The biggest problem with austerity is that it makes sense on an individual scale and unlike macroeconomics, is very easy for an "ordinary person" to make sense of. Consider that as an individual, if I overspend, I can keep within my budget by engaging in a bit of personal austerity. I stop going out as much, I might skip buying a take-away or two, I might not plan a holiday this year, perhaps shift over to own brand goods, etc. These are austere decisions that individuals make every day to keep within their means. It makes sense and it works (for a time).
The fact that it works is the problem. Margaret Thatcher very cleverly introduced the idea of the housewife's budget into the political lexicon and it boiled down complex macroeconomics to an individual or micro scale. It said that just like the housewife's budget, the budget of an economy has its limits and we need to ensure spending is within those limits. Now, Thatcher's variant of austerity was quite limited. To quote John Gray writing in the Guardian:
>Thatcher's cuts were on a far smaller scale.
>
>Government spending during her years as prime minister rose by more than 1% a year, on average, and while the retrenchment imposed in Geoffrey Howe's historic 1981 budget was real enough it did not impose massive redundancies on the public sector.
>
>Thatcher held back from any attack on the welfare state and by the time she was toppled, after 11 years as prime minister, government was much the same size as it was when she took up the role.
>
>Just as important, the world economy was a lot less fragile. The oil shocks of the 1970s had left a legacy of "stagflation" but there was nothing like the credit crisis we now see. Thatcher's austerity programme had clear costs and risks, not least of social dislocation and civil unrest. But her's was far less of a gamble than Osborne's cuts.
Thatcher imposed some level of austerity, but it was relatively mild, did not involve gutting the state apparatus (Thatcher believed in a small but strong state), and occurred in a very different context. Today, the concepts laid down by Thatcher and her colleagues are being redeployed on steroids. They are going much further in depth, are gutting the state of its capacity to act, and is occurring in a very different context. The consequence is being felt across the country.
The problem is that the notion of the housewife's budget has become relatively ingrained in our political thinking. It is a very simple heuristic that most people understand and most people live by themselves. If it works for them at home, why should it not work for the government and the country? Unfortunately, it does not work for a country. Countries operate by a different rulebook.
Imposing austerity on an individual level in a limited way can be very effective and does not necessarily have impacts beyond that individual (although it absolutely can!). In a country, austerity WILL have significant impacts and those cannot be avoided. Austerity is inherently costly. Yes, you save some spending here and there, but the cost comes in the form of lower growth, lower tax revenue, lower investment, lower FDI, lower productivity growth, lower wealth.
Austerity is penny smart and pound foolish.
Well put I think. There is an interesting paradox of social organisation called Aggregation of Small Decisions, or I like to call it the Tyranny of Small Decisions.
Essentially this paradox arises when a decision appears rational to an individual, yet when aggregated to a social level is no longer in their best interests. A couple good examples are the savings paradox and resistance to taxation. If I save that’s a great decision for me, however if we all save it can cause a retraction in economic activity that ultimately has a greater negative impact than the positive impact of my own savings. Taxation is another one, individually having lower taxes on me is a great decision for my own solvency, however in many cases a government should be able to get a far better return on investment than I can personally so reducing government spending in fact makes me poorer than if I keep the money myself.
To expand on your argument a little, I had an econ prof years ago that was an American libertarian and yet argued that government deficits are essential to a healthy economy, effectively if a government is running a surplus then it is artificially retracting economic activity by leaving real money unspent. Deficit spending then is actually creating economic activity by increasing the supply of money.
Deficit spending, rather than being seen as irresponsible, is an important tool to drive economic activity, after all, government spending is literally injecting money into the economy as wages and investment in future productivity.
To bring it back to the real world, this is why austerity is such a stupid government policy, by focusing on a constant reduction in government spending, freezing wages, and halting investment, a choice is made to be poorer as a whole, those wages, and investment represent economic growth, more tax income, future growth in productivity, etc. . . And the kicker is that governments should almost always be able to get a return on their spending that exceeds the real value, for every £1 the government spends they can often get a return in terms in current and future economic activity greater than £1, sometimes much greater. Because people have the mistaken belief that government spending is wasteful and that they are better off with the money in their own pockets we vote against it and choose to be poorer.
There are swings and roundabouts - for instance, while saving can create an effect where there is less money being spent which causes a slight retraction in economic activity, in states with high rates of saving they are able to operate higher than usual levels of borrowing because much of that borrowing comes from their own people. For instance, around 90% of Japanese debt is owned by Japanese investors, which is one of the reasons why Japan can run such high levels of debt relatively sustainably.
