A common feature I’ll be doing will be to provide debate points on issues that come up again and again in political discourse. Rather than have to make the same arguments over and over, I prefer to write them down in one place and refer people to them.
The Economic Crisis Debate Points
The current economic crisis – started in 2008 with the financial crash and now prolonged into 2012 thanks to inept Tory governance – is the central point of discussion in Uk politics at the moment. In this debate points post, I hope to address points (or myth bust) the arguments you’ll often encounter from the right, to present why a left-wing government is best placed to get us out of the current mess, and why it wasn’t what the right says it was that got us into it in the first place.
The most commonly heard phrase from this coalition government is the following:
“We’re making the tough decisions needed to fix the economic mess the previous government left.”
It justifies everything they have since done; every cut, every redundancy, every month the country spends in recession, every business that goes bust and job that is lost, young person’s life that’s put on hold – this line justifies it all. Except its nonsense. So, let’s get busting:
Myth A: The previous government (Labour) over spent, hence we have this massive budget deficit.
No… the reason for the budget deficit is the financial crisis of 2008 – something all developed countries faced. That recession was the result of laxed controls of the financial system, not government debt. It threw the country into recession, causing a fall in tax revenues and rise in government costs (unemployment benefits etc) which increased the deficit. Prior to the recession, our deficit was comparable to many other countries (as a percentage of GDP it was basically the same as France). Meanwhile our overall debt as a percentage of GDP was lower than most other comparable countries – France, Germany, USA etc.
“Total UK national debt in March 2008 – before Lehman’s fell over and the crisis really hit – was £527 billion. To that date for a period of a decade Labour had near enough balanced its books: sure it had borrowed to invest, but current income had very largely equalled current spending over the decade to 2007.”
Myth B: If not for austerity, the markets would lose confidence and the cost of borrowing would soar.
The markets are going to be more confident in a growing economy than a shrinking one. The cost of borrowing, meanwhile, which is at very low levels at the moment, is not so because of confidence in the policy of austerity, but because of lack of confidence in the real economy at large. If you’re not going to invest in the real economy, you can either keep your money in cash form and let inflation devalue it, or you can buy government bonds – the safest form of investment to hold.
Austerity is the cause of uncertainty in our economy. Our ability to control our own currency means we’re nowhere near the same situation as Greece, Spain, Italy etc. We can always print more money if worst comes to worst, so our borrowing costs are not going to reach the same highs as theirs whatever spending policy we enact.
In general, the worse the economy has performed, the cheaper government bonds have become.
Myth C: We can’t spend our way out of a problem caused by spending.
Spending didn’t cause the current problem, see above, and yes it can. Basic Keynesian economics dictates this. Government spending will stimulate the economy, create jobs, get growth going and get money flowing. Once the economy is moving again, then we can cut spending, knowing that the economy (the private sector) is strong enough to take the slack. This policy worked during the Great Depression, it can work now.
Just look at examples around the world for this. The US saw a pick up in growth following Obama’s stimulus, Iceland has proven a success story in terms of its recovery thanks to dodging the austerity budget. Meanwhile austerity embracing countries like Ireland and Greece have… well… yeah, not recovered. Or just look at our own economy:
The last five quarters of labour economic policy on the Uk economy saw growth of 3.1%, not far off pre-recession levels, whilst the seven quarters under which we’ve endured Tory party economics have seen a total of -0.4% growth… so, yeah. We know stimulus grows the economy, we know austerity shrinks the economy. Pick which one you want.
End of the day, the government will have to spend money – whether it goes down the austerity path, or the stimulus path. The difference is, under stimulus, we’re spending money to get people into work, to produce things which benefit the country. Under austerity, we’re paying people to be unemployed, and losing potential tax revenues from those very same people who aren’t in work.
Myth D: The Tories can be trusted with the economy more than Labour.
Myth E: The public sector is too large. We need to shrink it and increase the size of the private sector.
Maybe, maybe not. Let’s hold that debate separately from the more important issue of growing the economy and shrinking the deficit. If we think the public sector is too large (and that’s IF) then we can shrink it when the economy is growing strongly again, not when its dying.
You’ll often find people advocating austerity very quickly switch to this argument when their pro-austerity argument falls apart. It’s quite clear that most proponents of austerity don’t give a damn about the economy, but are more interested in the ideological argument for shrinking the state and providing tax cuts for the wealthy.
