It has taken less than a week for one of the casualties of the election to become apparent. Austerity is over. The long term economic plan of 2015 is as dead as the strength and stability of 2017.
It would be easy to say that Labour's success killed austerity and the pressure within the Conservative party to pull back from cuts is a direct political response to Labour's policy. And I do just that. But it is not a sufficient explanation.
As the FT notes the real explanation is falling incomes. This is the data:
The reality is that people in general can no longer be persuaded that austerity works. It plainly does not. It has imposed real costs.
More than that though, it has imposed specific costs. Nurses, teachers, the police, and so many other key workers people depend upon and value have said that austerity and their consequent penal pay awards has gone far enough and they can take no more. And people agree with them: these key workers are very obviously only saying what is reasonable and justifiable.
And only those most willing to turn a blind eye to suffering cannot have noticed the suffering of those in need of the UK's failing social safety net.
As a result papers are full of stories suggesting that austerity must end. Some may well be coming from the Treasury. Tory back benchers are clearly saying it. George Osborne is fighting back as if on the frontline a century ago saying that line must be held whatever the cost.
What is not clear is that this call for the end of austerity is based on any better understanding of the economics of all this. The line about future generations having to pay for this is still trotted out. A blind eye is turned out to the fact that one quarter of UK national debt has been wiped out by QE. And the possibility that government spending is not poured into a money pit with the funds in question never to be seen again is not challenged.
All that really needs to be said is something very simple. The fact is that government spending is someone else's income: it cannot be otherwise. And not only will some of that spending end up as an asset on the government's books if what is bought is infrastructure, all of it will end up in other people's pockets.
From there some of it will be taxed: around one third will come back in one way or another pretty quickly from the first recipient of the funds.
The vast majority of the rest is spent by them.
Then the recipient of that spend will be taxed. And then they will spend the rest.
And so the cycle goes on.
At worst the spend comes back. It is bound to do so. That is because this is a simple arithmetic progression.
Even if it is saved it may also come back in a different way: UK government bonds underpin UK savings.
But this assumes that the spending is simply neutral: that none of it results in innovation. If the spending is itself spent by the government on investment in the future or, alternatively, the business community responds to the stimulus by investing then we get a multiplier effect. Each pound spent by the government incrementally increases incomes by more than the original spend because the investment it gives rise to increases productivity and so well-being in the economy at large. If that happens (and this is why investment of the sort described in the Green New Deal is so important) then the spend by the government invariably does result in more being received by it than was originally spent: a share of the growth comes back to the government in the end. Of course, the chance of that happening increases if the government directs the spend into necessary investment in the first place. This is why a National Investment Bank is so important.
The Tories now fear austerity. And so they should. For seven long years they have ripped the economic soul out of this country to feed their dogmatic hatred of government. We have all paid an enormous price for that.
But now we don't have to be timid about the alternative. We have to be clear about why government spending when there is less than full employment works. And to those who say it will burden future generations we have to issue a challenge: if they think leaving future generations a functioning, vibrant economy with enough money within it (for this is what the national debt really is) to make the system go round is disastrous then they have to be told that they really taken leave of their economic sanity.
We've had enough. It is time to say it, loud and clear.
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“It would be easy to say that Labour’s success killed austerity and the pressure within the Conservative party to pull back from cuts is a direct political response to Labour’s policy. And I do just that. But it is not a sufficient explanation. The reality is that people in general can no longer be persuaded that austerity works. “
It doesn’t matter what people in general think they will just be ignored. Unless what they think can be can be expressed through a political movement. For the first time in many years we have an opposition that represents a real threat to the status quo. For the first time in many years we have a real opposition. Many thought that the performance at PMQ’s or failure to score good debating points in Parliament represented JC weakness and unsuitability to lead the Labour party. But that is a failure to recognise that what goes on in the debating chamber is just pantomime. Whatever the merits of the argument it is the votes that count and they go mostly to the party with the greater number of seats. JC has proved himself to be the consummate professional. Whilst spending all those years in active campaigning he has mastered his craft. He has done this by focussing on the real issues of concern to ordinary people. He has resisted the fleshpots which are the rewards for political cowardice. He has reached over the heads of the PLP directly to the voters. His approach has therefore been very practical. Among the qualities that practical people have is their grasp of theory — they know how their world works. That theory includes the democratic mandate of the people. It is this confidence that enabled him to face down the hostility of his own PLP the vicious assaults from the MSM and his belief that he would succeed. What JC and his team have demonstrated that contrary to believe in some quarters they represent real opposition.
