2\/posts\/2324\/revisions"}],"predecessor-version":[{"id":2328,"href":"https:\/\/irisherself.com\/blog\/wp-json\/wp\/v2\/posts\/2324\/revisions\/2328"}],"wp:attachment":[{"href":"https:\/\/irisherself.com\/blog\/wp-json\/wp\/v2\/media?parent=2324"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/irisherself.com\/blog\/wp-json\/wp\/v2\/categories?post=2324"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/irisherself.com\/blog\/wp-json\/wp\/v2\/tags?post=2324"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}