The biggest lie: “Austerity heals the economy”


Perhaps the most bizarre assumption pervading last week’s seven-way leaders’ debate was that slashing public spending not only doesn’t harm the economy but actively strengthens it. The claim surfaced repeatedly, most often – and least surprisingly – from David Cameron and Nick Clegg. A few samples:

Clegg: “I will always act responsibly. I’ll never let anyone else borrow money that we don’t have and jeopardise your, risk your jobs and our economy.”

Cameron: “So when people talk about cuts, we had to make these decisions because the British economy was on the brink. People were worrying about whether we’d be able to pay our debts.”

Cameron: “Now we’ve been talking about the difficult decisions we had to make to turn the economy around.”

Cameron even claimed – incredibly – that public spending cuts would thereby protect the NHS:

Cameron: “But a strong NHS needs a strong economy. If we go back to Labour’s plans for taxes and debt and spending and welfare, the economy will be wrecked and that will wreck the NHS.”

Cameron: “Now all of this has taken the extra resources that we put into the NHS, because the long-term economic plan is working.”

What evidence supports these claims?

To put it simply, there is none. Last month, the Centre for Macroeconomics surveyed economists, asking: “Do you agree that the austerity policies of the coalition government have had a positive effect on aggregate economic activity (employment and GDP) in the UK?” Two thirds either disagreed or strongly disagreed; only 15% agreed. Notably, not a single respondent strongly agreed. Once we remove the fence-sitters (those that neither agree nor disagree), a whopping 81% disagree, and only 19% agree. Of every five economists that expressed a view one way or another, in other words, four disagree that austerity helps the economy or creates jobs.

The survey then asked the economists how confident they were in their replies, and weighted responses accordingly. The proportion of non-fence-sitters that “strongly disagreed” rose to a majority of 53%. Set that against the number “strongly agreeing”: zero.


If that’s the economists’ view, what’s the evidence behind it? In 2010, Harvard’s Alberto Alesina promised Europe’s governments their economies could grow even as they slashed public spending, through “expansionary fiscal contraction”. The argument ran:

“business expectations will be so encouraged by the prospect of lower taxes and higher profits that the resulting economic expansion will more than offset the contraction in demand caused by cuts in public spending.”

Believing their tax bills would shrink, while opportunities for big bucks lay just around the corner, businesses would spend, spend, spend.

When the International Monetary Fund (IMF) examined the same data as Alesina in 2012, it came to a rather different conclusion:

“while it is plausible to conjecture that confidence effects have been at play in our sample of consolidations, during downturns they do not seem to have ever been strong enough to make the consolidations expansionary.”

The “confidence fairy”, in other words, proved entirely imaginary.

The idea that “confidence” alone will transform shit into gold, economist Mark Blyth explains,

“assumes that consumers anticipate and incorporate all government policy changes into their lifetime budget calculations. When the government signals that it plans to cut its expenditures dramatically, the argument goes, consumers realize that their future tax burdens will decrease. This leads them to spend more today than they would have done without the cuts, thereby ending the recession despite the collapse of the economy going on all around them. The assumption that this behavior will actually be exhibited by financially illiterate, real-world consumers who are terrified of losing their jobs in the midst of a policy-induced recession is heroic at best and foolish at worst.”

Another plank of evidence buttressed the case for austerity, however. This was “Growth In A Time of Debt”, a paper by economists Carmen Reinhart and Kenneth Rogoff, that claimed economies suffer once government debt hits 90% of output. Other economists had trouble producing the same result, though, and so eventually got Rogoff and Reinhart to release their figures. It turned out the two had made a coding error in a Microsoft Excel spreadsheet that simply cut off several lines of data. They had also left out years of evidence of high growth and high debt in Australia, Canada and New Zealand.

Thirdly, the International Monetary Fund (IMF) and Office for Budget Responsibility (OBR) both drastically underestimated the economic benefits of public spending. They assumed that every pound the state spends increases national income by only about fifty or sixty pence. In fact, it turned out to increase it by more than a pound. (In econo-speak: both assumed the “fiscal multiplier” was about 0.5-0.6, when it was actually around 1.3 or 0.9-1.7.) So austerity may have done three times as much economic damage as first predicted.

Last November, the IMF released its “Response to the Financial and Economic Crisis”. As economist Simon Wren-Lewis put it, this document,

“untainted by political face-saving or ideology, has given a clear verdict. The 2010 switch to austerity was a mistake. The conclusion is not qualified: it was a mistake in the UK, the US, and in the Eurozone as a whole.”

That would certainly tally with the evidence all around us. As Mark Blyth wrote in Foreign Affairs in 2013:

“The results of the experiment are now in, and they are equally consistent: austerity doesn’t work. Most of the economies on the periphery of the eurozone have been in free fall since 2009, and in the fourth quarter of 2012, the eurozone as a whole contracted for the first time ever. Portugal’s economy shrank by 1.8 percent, Italy’s fell by 0.9 percent, and even the supposed powerhouse of the region, Germany, saw its economy contract by 0.6 percent. The United Kingdom, despite not being in the eurozone, only barely escaped having the developed world’s first-ever triple-dip recession.”

And it’s not as though our leaders don’t know all this. In May 2010, for instance, the economists’ view found an unlikely champion in Nick Clegg:

“My eight-year-old ought to be able to work this out – you shouldn’t start slamming on the brakes when the economy is barely growing. If you do that you create more joblessness, you create heavier costs on the state, the deficit goes up even further and the pain with dealing with it is even greater. So it is completely irrational.”

Which raises a big question – posed in May 2013 by economist Ha-Joon Chang:

“If even the IMF doesn’t approve, why is the UK government persisting with a policy that is clearly not working? Or, for that matter, why is the same policy pushed through across Europe? A certain dead economist would have said it is because the government is “in reality instituted for the defence of the rich against the poor”. Dead right.”

(The name of that economist? Adam Smith.)

Ignoring economic expertise and evidence, then, Cameron instead relies on some wealthy backers to lend his plan a gloss of credibility:

Cameron: “Yesterday, a hundred of business leaders from some of the most iconic business brands, large and small, said that the plan that we have is getting the country back to work, is getting the country on the right track, and if we go off that with Ed Miliband’s plan, we put the country at risk, the recovery at risk and jobs at risk.”

These “business leaders” aired their views in a letter to the TelegraphOne third of this letter’s signatories, it turns out, are Tory donors; one in five received an honour from Cameron. Comparing the letter with the economists’ survey, the BBC’s Robert Peston mused lamely that “Neither business leaders nor economists have a monopoly of wisdom on what’s good for Britain or are free from political bias” – though the self-selecting pro-Tory signatories represent only 0.002% of UK businesses. And there is another difference between “business leaders” and economists, of course: as Wren-Lewis quipped,

“probably without exception, we are paid a lot less than business leaders, so the danger that our opinions might be influenced by Labour policies like reintroducing the 50p income tax rate or introducing a mansion tax is perhaps also smaller!”

If it’s evidence in favour of austerity you want here, you won’t find any. What the pro-austerity parties offer – Labour, Lib Dems, Tories and UKIP – is political marketing: a gloss of credibility and a story that plays to the crowd, or that portion of the crowd they can get to swallow it. And this is to mention only austerity’s economic consequences, without addressing its devastating impact on ordinary people’s lives.



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