Thursday, 7 November 2013

George Osborne Should Hang His Head In Shame

by Henry Cunnison


Why is this man smiling?
The Office for National Statistics estimates that the economy grew by 0.8% in the third quarter (1). Unemployment, although still elevated at 7.7% (2), looks set to continue to gradually fall. This is good news for the millions of Britons suffering in the aftermath of the Great Recession. It also appears to be good news for the Coalition. The Chancellor, George Osborne, has declared Britain is on “a path to prosperity”. He had already proclaimed the “austerity argument is won” and in the words of the Telegraph, “we saved the economy.” (3)  The media too has been quick to laud the austerity government. (4) However, in reality, the policy makers should be being condemned for what is a colossal failure. They have not only failed to help the recovery, they have actively hindered it.
The Office for Budget Responsibility estimates that UK GDP is 1.5% lower in 2013 as a result of austerity. The cumulative loss of output from 2010 to 2013 is estimated somewhere between 5% and 6%. In money terms this means nearly £100 billion. Simon Wren-Lewis has calculated that per-household the cost of fiscal consolidation has been £3,500 (5). That is an utter failure.
But it gets worse. These figures understate the costs of austerity in several ways. Firstly they use a conservative multiplier (6). Furthermore they neglect the disproportionate impact of the cuts. As the government spends more money on the poorest in society, cuts have hit lowest income households hardest. The rich, who lost virtually nothing due to the cuts, further benefited from the cut in the top rate of income tax. The figures also do not include the additional, prolonged, damage caused by austerity. These may include the greater inequality already mentioned, long term unemployment and the damage to health. (7)
It should also be noted that this is 6% lost compared to a government that had done nothing to fiscal policy. Instead of damaging the economy the government could and should have had a positive effect.  
Of course, now we do appear to be on course for a lasting recovery. Yet although this is obviously good news, the government should not be getting credit. The recession began over 5 years ago. Since then we have had five flat years. The economy was always going to recover at some point, no one disputed that. The argument for stimulus was that the recovery would have been far faster and stronger. The economy is still smaller than before the crash. (8) More than half a decade of growth has been lost. In terms of output, Britain is doing worse than during the Great Depression:

(source: NEISR)
 
Furthermore, as we are so far below capacity, we should expect rapid growth. The economy is way below trend output. In the long run the economy should return towards its trend level of output. Thus we should be experiencing high levels of growth. Arguably, given how depressed GDP is, 0.8% quarterly growth is actually pretty disappointing. In the words of Alan Taylor “in a bad current state the economy is more likely to grow faster than trend going forward.” (9)

This government should not be taking credit for“saving” the economy. They should be hanging their heads in shame for taking fiscal policy back into the pre-Keynesian era. This is not just numbers. This is unnecessary human suffering. Of course some will argue it was necessary given the deficit and national debt, but that case has been rebuked numerous times. (10) Deficits should go up in a downturn, as the state safety net becomes required. The public debt, as a percentage of GDP, is not at a historically high level. (11) Others might feel that with recovery seemingly taking off, the debate on austerity is irrelevant. But we must learn from the government’s failure. It has made the same mistakes that were made in the 1930s. They must not be made again.


(1) ONS

(2) ONS
 


(5) http://mainlymacro.blogspot.co.uk/2013/10/why-i-am-obsessed-by-austerity.html  I strongly recommend that anyone who wants to know more about the points raised in this post to read some of what Wren Lewis has written on his blog, mainly macro.

(6) Used to measure the proportionate effect of government spending on output. For example, a multiplier of 1.5 means for every £1 the government spends, GDP increases by £1.50.

(7) David Stuckler and Sanjay Basu have written a very interesting book, The Body Economic: Why Austerity Kills, which explores the correlation between austerity and declining health. Although the impact in the UK is undoubtedly less severe than in Greece, where Malaria and HIV have made comebacks, some effect is likely.

(8) ONS


(10) See among others: Joseph Stiglitz, Freefall, Paul Krugman, End This Depression Now! Martin Wolf’s column in Financial Times and Simon Wren Lewis’ blog at http://mainlymacro.blogspot.co.uk

(11) http:www/ukpublicspending.co.uk/debt_brief.php

 





3 comments:

  1. Our economy hit recession due to a housing bubble in America. It was caused by the government skewing the regulatory system, by removing restrictions on banks operations as an investment bank but preserving government insurance of deposits. This meant that bankers could take too many risks and would be kept better in check by the forces of a free market ( but that's for another day.) After this bubble burst a necessary contraction must take place, allowing a market to correct itself from a period of excesses. Eventually entrepreneurs lead an investment led recovery. A reduction in money supply can cause the interest rates to rise, banks are more likely to loan and the level of inflation is low due to high interest rates. Lower prices of raw materials can increase likelihood of investments and over time the economy is back on its feet. This is the next phase in Osbournes master plan. What you want is the B of E keeping interest rates low and more money being pumped into the economy. All of this disrupts the free market valuation of goods and money making them cheaper than the forces of supply and demand dictate. People borrow money and invest in another speculative bubble ballooning its value well above its real value causing another bubble to burst. Osbournes message is loud and clear saving has saved the economy and unfortunately as Keynes should have said "in the long run its his ideas which are dead" Without saving the economy can only fake growth living of printing presses. Your ideas would have caused unsustainable growth shortly followed another recession and leave humanity on the precipice.
    Regards
    Mr Schiff

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  2. Austerity is a purely political policy as to the average man in the street cutting the government's budget deficit appears to be the only solution to resolving economic problems as debt is a bad thing, or is it? If the government had invested more in job creation the long-run effects on the economy would be much more positive. As although increasing government spending and therefore further increasing the deficit is a negative in the short-run, allowing such a high level of youth unemployment is going to have a catastrophic effect on the productive potential of the economy in the future as those who should be moving up the pay scale will be lacking the required experience to do this as they will have spent 5 or so years being unemployed rather than gaining valuable experience in the work place.
    Using the economic cycle it is obvious that economic growth is never going to be totally stable and that eventually the economy will drop into another recession therefore the idea that by not using austerity measures would lead to another recession is ridiculous as an strategy employed will inevitably lead to another recession eventually.
    I believe we need to learn from the mistakes made by the government during the boom period in the UK, if during those times the government had released that the prosperity experienced at that time was inevitably going to end at some point then they would have realized the need to attempt to run a decent sized budget surplus which would have acted as a safety net for the UK when recession hit.

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    Replies
    1. Austerity is not a purely political policy. In a political sense it makes sense to increase government debt that is much more of an unknown quantity in an attempt to increase growth, which is a general indicator of how a particular government is performing. Very few people know how much government debt is rising or falling by compared to how much GDP is increasing or decreasing by.
      Regards to your point about the economic cycle : the UK as you say will most probably end up in a recession again. This could happen because banks overstretch themselves, or more likely we are dragged in by the Eurozone or America. Growth will never be stable if the economy isn't allowed to contract following its excesses of the past. Both your policies just result in another debt filled bubble and then another recession as the bubble bursts. Growth would be much smoother and a recession will not realistically occur, if the economy contracts as it has done and banks don't loan out so much which can't be backed with a fair priced amount of collateral. ie that the banks can't rely on government backing as this causes excessively risky loans to be taken out which can't be paid back.
      The IMF who strongly opposed Britain's austerity have backtracked and apologized along with Vince Cable who also conceded defeat to Osborne live on television. Considering how strong our ties are with the Eurozone our growth rate is impressive but what makes it more impressive is that is has been achieved not through "cheating growth" where unsustainable levels of debt are spent.

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