Myth F: We have to endure some pain to pay for our years of excess.
This is one of those times morality seeps into economic discourse. It happens a lot these days. The reality is its nonsense. Economics isn’t a morality play, we don’t ‘have’ to endure pain to get out of the current mess. If George Osborne really wanted to, he could wake up tomorrow and decide to end the recession. He could, seriously. He chooses not to for ideological and political reasons. There is no moral or economic need to suffer though. Not least because those who’ll most suffer from the government’s policies are those who gained the least during the boom years, whilst those who did reap the rewards – the super rich – are getting off with tax cuts and bigger bonuses than ever.
The way out of the current mess is to grow the economy. That means good things for our young people, jobs, education, a future to look forward to. Maybe our wealthiest citizens will have to a bare a little more in taxation, but that is a pain we as a nation can take.
Myth J: Inflation means we can’t spend our way out of recession.
A little inflation (shock horror) isn’t a bad thing in itself. And at the moment, inflation is pretty low and coming down. Spending our way out will increase it a bit, but hardly by a huge amount. Certainly the negatives of it will be outweighed by the benefits of… you know… lower unemployment, GDP growth etc… Plus it will come back down again in the long-term.
And if our output gap is as great as it has been posited, then inflation, which has so far been largely driven by one-off factors (VAT, oil etc) could actually be much lower and stay lower even after stimulus.
Myth K: There is no solid alternative being proposed from the left.
Perhaps not so much as a myth as we’d hope. Certainly Labour haven’t been as vocal about their alternative as they should be. Where the Tories and Labour have differed most is perhaps in welfare and taxes. Labour want a tax on 50p rate payers, the Tories don’t. The Tories are cutting corporation tax and other taxes, whilst cutting welfare back further than Labour. And, as I will point out; the poor are more likely to spend their money in the economy – thus stimulating growth – than the rich, who are more likely to save it, or simply take it offshore. Therefore, Tory party tax and spend policy is going to be more damaging to the economy than Labour policy.
Either way, here are some outline plans for ACTIVE methods of improving the economy, here, now.
Plan 1: One off infrastructure investment.
Given borrowing is at a really low-level, take a one-off chunk of cash and invest it in the economy on infrastructure spending. It’ll add nothing to the deficit (nothing meaningful since the interest on the loan would be so small) and only a meagre amount to what’s already a substantial national debt. (Plus it’ll offset the debt that the continued deficit will rack up anyway.)
The spending can go on many things; housing, infrastructure and green energy are the three things that spring to mind, as well as funding the setting up of a national investment bank.
Housing spending will get money into getting the construction industry (which has suffered greatly through the recession). It’ll also help to combat rising social housing costs. Build more social housing, bring down the housing budget, make jobs happen, grow the construction industry all in one.
Green energy is ripe for outside investment, but without a clear sign from government that its committed to the sector, that investment won’t come. A one-off investment in creating jobs in green energy and growing the sector at home will give that sign, bring in investment, create jobs and provide us with a lot of renewable energy at the same time.
Plan 2: INCREASE the welfare budget.
Yeah, it seems counterintuitive at a time when we need to cut the deficit and this country is bent on making those cuts from the welfare budget, but bear with me a second. Welfare spending is one of the simplest, most effective ways of pumping money into the real economy. Poor people spend more of their incomes than rich people (who are likely to save it (abroad)). Give money in welfare, it’ll end up being spent, create jobs, grow businesses etc… Give money to the rich and it won’t.
On top of that, it’ll also reduce costs from crime and health. Poverty and inequality leads to crime and poorer standards of health. Improving living standards for the poorest will lower the burden of cost on the NHS and cost to society from crime. IF we’re going to have to spend money on the poorest anyway – through treating illness or policing criminal neighbourhoods – might we may as well spend it to improve and build the economy rather than fix the problems of poverty?
Iceland have had success with this policy, whilst Greece’s welfare cuts are leading to queues at free clinics and food banks and rioting on the streets.
There’s no easy way out, no policy is all joy. But the left-wing method brings about good whilst getting out of the bad, whilst the right-wing method is just a moralising attempt to punish those who’ve done nothing wrong. One method works, we know it does, seen it work and can make it happen again, the other method has failed, is failing and will continue to fail. Pick.
If there are any other Myths you want to throw my way, then please do.