Why the government is PIG ignorant on economics

by Stuart Rodger

The world is transfixed by the Greek Tragedy unfolding before our eyes. It is increasingly clear for those on the left that what is being foisted upon the Greek people by the IMF, EU, and ECB as we speak is nothing less than a form of economic ‘shock therapy’: the labour markets must be ‘liberalised’, large public assets are to be sold off (at rock bottom prices), and banks are to be re-capitalised but maintain their “managerial independence”.

The Golden Dawn – Greece’s equivalent of the BNP – is on the verge of winning representation. In a recent Newsnight report, one unemployed, professional Greek citizen spoke of “civil war”. The place where democracy was born is turning out to be the place where democracy goes to die.

But far from being an irrelevant calamity at the other end of Europe, the economic crisis unfolding may have some important lessons for us – David Cameron et al, after all, routinely bring up the examples of Portugal, Ireland, and Greece as warning signals for what could happen to Britain should it not cut its way out of its deficit, with the price of debt spiralling up and growth stalling.

But a cursory reading of the news made me wonder if austerity is in fact exacerbating their problems, and is in fact the root cause of their problems in the first place.

So I decided to dig into the statistics to see if my theory was true. So, is David Cameron’s government PIG-ignorant? (see what I did there?). The following fiscal and growth statistics are all from the Eurostat and World Bank websites respectively, unless otherwise stated (measures of inflation have also been taken from the World Bank).

P is for Portugal. This country is important because it has been held up by David Cameron as his response to the Labour Party’s proposals to halve the deficit over the course of this parliament, rather than try to eliminate it entirely.

What policy did they follow? Initially, they increased spending moderately and the result was a moderate recovery. But in May 2011 they announced cuts to public spending and then, six months later, Portugal was reduced to “junk” status, with Eurostat estimating moderate contraction in 2011.

The lesson from Portugal is that spending brought recovery, and cuts promptly killed it off, worsening their debt problems. Crucially – punishment by the bond-markets came post-austerity. By citing Portugal, Cameron cites an economic experiment which proves him wrong.

I is for Ireland. This country is important because it was held up by George Osborne in his budget speech of 2011 as a warning of what could happen to Britain, lest it end up with Ireland’s 10% interest rate and we lose our ‘stability’ and ‘credibility’.

What policy did they follow? They responded immediately by slashing capital expenditure in 2009, and slashing overall spending again in 2010.  The result? A whopping 8% economic contraction. When was it punished by the credit ratings agencies? Moody’s downgraded Ireland to “junk” status in July 2011.

The lesson we can draw from Ireland is that reduced spending causes further contraction, increasing their debt problems and wrecking their credibility. Crucially – punishment by the bond-markets came post-austerity. By citing Ireland, Osborne cites an economic experiment which proves him wrong.

G is for Greece. This country is important because it was held up by Nick Clegg as his justification for propping up the Tories as a matter of “necessity”. Greece was held up by Clegg as an example of what “could have been”.

What policy did they follow? They kept spending level initially, but slashed it dramatically in 2010. The result? A 6.5% contraction over two years. When was it downgraded to junk status by credit ratings agencies? April 2010, five months after the announcement of their 10-billion pound austerity budget.

The lesson from Greece is that reductions in spending bring increased contraction, worsening their debt problems and wrecking their credibility. Crucially – punishment by the bond-markets came post-austerity. By citing Greece, Clegg cites an economic experiment which proves him wrong.

So why is this? It’s because the PIG countries failed to follow the Keynesian fiscal stimulus approach in response to the crisis. In a recession, when private individuals are cutting back on their spending, the state has to step in to resuscitate demand, and prevent the economy spiralling further downwards. Extra spending gets money flowing back through the arteries of the economy again. Spending more makes you richer, spending less makes you poorer.

It’s paradoxical, yes, but Keynes himself called it “the paradox of thrift”. Forget bogus Tory metaphors about an alcoholic not being able to drink himself out of drunkenness. Think instead about someone taking out a loan to embark on a course of training, which makes them more employable and prosperous over the long-term.

This point can scarcely be repeated often enough, since neither the Labour party nor the mainstream press are making it (with a few honourable exceptions in the case of both), and because the Tory-led government have successfully persuaded (brainwashed?) the British public that government spending was the cause, rather than the cure, of the crisis.

Of course, all of this begs the question – if my theory is correct, why have the bond markets not punished the UK?

Partly, it’s because the UK is fortunate enough to have monetary control: through quantitative easing, the Bank of England can essentially underwrite large chunks of government debt, meaning the UK will almost always be a safe place to invest. But it’s also because the cuts implemented so far have been fairly limited, with the government cutting public spending in 2010 by only 2 billion, adjusted for 2010’s inflation.

The real cuts began in earnest in 2011, and already growth has completely flatlined. But as Polly Toynbee explained a few weeks back: only 6% of the cuts have happened yet. Considering that this has already caused growth to stall and unemployment to notch up to a 17-year-high, this should make our stomachs do somersaults.

