Wednesday 22 April 2020

The Spectre of Austerity

There's a ghastly spectre haunting politics. The spectre of austerity! Seemingly exorcised from the mainstream by Jeremy Corbyn's efforts, and confirmed in its crypt by Boris Johnson's nothing manifesto, Rishi Sunak's first budget and Keir Starmer's victorious policy platform, the emergency measures taken to ward off Covid-19 has allowed it to slip between the veil separating the dead from the living. The first to talk up the possibility of post-crisis austerity was the (apparently) centre left think tank the Social Market Foundation. They want to see the next round of austerity shared equally between the generations. A weird position for an outfit priding itself on its Keynesian heritage to be in, but such is the weirdness of politics. A more unwelcome necromancer party to the austerity incantation is one George Osborne. Speaking at a City event online (for how much?), he said a period of retrenchment was inevitable after the crisis. "When this is over there is going to be a very large amount of debt and it’s not going to be bonanza time." Great news.

Austerity, however, is neither necessary nor inevitable. There are two things worth considering: the arguments for a post-Coronavirus austerity, and the likelihood the Tories will push for it.

Just like Dave's original case for austerity, cutting back on spending looks commonsensical. The state is borrowing huge sums to tide us through the present crisis, which means a rapidly growing debt mountain and a yawning public spending deficit. The gap between what is spent and tax revenues is widening thanks to the catastrophic slow down. As there is no magic money tree, post-crisis the government of whatever hue must cut spending to drive down those debt repayments quickly and send a message to the money markets, of which the trade in UK govt bonds is not insignificant volume, that the state honours its debts. This gives the market confidence that further investments in gilts (i.e. UK bonds) are a safe proposition, meaning the government should have no trouble borrowing if it needs to in the future. It assumes the state is like a bank account, or as Margaret Thatcher argued, a household budget. You can't spend money you don't have.

The position is logically consistent and has the virtue of chiming with everyday experience. Almost everyone knows what it's like not to have enough money. It's potent, and it proved to be a powerful political battering ram for meeting Tory policy objectives and catering the the class interests their party stands for. It's also complete bollocks. At any one time, government debt is a fiction in whole or in part. About a quarter of UK debt at any time is held by the Bank of England which, in turn, is owned by the government. The rest is owned by a mix of private institutions, individuals, and foreign investors. However, unlike an ordinary debtor the state can structure its debt. Gilts are issued with redemption dates on them - the government can choose, if it wishes, to replace them by issuing new gilts. It can also instruct the Bank of England to buy up these gilts or, effectively, print the money to pay off the debt. This doesn't lead to galloping inflation Weimar Germany or Zimbabwe style because, presently, the world economy is in a deflationary spiral. Furthermore, in recent years low interest rates and uncertainty in the wake of the 2008-9 economic crisis has meant reduced, low risk investment opportunities - the bonds markets being practically the only safe port in the storm. If there was a time to borrow, it was in the aftermath of that crisis.

Things now have changed. The Coronavirus crisis is unique from capital's standpoint because economic activity has never come to such a sudden stop. It's unique because rather than being a matter of underconsumption or overproduction, it's a direct biological threat to labour. It's not so much that consumers aren't consuming, it's that workers are not producing. To all intents and purposes British capitalism in the Covid-19 interval is ephemeral to a core infrastructure funded and run by the state. However, because this is a biopolitical crisis in which surplus value generation is largely suspended, capital is either being hoarded or has fled to the safest of safe ports: US bonds. In other words, because the bond markets aren't even functioning in a truncated condition there is only one avenue left for funding: the Bank of England. It is now financing the Treasury directly, which means unlimited funds are available for the NHS, to extend the furloughing scheme, to even experiment with radical social security policies - if the political will is there. And what is more, this debt can literally be placed on the never never. The state can determine the length of repayment, the interest rate payable, or even direct the Bank to write it off. In other words, once Coronavirus has passed through there is no debt crisis on the other side.

