Austerians declare victory
I am not an ideologue.
I take whatever theory best fits the facts, and revise my views based on new evidence as it comes to light. Consequently, my economic and political views are a mixture of elements from classical liberalism, paleo-Austrianism (pre-Mises), paleo-Keynesianism (pre-Samuelson), Minskianism, Georgism and social democracy.
But updating your views to fit the evidence is hardly what supporters of David Cameron and George Osborne's austerianism appear to be doing in declaring victory now that the U.K. economy is growing at a moderate 2.9 percent per annum. Updating the evidence to fit their views is more like it.
Let me say this clearly: the U.K.'s economic performance since the 2008 slump has been worse than its performance after the 1929 slump. We are still — no matter how many times one repeats the fact that the U.K. economy is currently growing — in a worse slump than the Great Depression. This is not a vindication of the policy mix that we have experienced since 2008.
But that hasn't stopped Osborne and his advocates in the British media declaring a crushing victory for austerity. Yesterday, the BBC's Andrew Marr pushed the IMF's director Christine Lagarde into saying this: "We got it wrong. We acknowledged it. Clearly the confidence building that has resulted from the economic policies adopted by the government has surprised many of us."
This triumphalism really makes me want to pull my hair out. Here's the growth that the austerians are celebrating. The U.K. is still the sixth-worst out of the G7 for economic growth ahead of only (the massively austerity-hit) Italy:
Is this uptick in economic growth in the last year the result of "confidence building"?
I am sceptical. Business confidence has risen for six consecutive quarters, and according to the most-recent ICAEW survey is "stabilising at a high level". But is that a result of government policies, particularly austerity? Businesspeople are heterogeneous, and "confidence building" austerity measures for one firm could be confidence destroying for another firm which sees their revenues reduced as a result of austerity. More plausible is this explanation from Paul Krugman that suggests that the growth is the result of a general uptick: "Economies do tend to grow unless they keep being hit by adverse shocks. It’s not surprising, then, that the British economy eventually picked up once Mr. Osborne let up on the punishment."
Or to paraphrase Keynes: "the storm [of 2008] is long past" and now "the ocean is flat again." Humans are clever and inventive. In the long run, irrespective of government, the economy tends toward growth.
Krugman's bigger point: "Britain’s recent growth doesn’t change the reality that almost six years have passed since the nation entered recession, and real GDP is still below its previous peak. Taking the long view, that’s still a story of dismal failure — as I said, a track record worse than Britain’s performance in the Great Depression."
Is this cause for celebration? Apparently so, if one listens to those who vouch for austerity in the slump because they believe (perhaps they have been reading the early Lionel Robbins?) that it will somehow endow "confidence". They ignore the bigger picture of growth since the slump, and focus on the present.
Growth, of course, is better late than never. But the austerians — and their apologists like Lagarde — would do well to heed the reality that the present is transient and fleeting.The credit they are claiming for this uptick may well evaporate tomorrow if this uptick turns out to be a transient bump. Japan in its 20 years of deflationary depression has had plenty of upward and downward bumps in the road.
And deflation does appear to be looming (although not nearly as large as across the English Channel). After six years of unprecedented monetary stimulus, inflation is low and on a downward trend. The central bank, of course, can probably always do more to fight deflation. And Mark Carney appears to be at least a capable central banker, although I do worry that he left Canada with an excessively high rate of unemployment, and a housing bubble (although the latter may be more the fault of Chinese capital flight than Mark Carney).
But the way out of a slump that originated in a Minsky moment tends to be rising, not falling inflation. That's because rising inflation erodes the real value of the weight of previous debts. That means that consumers can spend less of their incomes on deleveraging and more on consumption and investment.
So this growth may not be sustainable. Below-target inflation should make Osborne and Cameron uneasy. It won't, of course. They live in a different mental universe to me, one governed by deficit panic, and confidence fairies. They don't take the possibility of turning Japanese seriously. But history cares little for the blithe triumphalism of the present.
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