“It’s ideology, stupid.” – a subtext to the Queen’s Speech
On Five Live a bond trader says that austerity isn’t working and the government should be more expansionary. In Wake Up to Money a fund manger says that austerity has been overdone and it’s time for countries like Germany and Britain to borrow more.
Yet on Tuesday’s Today programme, David Laws continued to advocate austerity.
It is more and more apparent that ‘economics’ is being used to serve the ideology of a smaller State, damning the idea that the State should have different responsibilities at different times, especially when the private sector is unable to take a lead.
Laws was exceptionally revealing. Justifying his thinking, he said that the scale of the deleveraging in theUKeconomy had been a surprise and was the prime cause of the slowness of recovery and the delay in the effectiveness of expansionary fiscal contraction.
This truly beggars belief. Deleveraging and the process of converting assets (especially property assets) into cash began in 2007 as canny speculators began to get out at the top of their market.
As Steve Keen has demonstrated, it is the change in the pace of debt which directly affects the economy. We know that the Bank of England missed this turn and as the money GDP of the country fell by 8% they failed to reduce interest rates and provide the necessary compensating monetary stimulus.
Far from managing the reduction of the money supply with expansionary policy the Bank made matters worse by insisting that bank balance sheets be strengthened, giving a further twist to the deleveraging vortex.
There followed the Coalition’s austerity drive which could have only one result, further focus by families and firms on paying down debt shelving investment decisions in the face of plummeting demand and fear of job losses.
It beggars belief for Laws to say that the scale of this process comes as a surprise. It results from everything he has advocated over the last five years.
But, like the bond trader and the fund manager, does he revise his position?
No, there followed calls for austerity to continue.
The pernicious fallacy of expansionary deficit reduction has done enormous harm to the economy since 2010, killing off the recovery that was in progress. It is precisely Coalition economic policy, the message it gave out and the expectations it created, that has seen our recovery stall.
Reducing government expenditure, and especially capital expenditure (which is mostly contracted out to private sector firms), whilst expecting the private sector to make up the gap defies the Laws of Gravity.
Planned cuts have hardly begun yet the private sector sees no reason to risk its reserves until it detects a recovery in demand, the pound has lost much of its advantage from earlier depreciation and the Coalition is relying on a policy that has no empirical evidence to support it.
Everywhere the mood is changing, but not inBritain, where Cameron and Clegg continued to plough their furrow, appropriately in a tractor factory.
Deep down this has more to do with the ideology of rolling back the state and not much to do with the jobs, homes and the wellbeing of ordinary folk.
* Bill le Breton is a former Chair and President of ALDC and a member of the 1997 and 2001 General Election teams