Austerity I

The dominant politico-economic theory in western countries has been, for the last 30 plus years, ‘neo-liberalism’. It was the work of the Austrian Friedrich von Hayek, and the subject of a symposium at Mont Pèlerin just after the end of WW2. It was also advanced by the Chicago school of economics under Milton Friedman.

Neo-liberalism is so-called because it harks back to the liberal economics of the 19th century, when a particular feature was laissez faire, the idea that the market knows best, and government should not interfere with its workings. At the start of the potato famine in Ireland, the prime minister, Sir Robert Peel, had to covertly buy ‘indian maize’ for distribution. (Unfortunately, Irish mills couldn’t process such maize, and the population didn’t know what to do with it.) Soon after, Peel was replaced by Lord John Gordon; he was very disinclined to interfere with the ‘market’, though, after a while, a series of public works measures were introduced. And, during this whole period, Ireland still exported grain to England; that was the ‘market’ at work.

Dr Ludwig Erhard was finance minister in the first governments in (West) Germany after the war; he joined the Mont Pelerin Society in 1950. Though credited with being the architect of the German economic miracle, he did have to distinctly compromise the ideas of the Society.

Neoliberalism believes in the market, and that government should not interfere with them, nor should governments provide services; rather this is the preserve of private enterprise. Unfortunately, the originators  of neo-liberalism didn’t foresee just how much instability and inequality would come from the application of their ideas. In the US, the Republican party, and their ‘Tea Party’ elements are the major mouthpieces for neo-liberalism. But then Americans think that ‘socialism’ and ‘communism’ are pretty much the same thing.

Since the 1980s, with Thatcherism in the UK and Reaganism in the US, governments have ‘privatised’ state holdings, sold off council houses, deregulated financial services and banks, and markedly reduced taxation on the rich.

We all know what happened; sub-prime mortgages, strange financial products that no one seemed to fully understand, the ‘greed is good’ mentality; and a very marked rise in income and wealth inequality. Even after the market crash, when recovery began, the rich, the 1% (and less) still claimed around 95% of this recovery.

The neo-liberal response to an economic downturn is austerity; a further retrenchment by the state, a reduction in government spending, though not increased taxation for the rich. The neo-classical approach would be state intervention in a downturn; Keynesians would do likewise, but (attempt) to save when times are good.

In the UK, this reduction in state spending is justified by reducing the ‘deficit’, the difference between government revenue and spending; the national ‘debt’ is what the state owes. This deficit reduction is seen as a ‘good thing’ by comparison to individuals. If you or I outspend our income, the bank will want their overdraft back, and want it back soon—certainly before we die. This is a major flaw in reasoning; governments don’t die. They may not be eternal, but they are very long lasting. In England, and later in the UK, the state has been borrowing for a millennium; and if it takes a century to pay back a loan, so what? We accept that a century from now there will still be government in the UK, even if we can’t really say what sort of government it will be, or what sort of place the UK will be.

To further justify austerity, scapegoats have to be identified; clearly, the poor are benefit scroungers, people who can’t be trusted with managing their own finances (the poor are usually very good at managing); immigrants who flood in from eastern Europe, not only to benefit scrounge, but for ‘NHS tourism’. Even the obese are vilified. None of this is correct; and the real rascals, the villains whose activities precipitated the present position—bankers and the ilk—aren’t penalised, taxed or jailed; their activities are supposedly so important as drivers and creators of wealth. Of course, the wealth that they create goes mostly into their own pockets.

Perhaps it’s me, but I hear so many politicians these days saying things like, ‘but the truth is such-and-such’ as if they all have knowledge of exact truth, rather than positions; often such ‘truth’ is partial and incomplete. So, if we hear that the 1% pay a quarter of all income tax (or whatever the fraction is today), this statement is correct; but what isn’t said is that they don’t pay nearly enough income tax, and they don’t pay any wealth tax. The poor certainly pay income tax; but all classes pay taxes on ‘consumption’ such as VAT. The poor pay a much higher percentage of their income on all these taxes, the rich a much smaller proportion of their ‘earnings’. I say ‘earnings’ for much of their rents are capital gains, and these are taxed at lower rates than income; how many of the poor have vast capital gains, do you suppose?

We’ve all heard of people on benefits where these have been reduced (the ‘bedroom tax’), people with major disabilities, the seriously ill and the dying who have been ‘sanctioned’ and told they are fit for work. You might think that education of the young (and even the not so young) is important for the future, for their future earnings and the future of the country. But the educational maintenance allowance was discontinued; university fees were raised, even though it’s realised that a very sizeable proportion of graduates won’t (can’t) ever fully repay them. And for those graduates who do get a good job, such that their income is taxed at 40%, will have to pay an additional 9% to repay their fees. At 49% their tax rate will be higher than the 1% who are only paying 45% (if they are paying, that is). Is that reasonable or fair?

Even the churches are having a say about the effects of austerity on the poor; increasing numbers of kids going hungry because the money isn’t there to feed them. The Trussell Trust now has 14 food banks in N Ireland. Not, surely, an ‘achievement’ to be proud of.

Yet the government proudly claims success because of its policies; in reality, it might just be despite their policies—for, except in tiny countries, austerity simply doesn’t work. You cannot shrink the state and the economy and expect debts to be repaid. But, they tell us, private enterprise has produced so many thousands of new jobs; but how many of these are people now self-employed, or employed on the minimum wage on a zero hours contract. Even a full time worker on minimum wage will have earnings well below the poverty level.

Does austerity have any effects on health outcomes? I’m not thinking about Greece, where the health service barely functions, where HIV infections have risen, but the UK. Here, it’s clear that there has been a (slight) reduction in life expectancy. (If you are really cynical, this is to be welcomed, for it means a saving on ‘benefits’, for the state pension is classified as a benefit, albeit one that most people have paid for.)

What’s to be done? All political parties, except the Greens, are for neo-liberalism, austerity, debt reduction and so on. (Cynically again, you could say that we have a government of the 1%, for the 1% and by the 1%.) It will take a major culture change before policies alter; a major change in viewpoints. And, if you’ve ever tried to do a culture change, you’ll know just how hard this is. I’m not sanguine at present.

There’s another view of economics and economists, as a newspaper correspondent observed:

In the 1980’s when I was student at the LSE, I recall attending a lecture from the late Dame Ragnhild Hatton, the intellectually intimidating Emeritus Professor of International History. She was commenting upon the fact that even in times when devotion to religion was overwhelming, such as in Cromwell’s New Model Army, policy makers and senior officers remained convinced of the value of Astrology to inform their decisions. Dame Ragnhild then paused, looked over her glasses at the students before her and said, “Is anyone here studying Economics as their core degree subject?” About half the students in the hall put their hands up. Addressing them she said, “Well, ladies and gentlemen, Astrology in those days was viewed in the same way that we view Economics today. It was seen as a way of divining the future, whereas of course, as centuries of research have shown, both Astrology and Economics are pseudo-sciences with no basis in logic at all. They are the incoherent ramblings of third and fourth rate academics who falsely claim they can predict the future. They are the intellectual equivalent of the Fortune-Teller in a tent at a fair. Now, let us return to Cromwell”.


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