This begs the question why the likes of Osborne and no doubt a few Tories are looking forward to a repeat of the lost decade. Some are genuinely economically illiterate and cannot compute the system they defend. This isn't surprising: an ideological commitment to capitalism is hardly likely to produce clear sighted depictions of it. For others a spell of austerity allows for an indulging of one's ideological hobby horses or the creation of new markets. During the Coalition government we saw all kinds of these experiments, not least what they did to the NHS. More austerity means more creative ways in which public spending can end up in private pockets. However, the most compelling reason has nothing to do with economic growth figures. It's our old friend biopolitics, of disciplining the work force.

Consider the problem for the Tories. After a decade of saying money cannot be magicked out of thin air, all the state bail outs are indeed so conjured. Money can't be found to house the homeless, give nurses a decent pay rise, fund local government properly etcetera and so on, but all of a sudden the money is there. If it can be found in an emergency, then why do public services have to go without the rest of the time. Austerity then, in the context of the class relations of capital, is a strategy for dampening expectations. Talk up the debt, talk up the sacrifices we have to make to pay it off, peddle more homilies about how we're all in it together, and the economy of artificial scarcity that characterises capitalism is much easier to swallow. And if government is tightening its belt, so must workers too. In fact, following the crisis anyone who has a job ought to feel grateful they're still drawing a wage - millions aren't. And if we go from recent memory, it largely worked for the first five years of the last decade. Who's to say it wouldn't work again?

Therefore, you can see why the case for austerity is compelling from a Tory point of view. Get it accepted as the political common sense, position yourselves as the most competent administers of the programme, protect the elderly base, and the next election is yours. But how probable will the Tories go down this route? I think a full-throated programme on the Dave/Osborne model isn't on the cards. For one, the crisis has demonstrated how public services are not an optional extra and everyone knows it was exacerbated by a decade of purposeful underfunding and incompetence - even if the polls don't reflect that, yet. Second, the crisis stands a good chance of accelerating certain tendencies in global capitalism. The immaterial labour this blog has the tendency to bore on about has shown itself to be entirely essential - above all care and service work. Its enhanced status makes it difficult for the Tories to attack directly, even if, as a cohort of voters, they are not what you'd describe as comprising a core constituency of Conservative support. As it's Lenin's birthday, it's worth bearing in mind one of his key insights, that politics is concentrated economics. This shift toward care and service in the economy will manifest sooner or later in mainstream politics - Corbynism in England and Wales, and the SNP surge in Scotland are its initial radical outriders, and in the future? A new empathic politics in the Jacinder Ardern mode?

In other words, the political preconditions for an austerity retread aren't there and cut against the grain. It doesn't mean this is impossible, but it's down to our efforts to ensure the environment remains hostile to retrenchment. Hence why it's crucial to maintain the left's profile in Labour so the party doesn't backslide to a Milibandish compromise with austerity or a capitulation to Tory arguments. If we can do this, we can shatter the Tory dream and spare our people another nightmare.


Dipper said...

This is nuts. The government can take the action it has taken precisely because it got the deficit under control. It will have to do so again. The idea that we can, as a matter of course, borrow large amounts of money to pay for everyday items is completely wrong headed. The fiction that governments can just create money out of nowhere and that printed money has real value is just that. No-one who does a proper job for a living believes it.

Karl Greenall said...

I don't know where Dipper gets his ideas from but he is well behind the curve in this subject.
It is government debt which lubricates the economy, and just try to tell the Bank of England that banks don't create money when they create a loan, then wait for them to stop laughing.
Governments with their own sovereign money can borrow as much as they want, whenever they want. And how come printed money has no value? I have paper bank notes in my wallet, and I generally have no problems spending them. I earned them by working,and I certainly believe they have real value.
What's the problem with that?

David Parry said...

The vast majority of state expenditure is funded through borrowing, not taxation. Taxation is primarily about reigning in excess demand in the economy. The only time that taxation is actually about raising revenue is in the case of hypothecated taxation.

Also, the argument about austerity facilitating future government borrowing by keeping interest rates down was always self-serving claptrap designed to legitimise an economic policy aimed at serving the interests of finance capital by maintaining the value of capital assets.

