With Governments around the world now wedded to austerity, it’s easy to lose sight of what the overall goal of economic policy should be. At the moment, the goal seems to be ‘deal with the debt’, ‘pay down the deficit’ (whatever that means). We have stopped asking why austerity is necessary and kind of accepted it as a fact of life. Sure we don’t like it, but there’s no alternative right? Maybe we could raise taxes on the rich a bit more, or go after tax dodging more, but ultimately, that deficit must come down or the sky will fall in.
There is a general consensus about this right across the political spectrum, and – after being bombarded by over two years of propaganda – amongst the public at large. But should economic policy be all about ‘deficit reduction’ with only token nods to ‘policies for growth’? I think not. Thinking big picture, here are the three things most economists would consider the goal of macroeconomic policy to be (feel free to disagree):
1. Full employment – everyone who wants a job has one, or there is one job vacancy for every jobseeker (at the moment there is only 1 for every 5!)
2. Stable prices. This means a stable (not necessarily low) rate of inflation. Economists would define inflation as a general rise in prices. This includes wages. If prices rise more than wages, that is more a rise in the cost of living than inflation. So if wages and prices both rose by 5% per year, that would be considered quite high inflation, but if it was stable at 5%, this would not be too much of a problem, because households and business could make decisions about the future with more confidence.
3. A highly productive economy. The economy is producing close to the maximum it can achieve with the resources it has available (while not trashing the environment).
You would have thought that our politicians would be advocating policies that contributed towards those aims, but if you look at what austerity is actually achieving, it seems to be the exact opposite of the three points above:
- High unemployment
- Unstable prices – first prices rising quickly (but not wages), then falling back to the point where deflation becomes a real possibility.
- Falling productivity – the wealth produced per hour worked is falling.
So why are our policy-makers still dead set on austerity? There are two reasons I can think of. Either could be true (or indeed a combination of the 2):
- They know austerity doesn’t work, but the people who they really serve (those at the top) do quite well out of austerity. It increases inequality, thus ensuring the top 1% have a greater share of the (albeit smaller) pie.
- They are morons who honestly don’t know any better, either for ideological reasons (most Tories), or just pure ignorance (Nick Clegg, Danny Alexander).
At the moment I tend to believe option 2, but as more data comes in in 2013, if no change in policy is forthcoming, then option 1 will start to look more likely.