Richard – I am probably a good test of whether explanations of austerity and the spend and invest approach are intelligible to the general electorate I have some basic understanding of macroeconomics, mainly thanks to you, Simon Wren-Lewis and dear old Google. I certainly understand the principle but, in this post, I find the paragraph beginning ‘All that needs to be said is something very simple. . . .” hard to make sense of. By other people’s income, do you mean the taxes which are the result of our incomes? The bonds the gvt sells? Is it really counter productive to growth to hold a surplus?
I can understand the circle of spend to invest and how it creates growth and income, but how do governments make the calculation of how the whole complex process of spend and invest is balanced across many different areas and comes together to produce growth? This is why some lay people are a little apprehensive when they see the vast amount of projects in the Labour manifesto, and think that this may be a little too good to be true and ask can we be sure they have got their sums right.
This is probably a bit too basic for you to address . Perhaps i should reture to “macroeconomic for Dummies”!
+100%
This message is being repeated more and more by economists. Its about time the main stream media started picking up on it.
I was walking around the East Midlands city where I work (more like a town really but an ex-railway town) and to be honest it was dead. Nowhere near as busy as it used to be.
I went to a super market and a well know dispensing chemist and was shocked to see so few tills manned by workers and more space given to new self service.
The whole thing seemed so obvious to me: less jobs = no money = less jobs. We are stupid are we not, sleep walking towards what?
Later on that day I had to visit prospective sites for new development. The place is a mess. Half burnt down buildings lying there rotting everywhere. We just need to spend money!!
While of course it’s good news for the victims of austerity, whatever the motivation, the Tories are revisiting their policy for purely political reasons – not because they’ve had a monetary Pauline conversion. Which proves – if proof was needed – their cynicism and total contempt for those who have thus far born the brunt of them. Let us hope and pray that there really is a sustainable shift in the direction of UK politics which will result in the early demise of current Tory ideology.
Yesterday I watched recent speeches of Bernie Sanders – one at the Hay Festival (https://www.youtube.com/watch?v=cYQPXNRWJrY) and the other at The People’s Summit, Chicago (https://www.youtube.com/watch?v=Hf0KiVubDr8). He is inspirational. You definitely sense the birth of a new progressive, grass-roots dynamic that will eventually translate into electoral victory. I hope his and Corbyn’s team are in regular contact; it seems as though they are. As I believe Stephanie Kelton advises Sanders, there is a realistic opportunity that voodoo austerity economics will finally be consigned to the dust-bin of history on both sides of the Atlantic. What a victory that will be!
‘their cynicism and total contempt for those who have thus far born the brunt of them.’
The Tory cynicism is extraordinary. Osborne’s grotesque ignorance about ‘surpluses’ that a GCSE economics student could probably see was bollocks was dismissed by May, as she took over, with the phrase’that’s all different now’-these shysters can say that with no aplogy to the lives turned upside down by bedroom Tax, unnecessary benefit sanctions, welfare cuts and other forms of ‘intentional cruelty.’ These policies wreck lives yet the Tories ‘shapeshift’ without apology.
I noted on this blog on June 9th that May used the phrase coined by Corbyn in her speech ‘no-one and no community left behind.’ It was egregious plagiarism and the MSM missed it. There was no humility from May, no acknowledgement of Corbyn’s achievement and sod-all from nearly all her disgraceful M.P’s, just clenched buttocks and carrying on as if their stupidity was just a failure at a card game and had not trashed hopes and lives.
Unbelievable lack of humanity that should worry us deeply and ensure these vacuous bastards are not in power anytime soon!
Richard, economists like Michael Hudson see neoliberal austerity programmes as a means to create a debt-deflationary spiral with the ultimate goal of forcing sell-offs of public assets and businesses.
Under this perspective, austerity policies are not the result of a poor understanding of economics by the people that impose them, but rather, a scam perpetrated by bankers and politicians to rob populations of the property they hold in common, and to hold them in debt slavery.
What do you think about that perspective?
I agree with that
I did a video suggesting that recently
I wonder what ending austerity will actually mean? Writing off student debt? properly funding the NHS? Or just an end to any more cutting.
It is another indication that the Tories really have no principles – nothing gets in the way of the Conservative Divine Right to Rule.
Teresa May has copped no end of criticism for her ill-fated decision to call an untimely election.
That decision, nonetheless, has brought a bounty of unintended yet timely and beneficial outcomes. We really should thank her at some stage.
Agree with above and a National Investment Bank is central. Multiplier effects are, I think I’m right in saying, less effective within a given country when extra spend goes on goods produced elsewhere. (They are still a stimulus, but benefits are shared more widely). From a national point of view, it makes economic sense to focus spending on people who will spend a higher proportion of their extra income on locally produced goods/services. Green New Deal ideas have always made this sort of sense, apart from the not insignificant point that they are sustainable.