In case any more proof where needed, here is one of the credit ratings agencies from January 2012, Standard and Poors, straight from the horses mouth:

“we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.”

So yes, it does seem like David Cameron’s government are PIG-ignorant. But I should note at this stage that I passionately oppose austerity not because it will cause a collapse in GDP or a potential rise in borrowing costs, but primarily because of the social damage it will inflict. Even if it were true that spending more leads to higher borrowing costs (which it emphatically is not), I would still oppose austerity: for me, keeping people in jobs and out of poverty and listlessness should be the first, second, and third priority for any government. But if Cameron’s government are going to justify their economic policy by reducing the deficit and the cost of debt alone, they really ought to do it properly. And that, conveniently, would mean no cuts. Otherwise, Britain may be starring in its very own Greek tragedy in the not-too-distant-future.

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6 Responses to “Why the government is PIG ignorant on economics”

  1. Nick says:

    I’m sorry but you’re the pig ignorant one in this case.

    Partly, it’s because the UK is fortunate enough to have monetary control: through quantitative easing, the Bank of England can essentially underwrite large chunks of government debt, meaning the UK will almost always be a safe place to invest.

    So lets see. Invest in uk government bonds because we will print more money making what you get back worthless. Didn’t work in the Weimar republic or Zimbabwe.

    Now for economics.

    What does the government owe?

    Gilts – 1,050 bn according to politicians. That’s it.

    ie. Civil service pensions? No, we don’t owe people their pension.

    What about my state pension? No, not on the books, so we don’t have to pay that either. We’ve redefined it as future spending, and future spending is optional. Anyway, we can’t afford it anyway.

  2. Roger McCarthy says:

    The Golden Dawn (a wonderful name redolent of Crowley and Yeats and one of the more obscure David Bowie tracks for a less than wonderful fascist party) is not so much the Greek BNP – that role is taken by LAOS which already has parliamentary representation, was in the coalition government until it saw its poll numbers plummet and pulled out.

    What is fascinating about Greece is that parties which are by UK standards of the far left (KKE, Syriza and the Democratic Left) have been together hitting 30%+ in the polls and if PASOK was to regain its sanity and leave the government the first real left wing government Europe has seen in a generation could be elected and reverse the insanity.

    But not just our media but even some of us who should know better are consistently ignoring what is happening on the left in Greece as growing mass support for parties that still identify themselves as Marxist does not fit the narrative they need to impose on the crisis.

  3. swatantra says:

    Thats pretty unfair on pigs which aren’t all that ignorant you know.; messy, but not ignorant.
    Two facts are evident
    1. Yes, growth is needed, not just cuts for cuts sake.
    2. The Greeks were living beyond their means and up to all kinds of scams to disguise the fact; and living in a world of make believe, believing tat if you ignored the problems they’d go away. And its about time someone told them so.

  4. CTG says:

    Ahh – the old Keynesian argument.

    Essentially very sound. Except here, as seems sadly common in the Labour party, you omit a crucial part of any workable Keynesian model; tight fiscal controls, careful management of the public finances and limited use of debt during the boom years,

    You have to do this, or your not in a strong position to borrow money (or ideally, use your surplus) to ‘jumpstart’ the economy during the bust.

    Unfortunately, under Labour, this preparation for the bust that will always come eventually, was not undertaken. The government didn’t reduce debt during the boom; but increased it. It seems, they really did believe that they’d “put an end to boom and bust”; which, if you’re a true Keynesian, you must believe, is bascially impossible.

    This has put the nation in a very difficult situation now. We cannot borrow the sort of sums needed for the “jumpstart” you’d like to see, without making borrowing more expensive and ultimately putting us in a worse situation further down the line.

    This is why the classically Keyenesian solution won’t work here; there aren’t the funds to do it; even if we borrow more now – we’ll just delay the problem for the future.

    Your training analogy doesn’t work here either because even were it not for the crisis, there’s no obvious how Britain could grow quickly enough to generate enough tax revenues to cover this ever more expensive debt – our economic position was being gradually eroded by the growing power of BRIC countries anyway. Certainly there is no realistic possibility that a transformation of earning potential that a qualification could achieve for an individual would be scalable to the whole British economy.

    So cutting (even though it will restrict some growth) is the only option. Appalling preparation has put us here; cutting spending is just the best option of several pretty terrible options. You can argue with that needs to be cut (and what should be invested in) but the overall trend has to be this way.

  5. Augustine says:

    You’ve practically plagiarized this from Johann, Stuart…

  6. Greece itself to blame for their troubles. ‘sock therapy’ is a way out of the crisis. Just austerity economy is the solution, ignoring the problem is not an option and it will not go away by itself, but retrenchment and hard work can help. Costs should not exceed income, that’s why it is reasonable to begin to save and cut the budget. Otherwise, it will bring just more debt. ?ll countries switched to the “shock therapy” and Greece should not be an exception.

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