I hope, Dipper, that should you get your wish and the state once more attempts to force the masses to pay for what, in large part, are the consequences of its own mideeds and those of large private capital (in this case of years of health services being systematically vandalised through privatisation and frontline services being slashed to the bone, which has utterly undermined any capacity we might otherwise have had to deal with this crisis), this proves to be the catalyst for a wave of strikes and protests dwarfing anything that happened in France in May 1968. I'm not terribly optimistic about that, though.

SimonB said...

The household finances legend won’t be stopped by talk of bond markets and printing money. We’d be better off using it ourselves, eg austerity is like stopping going to work because you don’t have the bus fare.

spike said...

I wonder what sort of "Proper Job" Dipper does

TowerBridge said...

SimonB is I think right.

We need a simple to understand metaphor.

Currently the Tories survive on what is the "container" model of economics and it's so powerful and simple, Dipper is one of many who will simply repeat it. I think perhaps a new book, "the deficit myth" might do this.

In the meantime, an explanation which focuses on buying and selling as the basis of capitalism is where I would start. You buy I sell, you sell, she buys, this is the music that keeps it going. Money motion. In this model, when the music stops, you get a recession. How do you get it going again? That's where printing money greases the wheels, starts the music again.

I'm at the start of my thinking as you can see but I think there's something in this.

Dipper said...

the notion that money is just something the state can create at will and throw around like confetti does not appear to have worked particularly well in leading lefty states eg Zimbabwe, Venezuela. In contrast, Germany seems to have become wealthy without having to print enormous amounts of money, probably because they remember what happened the last time they turned the printing presses on.

Just to restate the obvious point, if governments can just conjure up money at will, what is the point of anyone working? It is an anti-worker policy in that it undermines the ability of workers to create their own wealth. It transfers all power and resources to the people who run the state.

@ Spike "I wonder what sort of "Proper Job" Dipper does"

correcting the nonsense that proliferates lefty blogs is pretty much a full time 'proper job' I can assure you.

Karl Greenall said...

You are eating your time trying to correct "lefty nonsense" from a position of total economic idiocy.
Perhaps you could explain, from your own fantasy paradigm, how wealth is created, when only something like 3.5% - yes, 3.5% of all Pounds Sterling, as an example, exists in hard cash of coins and notes. Where did the other 96.5% come from?
I won't hold my breath.

ActonMan said...

Workers don't create their own wealth. They create wealth for their employer. Discuss!

David Parry said...


The crises in Venezuela and Zimbabwe have nothing to do with printing money per se. Venezuela's hyperinflation stems from the attempt in 2003 to discourage capital flight by introducing a system of dual exchange rates, which ended up playing into the hands of commodity speculators in the black market. In Zimbabwe, it was the expropriation of white farmers and the redistribution of their concerns among Mugabe's cronies, who then ran them into the ground, which caused the crisis there. The hyperinflation in Zimbabwe was caused, not by printing money per se, but the fact that the money being brought into circulation resulted in demand for goods and services massively exceeding supply, the latter having sharply diminished.

This leads me to a distinction that I think you're overlooking, namely between money and wealth. Money is currency. Wealth is goods, services, natural resources and so on that have been or can be exchanged for money.

Thus, to posit that the state can create money out of nothing is not to say that the state can create wealth out of nothing. Those are two different propositions.

Anonymous said...

Ten comments in and no one has mentioned MMT Modern Monetary Theory. The link below is a good place to start. There is some serious academic work behind this that explains why the blogger here makes sense and Dipper doesn't.

Bill Mitchell Modern Monetary Theory

Anonymous said...

Good luck trying to get Dipper to engage with actual facts- every time you present him with one he slips onto another polemic. See his hopeless response to reality on the covid post. He's a troll and the worst thing is he doesn't appear to realise.

Dipper said...

please please put statements like "Money and wealth are not the same" in the Next Labour Party manifesto. And also for good measure 'our economic theory allows us to run up a big deficit. People who think that's a problem are just stupid and don't understand how modern economic theory works'. That would be christmas for the Conservative Party. If you cannot explain your economic policy to people who spend all the hours putting a roof over their families heads and food on the table in words other than we've got this really clever way of just making you richer then you are lost.

s for Anonymous, when I said that non-scientific people were revealing themselves as being completely stupid, I didn't;t expect someone to step up and demonstrate so comprehensively. Pulling a few numbers out on a non-comparable basis and then saying this shows you were right all along, stating things as fact with absolutely no underlying logical or evidential basis, just deon states my point.

