Thinking About Austerity in Britain: Daily Focus
: Destroying the State is No Accident:
“Why do I think [that Osborne’s] sharp reduction in the size of the state in the UK is no accident?…
There is no sound macroeconomic case for a rapid reduction in the share of debt to GDP at a time when interest rates are still at or near their lower bound and there are risks to the recovery. So, if the macroeconomic argument for deficit reduction is unsound, there has to be another motive…. [And] why on earth has Ed Balls come to accept the austerity case?… Just think if Clement Attlee’s government at the end of the second world war had decided that the first priority was to reduce the debts built up during the war….
The reason for this about turn is of course mediamacro…. When the entire media jumps on your leader because he forgot the bit of his speech where he mentions the deficit, as a politician you are bound to conclude that the battle has been lost…. And please don’t say politicians who bow to this media pressure ‘lack courage’–a politician’s job is to win elections. The cock-up argument could respond that somehow the government has got trapped by its own rhetoric. It used the deficit line as an obvious stick with which to beat the opposition, but it has somehow got out of control….
Seven times as many people want higher taxes and spending than want lower taxes and spending. People like their NHS, they want resources put into state education, and pensions are also popular…. While people are clear about their preferences for public goods, they are not experts on macroeconomics. So when they are told that the deficit has to be reduced… they think about their own budgets and it makes sense. They remember the Eurozone crisis which involved governments not being able to sell their debt. Media myths have to come from half-truths…. The neoliberal force is strong with this government, and I see no reason to believe that does not also apply to their Chancellor and his macroeconomic policy.
First, we did so because we saw the large deficits created by the Reagan-Bush 41 administrations as a very damaging to America. We saw them, I still believe correctly, robbing us of more than 0.5%/year of economic growth via the higher real interest rates and the dollar cycle-induced hollowing-out of America’s manufacturing communities of technical practice. America in 1992 thus looked to us to be 6% poorer than if the Reagan-Bush 41 administrations had followed the economic policies of an Eisenhower.
Second, we did so because we also thought we saw signs over 1990-1992 that US was reaching the edge of the limits of its debt capacity, and that a failure to demonstrate that the political system could put the debt back on the sustainable trajectory might turn us not into Argentina but into an economy in which the annual costs of demonstrating to the bottom market that we were not Argentina would become substantial. In view of the extraordinary demand for the debt of the US government and of the other sovereigns with the exorbitant privilege of printing reserve currencies out of thin air that we have seen over the past decade, that second now needs considerable rethinking–it was probably a mirage, a misreading of the causes of the high real interest rates of the late-1980s and early-1990s.
Be that as it may, the macroeconomic policies of the early Clinton Administration were still an astonishing success: a strong, high-investment recovery advancing in time and strengthening the dot-com boom that paid enormous dividends to the US and to the world economy as a whole even as it took $4 trillion away from investors in the bubble.
Now, of course, things are very different than they were at the start of the 1990s. There is no warrant anywhere in financial markets for any belief that Germany (the Euro), Britain, or the US is anywhere close to its debt capacity. At current low interest rates there is every reason for reserve currency-printing sovereigns with exorbitant privilege to borrow and spend at least until the interest rates and inflation rates are normalized, and substantial reason to continue such policies a little later in order to acquire a credible reputation that they will be similarly irresponsible what should the liquidity trap come again.
Yet Ed Balls is not making the technocratic macroeconomic argument for a higher government spending now. And he is not making the technocratic public-finance political-economy argument that the rightsizing of the public sector will require a larger share of GDP for government in the 21st century than we have seen in the 20th. Education, pensions, healthcare, research and development, infrastructure, defense, and information goods are none of them optimally provided by a lightly-regulated market. And all of these, save (we hope) defense, loom larger in the 21st century than they loomed in the 20th. Wherefore then the belief that shrinking the state is a good thing?