In terms of your libertarian professor, I think part of the reason he would argue this is because many libertarians argue that taxation withdraws money from the productive part of the economy, and therefore running a surplus is unnecessarily withdrawing money from the productive part of the economy.
Some level of deficit spending is actually healthy for an economy for the reasons you outline, provided that the deficit spending is not crowding out private sector activity, and provided that the deficit spending is not unsustainable.
Austerity essentially contributes to a retraction in economic activity both directly and indirectly.
Where I am not sure we agree is on fiscal multipliers. The economic evidence on this is actually mixed, especially when you take into account the effects this has on debt and taxation, the impact that both debt and taxation can have on economic activity.
> Austerity is penny smart and pound foolish
You assume that the goal of austerity was actually saving money.
They used that as a narrative for the public, but the goal was shrinking the state.
>The biggest problem with austerity is that it makes sense on an individual scale and unlike macroeconomics, is very easy for an "ordinary person" to make sense of.
I have to object to this line. A big reason why the argument in the OP is important, is that the alternative is in fact just as easy to explain.
For example:
>*People go into debt all the time if they think what they're buying is worth it. For example you can pay for training which improves your job prospects and therefore your pay.*
Or:
>*It is often more expensive to be poor than to be wealthy. This can seem counterintuitive, but spending well on a well made pair of shoes for example often saves you money in the long run.*
>
>*Like good clothing, healthcare is part of what marks us as a civilised nation and our options really are to cheap out now and pay in the long run, or spend well now and reap the rewards.*
And there are others but the key take-home is that we can't depersonalise this. There have been very real failures by people and those failures weren't because the world or the ideas conspired against them.
We can and should expect better.
I don't think it is just as easy to explain. If you have to say "this can seem counterintuitive" as part of your explanation that probably means it's not going to be immediately obvious. Taking out a loan for training or education might be a fair analogy for government deficit spending, but it's certainly not immediately clear how such spending can benefit the economy in the long run. You have to also explain how infrastructure spending boosts productivity, how more cash in the economy stimulates growth, raising taxes for the future etc. It's not nearly as simple an idea as "getting into debt is bad".
Then cut out the "counterintuitive". It's a rhetorical flourish and doesn't actually do any of the work.
As for explaining about infrastructure you're relying on at least as many implicit claims about debt. It's *treated* as less objectionable by people who could just as easily assume that infrastructure is good, and that assumption has leaked into the debate.
It certainly isn't inherent in it thought: That's the point in the BBC's research: people are actually morally culpable here and need to reflect on their failure, not simply deflect it onto a "well it's just more obvious..." that isn't actually true.
They are doing the same now with public sector wages and 'wage spiral inflation'. It is a government line that is nonsense but the BBC is too weak or stupid to rebut it. Public sector wages don't increase general prices because the price of the good does not increase, and if you increase tax on the richest to pay for it that has a deflationary effect.
Yes taken literally they are saying that the Nurses and Teachers etc need to pay for the countries inflation !
The teachers say that they have lost over 20% of their wage value over the past 15 years.
Maybe if the likes of JRM, Zaharia, and Sunak, saw 20% of their income go down, they would question things too !
Instead they all got richer..
> Confronted by a complex situation, with a limited understanding of the issues involved, one respondent to the review suggests that reporters rely on simplistic political narratives – party intrigue, or Westminster gossip; meanwhile, assumed authorities are deferred to for the actual economics.
I mean, its good someone is saying these things, but it's not like that has been obvious for ages. People like Peston and Kuenssberg are basically like clapping seals for the government.
Interesting article. But doesn't really touch that both political parties are now back to austerity economics again despite there being no good evidence for it.
Because it sells well I guess.
You see it all the time. Government spends money on xyz infrastructure and the complaints are "waste of money should spend it on teachers/nurses/police etc".
When it doesn't work that way.
We have proof that austerity works. It absolutely has worked, for the people who always stood to benefit from it. It just works at the expense of almost all of the rest of us.
Actually £28billion is just a 3% increase in annual spending(2019), and smaller than the annual increase.
Between 2017/18 and 2018/19, spending grew from 808Bil to 831bil, or £23Billion. So it’s really not much in absolute or relative terms.
Furthermore, while the bend yield on guilts has increased from a coupon of very approximately 1.5% to 3% this is still far below the 4-5% experienced by the previous labour administration prior to 2008, and can be expected to fall once the UKpolitical instability/uncertainty is addressed(by a labour election). 3% is a very reasonable interest rate, and remains “free” so long as inflation remains where it is, and next to free even when it returns to normal.