One thing that has surprised me about the response to Covid is just how degrees in Humanities rubbish appears to make people experts in public health, epidemiology, medicine, and science in general. I see now that all these sociologists and economists clearly knew that science was just to easy for them.

David Parry said...


I'm an anarchist. I don't give too much of a tinker's toss what the Labour party do or don't do. I want the whole rotten edifice of our current political and economic system to crash and burn - literally if necessary - and something much more humane, egalitarian and democratic to take its stead. I'm just correcting your economically illiterate Dunning-Krugerisms. That's all.

Jimbo said...

Hi dipper, interesting post. Where did you achieve your education in medicine?

dermot said...

Dipper, nice 3 para stream of consciousness there.
Not a word to engage any of the arguments preceding.
You are thick.

Andrew Curry said...

One of the things that has changed since 2010 is that Reinhart and Rogoff’s claim that one the GDP-to-deby ratio went past 90% growth started plummeting has been shown to be based on spreadsheet errors. So no cover for the austerians from that quarter.
In the meantime IMF researchers have also concluded that cutting public spending leads to bigger falls in private sector output. Despite claims by concersvative politicians, it does not create space for growth (insert speechwriter’s flourish of choice here).

George Carty said...

Was the real problem post-2010 not that the Tories imposed austerity, but rather that they didn't extend it to their own voter base (pensioners and landlords). The deficit that is really killing our economy isn't the government budget deficit, but the national current accountdeficit.

That would be one of the less irrational justifications for Brexit: that mercantilist Germany (having already screwed over the peripheral Eurozone countries) was now looking to screw over the UK as well...

Brownlow said...

>>the political preconditions for an austerity retread aren't there and cut against the grain<<

Alas, Dipper's comments suggest otherwise. The household fallacy has already acquired herd immunity to all counterevidence and counterargument.

Daniel Johnson said...

I fully support your words that low interest rates and uncertainty after the economic crisis of 2008-2009 have reduced the opportunities for low-risk investments - bond markets have become almost the only safe port in the storm.

Boffy said...

Bond markets are going to get crushed, when economies restart. We have spending on an almost unprecedented level, and borrowing to suit. Comparison is made with the 250% level of debt to GDP after WWII, but the subsequent borrowing after that was to finance recapitalisation of industry, and infrastructure. The current borrowing has gone simply to finance consumption, to pay people not to go to work! The former at least put equal value into the economy in the form of fixed capital, the latter has taken massive amounts out of it in unproductive consumption.

We have massive government borrowing as the latest deficit figures showed, and that's just the start. But, we also have massive household borrowing on top of the already historically high levels of household debt as people have used savings to compensate for loss of earnings. Then we have massive company borrowing, such as the tens of billions that companies like Ford have borrowed out of their existing credit lines, as they attempt to cover costs with no revenue streams.

We have profits destroyed because there has been no production, or production has been curtailed, as sales - at least for some - have been reduced. profits are the source of new supplies of loanable money-capital. So, with profits disappeared, when companies come to restart, they can only do so by borrowing. That means the demand for money-capital will rise sharply, perhaps very sharply if as soon as the lid is taken off, many people will resume consumption, causing firms to want to not lose market share. Rising demand for money-capital at a time when the supply of money capital from profits is reduced inevitably means higher interest rates. Add in the vast amount of government and household borrowing and interest rates are set to soar, which means bond markets, and other asset prices such as shares and property will get crushed.

The government and proponents of the Magic Money Tree (MMT) think it can be resolved as the government in Weimar did in similar conditions in the 1920's, by printing money. That, then, and would now result in hyperinflation, without preventing interest rates rising.

Gold would be a safer haven other than all the smart money got into it when it was $600 an ounce cheaper. Best option is probably cash, on the expectation that hyperinflation takes a while to develop as the government prints ever more worthless bits of paper, whilst the rise in interest rates will occur sooner, and the crash in asset prices will happen then more or less overnight, so that cash is king, and able to buy up assets at once in a century cheap prices.