Wednesday, 5 February 2014

Austerity and economic illiteracy


Since the Tories were enabled into power by the Liberal Democrats in 2010, the national debt of the United Kingdom has soared enormously. Despite their campaign of "austerity", the debt grew more in the first three and a half years of this Tory led government than it did in the entire 13 years of New Labour rule (despite the fact that in 2007-08 New Labour had to deal with the largest global financial crisis in generations ). As regular readers know, I'm no fan of New Labour, however the economic evidence speaks for itself - this Tory government is far worse for borrowing money than the New Labour one that preceded it.

Austerity

 So, despite using their mantra of austerity to justify their campaign of social security cuts, infrastructure neglect and hasty privatisations, the Tories haven't saved any money at all. In fact they've borrowed and borrowed and borrowed. One of the most obvious indicators that austerity is a failure is the fact that in 2010 George Osborne and the Tories came to power promising that they would cut the deficit by 2015, an objective that they now admit is impossible. Instead they now talk of making austerity permanent.

 It is easy to conclude that the reason austerity is failing is that the Tory party are a bunch of economic illiterates that have built their economic policies upon a foundation of defunct economic pseudo-babble called neoclassical economics. However this is a false conclusion based on a faulty premise. The faulty premise being that austerity is meant to reduce the indebtedness of the UK, rather than it being nothing more than a simplistic justification narrative for a programme of harsh cuts and hasty privatisations that the Tories have always wanted to conduct, long before the economic crisis ever came along. 
 
Austerity is a scam designed to do nothing more than transfer wealth from the poor and ordinary to the super rich. It has nothing to do with "saving money" and it never did.

It is the same old neoliberal pseudo-economic ideology that caused the global financial sector meltdown, crudely rebranded as the "only solution" to the economic crisis that was triggered by the global financial sector meltdown.

Essentially the Tories have found a way of selling gullible people the cause of the crisis as the solution to the crisis.

From an economic perspective there are two very big reasons that austerity is a false economy that could never have achieved what the Tories falsely claimed that it could. To the layman, terms like Fiscal Multiplication and the Marginal Propensity to Consume may sound like highly complicated gobbledygook, but they are not actually that difficult to understand. I'll do my best to provide simple and concise explanations of what they mean and why they show that austerity is an ideological agenda which has nothing to do with "saving money".

Fiscal Multiplication
[Main article]

A fiscal multiplier value tells us how much money is returned to the economy as a proportion of the cost. A project with very poor returns on investment (such as a tax cut for the rich or a stupid government vanity project) might have a fiscal multiplier of 0.29 (29 pence returned for every £1 of investment) whilst any project with a fiscal multiplication value of above 1.00 would actually create more economic returns than it cost.

It is absolutely clear that any government with the slightest intention of "saving money" would carefully consider the fiscal multiplication values of the infrastructure and services that they are planning to cut. If this is not done, then they'd undoubtedly end up cutting a load of stuff that actually returns more to the economy than it costs.

The Tories (and the neoclassical economic wonks at the OBR) didn't bother to do this kind of careful analysis, instead they simply assumed a fiscal multiplier of 0.5 for all government spending. They worked on the assumption that all government spending is essentially 50% waste.

The problem of course is that not all government spending is 50% waste. The construction of flood defences has a fiscal multiplier of 8.00, health service spending has a multiplier of 4.30, and investment in housing and infrastructure often creates fiscal multipliers of well above 2.00. All of these things have been ruthlessly slashed by the Tories.

It may seem paradoxical, but if the Tories were actually intent on "saving money", they would have increased spending on things like health service provision, flood prevention schemes, infrastructure projects and social housing, because if managed efficiently they are all capable of producing very strong returns on investment.

Marginal Propensity to Consume
[Main article]

The Marginal Propensity to Consume is just a economists way of saying that poor and ordinary people tend to spend a much higher proportion of their wealth than the very wealthy.

If a government were intent on getting more money circulating around the economy, they would ensure that the poor and ordinary have a bit more money and prevent so much going to the super-wealthy minority who tend to try to hoard their wealth by investing it in housing or stock market Ponzi schemes, or extract it from the economy entirely through elaborate tax-dodging scams.

If the government wanted to stimulate economic activity they would redistribute money from the extremely wealthy to the poor and ordinary, however the Tories are quite clearly doing precisely the opposite.

The poor and ordinary have borne the brunt of austerity (wage repression, service cuts, social security cuts, "Bedroom Tax" disability cuts...), whilst the super wealthy minority have continued getting richer than ever thanks to extremely favourable Tory policies (the 50p tax cut, corporation tax cuts, new tax loopholes, ludicrously extravagant outsourcing contracts and the vast ongoing firesale of state infrastructure).

Conclusion
 
The Tory party have absolutely no interest in "saving money". They are just doing precisely what they have always done - which is to serve the interests of the wealthy establishment minority at the expesnse of the rest of society. They have dressed up their same old Thatcherite policies (hasty privatisations, deregulated financial markets, defunding of government services, wage repression for the majority, tax cuts for corporations and the super rich, attacks on labour rights and the right to protest, consolidation of executive power ...) as the medicine to cure an economic crisis that was caused by these exact same policies.

 If Tory austerity was designed to "save money" then it has abjectly failed, and only an economically illiterate fool could conclude that an austerity programme that has added more to the national debt in 3.5 years than New Labour added in 13 is some kind of justification for even more austerity.

The problem is that there are an awful lot of economic illiterate fools that can't see Tory "austerity" for the obvious con that it actually is and even cry out for even more of the same, because it hasn't saved enough money yet.

The problem isn't that the Tories are economically illiterate, it is that the majority of their supporters are. If you earn well over £150,000 per year it might serve your selfish self-interest to support the Tories, but if you're an ordinary person with an ordinary income, you're a gullible and economically illiterate fool if you support the Tories and cheerlead for even more socially and economically destructive austerity.

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Posted by Thomas G. Clark at 15:25
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