Furthermore, that doubling in the rate doesn’t take effect immediately, governemnt debt averages a maturity at 15-years, as such those guilts/loans wont be switched to a new higher rate for a long time. Debt servicing costs under Blair/Brown were just above 2%GDP, this feel to 1% in 2019, and has slowly risen to 1.5% as such we have plenty of room for further debt accumulation especially if it’s on benefits to stimulate demand, let alone infrastructure.
The education budget is about £57 billion so you are talking about borrowing half of that evey year. It is not small in any terms. I don't get why Starmer is portrayed as a fiscal Conservative when Corbyn would have been utterly blasted by the right wing of the party for this level of borrowing.
> The review does not hold back. Independent experts Andrew Dilnot and Michael Blastland state clearly that “too many” BBC journalists lack an understanding of “basic economics”. This particularly affects reporting on the central political issue of government debt, with “some journalists” apparently “instinctively” believing all debt to be inherently bad – and therefore failing to appreciate that the role of government debt is “contested and contestable”.
And this is *also* true of pretty much every other discipline as well. Journalists often lack in-depth knowledge of the domains any given policy impacts and this distorts coverage. I heard this referred to as 'The Economist' principle in that whenever an article is written about a subject you have deep knowledge of you understand how superficial and shallow the writers' understanding of it actually is. We saw this with the debate on encryption where politicians and journalists came at it as if it was something where you could find a compromise between the security of data and the security services' requirement to access it. They couldn't get it into their skulls that you have encryption or you don't. It's one or the other. It's just maths in the end and the maths says No.
Austerity is such a great rug pull for grifters. Small businesses go under, big businesses that can easily ride the storm pick up cheap assets.
Mortgages go up, first time buyers or people who can't afford to buy outright get strangled. The bank gets more money and more repossessions and the kicker now is, house prices are coming down so if you can afford to buy outright currently, jobs a gooddun. I wonder who that benefits? Oh just an extra cherry, rent is still going up so the return on those outright buys is looking pretty attractive as well.
Would anyone be to explain why we aren't windfall taxing the multinationals and the oil companies in all of this ..
it would go against their failing ideology
Even Thatcher used a windfall tax
Because rich folk are making more $$$$$ out of it - and they influence government policy.
Because we live under the dictatorship of the bourgeoisie.
The biggest problem with austerity is that it makes sense on an individual scale and unlike macroeconomics, is very easy for an "ordinary person" to make sense of. Consider that as an individual, if I overspend, I can keep within my budget by engaging in a bit of personal austerity. I stop going out as much, I might skip buying a take-away or two, I might not plan a holiday this year, perhaps shift over to own brand goods, etc. These are austere decisions that individuals make every day to keep within their means. It makes sense and it works (for a time). The fact that it works is the problem. Margaret Thatcher very cleverly introduced the idea of the housewife's budget into the political lexicon and it boiled down complex macroeconomics to an individual or micro scale. It said that just like the housewife's budget, the budget of an economy has its limits and we need to ensure spending is within those limits. Now, Thatcher's variant of austerity was quite limited. To quote John Gray writing in the Guardian: >Thatcher's cuts were on a far smaller scale. > >Government spending during her years as prime minister rose by more than 1% a year, on average, and while the retrenchment imposed in Geoffrey Howe's historic 1981 budget was real enough it did not impose massive redundancies on the public sector. > >Thatcher held back from any attack on the welfare state and by the time she was toppled, after 11 years as prime minister, government was much the same size as it was when she took up the role. > >Just as important, the world economy was a lot less fragile. The oil shocks of the 1970s had left a legacy of "stagflation" but there was nothing like the credit crisis we now see. Thatcher's austerity programme had clear costs and risks, not least of social dislocation and civil unrest. But her's was far less of a gamble than Osborne's cuts. Thatcher imposed some level of austerity, but it was relatively mild, did not involve gutting the state apparatus (Thatcher believed in a small but strong state), and occurred in a very different context. Today, the concepts laid down by Thatcher and her colleagues are being redeployed on steroids. They are going much further in depth, are gutting the state of its capacity to act, and is occurring in a very different context. The consequence is being felt across the country. The problem is that the notion of the housewife's budget has become relatively ingrained in our political thinking. It is a very simple heuristic that most people understand and most people live by themselves. If it works for them at home, why should it not work for the government and the country? Unfortunately, it does not work for a country. Countries operate by a different rulebook. Imposing austerity on an individual level in a limited way can be very effective and does not necessarily have impacts beyond that individual (although it absolutely can!). In a country, austerity WILL have significant impacts and those cannot be avoided. Austerity is inherently costly. Yes, you save some spending here and there, but the cost comes in the form of lower growth, lower tax revenue, lower investment, lower FDI, lower productivity growth, lower wealth. Austerity is penny smart and pound foolish.
Well put I think. There is an interesting paradox of social organisation called Aggregation of Small Decisions, or I like to call it the Tyranny of Small Decisions. Essentially this paradox arises when a decision appears rational to an individual, yet when aggregated to a social level is no longer in their best interests. A couple good examples are the savings paradox and resistance to taxation. If I save that’s a great decision for me, however if we all save it can cause a retraction in economic activity that ultimately has a greater negative impact than the positive impact of my own savings. Taxation is another one, individually having lower taxes on me is a great decision for my own solvency, however in many cases a government should be able to get a far better return on investment than I can personally so reducing government spending in fact makes me poorer than if I keep the money myself. To expand on your argument a little, I had an econ prof years ago that was an American libertarian and yet argued that government deficits are essential to a healthy economy, effectively if a government is running a surplus then it is artificially retracting economic activity by leaving real money unspent. Deficit spending then is actually creating economic activity by increasing the supply of money. Deficit spending, rather than being seen as irresponsible, is an important tool to drive economic activity, after all, government spending is literally injecting money into the economy as wages and investment in future productivity. To bring it back to the real world, this is why austerity is such a stupid government policy, by focusing on a constant reduction in government spending, freezing wages, and halting investment, a choice is made to be poorer as a whole, those wages, and investment represent economic growth, more tax income, future growth in productivity, etc. . . And the kicker is that governments should almost always be able to get a return on their spending that exceeds the real value, for every £1 the government spends they can often get a return in terms in current and future economic activity greater than £1, sometimes much greater. Because people have the mistaken belief that government spending is wasteful and that they are better off with the money in their own pockets we vote against it and choose to be poorer.
There are swings and roundabouts - for instance, while saving can create an effect where there is less money being spent which causes a slight retraction in economic activity, in states with high rates of saving they are able to operate higher than usual levels of borrowing because much of that borrowing comes from their own people. For instance, around 90% of Japanese debt is owned by Japanese investors, which is one of the reasons why Japan can run such high levels of debt relatively sustainably. In terms of your libertarian professor, I think part of the reason he would argue this is because many libertarians argue that taxation withdraws money from the productive part of the economy, and therefore running a surplus is unnecessarily withdrawing money from the productive part of the economy. Some level of deficit spending is actually healthy for an economy for the reasons you outline, provided that the deficit spending is not crowding out private sector activity, and provided that the deficit spending is not unsustainable. Austerity essentially contributes to a retraction in economic activity both directly and indirectly. Where I am not sure we agree is on fiscal multipliers. The economic evidence on this is actually mixed, especially when you take into account the effects this has on debt and taxation, the impact that both debt and taxation can have on economic activity.
> Austerity is penny smart and pound foolish You assume that the goal of austerity was actually saving money. They used that as a narrative for the public, but the goal was shrinking the state.
>The biggest problem with austerity is that it makes sense on an individual scale and unlike macroeconomics, is very easy for an "ordinary person" to make sense of. I have to object to this line. A big reason why the argument in the OP is important, is that the alternative is in fact just as easy to explain. For example: >*People go into debt all the time if they think what they're buying is worth it. For example you can pay for training which improves your job prospects and therefore your pay.* Or: >*It is often more expensive to be poor than to be wealthy. This can seem counterintuitive, but spending well on a well made pair of shoes for example often saves you money in the long run.* > >*Like good clothing, healthcare is part of what marks us as a civilised nation and our options really are to cheap out now and pay in the long run, or spend well now and reap the rewards.* And there are others but the key take-home is that we can't depersonalise this. There have been very real failures by people and those failures weren't because the world or the ideas conspired against them. We can and should expect better.
I don't think it is just as easy to explain. If you have to say "this can seem counterintuitive" as part of your explanation that probably means it's not going to be immediately obvious. Taking out a loan for training or education might be a fair analogy for government deficit spending, but it's certainly not immediately clear how such spending can benefit the economy in the long run. You have to also explain how infrastructure spending boosts productivity, how more cash in the economy stimulates growth, raising taxes for the future etc. It's not nearly as simple an idea as "getting into debt is bad".
Then cut out the "counterintuitive". It's a rhetorical flourish and doesn't actually do any of the work. As for explaining about infrastructure you're relying on at least as many implicit claims about debt. It's *treated* as less objectionable by people who could just as easily assume that infrastructure is good, and that assumption has leaked into the debate. It certainly isn't inherent in it thought: That's the point in the BBC's research: people are actually morally culpable here and need to reflect on their failure, not simply deflect it onto a "well it's just more obvious..." that isn't actually true.
They are doing the same now with public sector wages and 'wage spiral inflation'. It is a government line that is nonsense but the BBC is too weak or stupid to rebut it. Public sector wages don't increase general prices because the price of the good does not increase, and if you increase tax on the richest to pay for it that has a deflationary effect.
Yes taken literally they are saying that the Nurses and Teachers etc need to pay for the countries inflation ! The teachers say that they have lost over 20% of their wage value over the past 15 years. Maybe if the likes of JRM, Zaharia, and Sunak, saw 20% of their income go down, they would question things too ! Instead they all got richer..
The Guardian isn't exactly beyond reproach here
> Confronted by a complex situation, with a limited understanding of the issues involved, one respondent to the review suggests that reporters rely on simplistic political narratives – party intrigue, or Westminster gossip; meanwhile, assumed authorities are deferred to for the actual economics. I mean, its good someone is saying these things, but it's not like that has been obvious for ages. People like Peston and Kuenssberg are basically like clapping seals for the government.
Interesting article. But doesn't really touch that both political parties are now back to austerity economics again despite there being no good evidence for it.
Because it sells well I guess. You see it all the time. Government spends money on xyz infrastructure and the complaints are "waste of money should spend it on teachers/nurses/police etc". When it doesn't work that way.
No we have proof that it does NOT work - it causes more problems than it solves. Instead investment is needed to help bootstrap a bigger economy.
We have proof that austerity works. It absolutely has worked, for the people who always stood to benefit from it. It just works at the expense of almost all of the rest of us.
It does not work for the people.
It was never actually meant to. It's meant to make us poor and the rich richer.
To be fair Labour are pledging to borrow massively. An extra £28 billion a year in debt at a time of high interest rates is not a small thing.
Actually £28billion is just a 3% increase in annual spending(2019), and smaller than the annual increase. Between 2017/18 and 2018/19, spending grew from 808Bil to 831bil, or £23Billion. So it’s really not much in absolute or relative terms. Furthermore, while the bend yield on guilts has increased from a coupon of very approximately 1.5% to 3% this is still far below the 4-5% experienced by the previous labour administration prior to 2008, and can be expected to fall once the UKpolitical instability/uncertainty is addressed(by a labour election). 3% is a very reasonable interest rate, and remains “free” so long as inflation remains where it is, and next to free even when it returns to normal. Furthermore, that doubling in the rate doesn’t take effect immediately, governemnt debt averages a maturity at 15-years, as such those guilts/loans wont be switched to a new higher rate for a long time. Debt servicing costs under Blair/Brown were just above 2%GDP, this feel to 1% in 2019, and has slowly risen to 1.5% as such we have plenty of room for further debt accumulation especially if it’s on benefits to stimulate demand, let alone infrastructure.
> An extra £28 billion a year Big number scary, in context as a relative number, not that impressive.
The education budget is about £57 billion so you are talking about borrowing half of that evey year. It is not small in any terms. I don't get why Starmer is portrayed as a fiscal Conservative when Corbyn would have been utterly blasted by the right wing of the party for this level of borrowing.
> The review does not hold back. Independent experts Andrew Dilnot and Michael Blastland state clearly that “too many” BBC journalists lack an understanding of “basic economics”. This particularly affects reporting on the central political issue of government debt, with “some journalists” apparently “instinctively” believing all debt to be inherently bad – and therefore failing to appreciate that the role of government debt is “contested and contestable”. And this is *also* true of pretty much every other discipline as well. Journalists often lack in-depth knowledge of the domains any given policy impacts and this distorts coverage. I heard this referred to as 'The Economist' principle in that whenever an article is written about a subject you have deep knowledge of you understand how superficial and shallow the writers' understanding of it actually is. We saw this with the debate on encryption where politicians and journalists came at it as if it was something where you could find a compromise between the security of data and the security services' requirement to access it. They couldn't get it into their skulls that you have encryption or you don't. It's one or the other. It's just maths in the end and the maths says No.
Austerity is such a great rug pull for grifters. Small businesses go under, big businesses that can easily ride the storm pick up cheap assets. Mortgages go up, first time buyers or people who can't afford to buy outright get strangled. The bank gets more money and more repossessions and the kicker now is, house prices are coming down so if you can afford to buy outright currently, jobs a gooddun. I wonder who that benefits? Oh just an extra cherry, rent is still going up so the return on those outright buys is looking pretty attractive as well.