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.
alittleecon 
I’m not as generous as you… I’m quite certain that its 1! Although Danny Alexander might qualify for 2, Osborne is definitely in the 1. camp. They need to create a ‘disaster’ in order to justify the dismantling and privatising of the post-war welfare state. It would be very profitable to institute a third world type low-waged economy with employment insecurity .. and more competitive with the BRIC countries.
Another great post 🙂
I’m still not sure. ISTM that it’s maybe true for Osborne, but many politicians seems genuinely in the dark still. They just don’t know much about the economy, and don’t seem that curious about finding out.
It always amazes me that people cannot connect simple concepts that every housewife knows to the economy as a whole. First, you can’t spend more than you make. Doesn’t matter if it’s your home or the country; that’s just a fact. You can get away with it for a while, but if you continue to do it, you’re going to drown in debt. Here in the United States, we are at a critical juncture and showing no signs of dealing with the debt. The federal government currently spends 55% of all the taxable income in the nation. To put that in simple terms, it means that every American income earner should be paying 55% of their income to the federal government. Except I don’t know any average person who can afford to do that. Those of us who are paying 25-30% are finding it hard to pay our bills after taxes. The current system is not sustainable.
Here in the United States, we have done nothing toward austerity and the economy has not recovered. It can’t because the weight of government debt is weighing it down. It’s like the household that makes good money, but must pay out 30% in credit card interest, paying last year’s bills today, so that there’s not enough left for today.
It is not the US government’s job to create jobs. Every dime the government spends comes from citizens who could otherwise use that income for productive investments. Every small business I know has reduced their employees and/or cut their benefits in preparation for the higher costs of the Affordable Care Act and the inevitable increase in tax rates. Until the government addresses the deficit and debt and provides us with a stable and sustainable taxation rate, unemployment will remain high and productivity will remain low, because every dime the government spends comes from the people and the people know that bill is going to come due someday soon.
Austerity is the only answer. Unfortunately, it’s not the one the politicians want to use so national bankruptcy will be the inevitable result.
The analogy that government is like a giant household sounds intuitively true, but it isn’t. The government can spend more than it makes – always. Look at the budget outcome for the US. Apart from a short period during the Clinton years, the US has run a deficit almost every year. It is totally sustainable.
We should not talk of Osborne, we should talk of his handlers. His performance in front of the select committee where he was forced, like a petulant recalcitrant child to admit the truth about the deficit established he’s just a spoiled and overgrown child, as are most of the cabinet. The goal of his handlers, as representatives of the British Establishment, is to maintain, at all and any cost, the status quo. The BRICS are powered by their publicly-owned banking systems where profits made go back to the communities that make them, unlike here where they’re creamed off by the privately-owned banks. As the Tories are backed by the big finance houses Osborne’s handlers won’t want to go anywhere near there. I doubt they have any interest in properly competing.
I agree with Sue for me, Option 1 is a clear winner, but I’m a cynic. Loved the post
Dear aurorawatcher. the economy of a sovereign nation like the USA or the UK (but not the rest of Europe, they’re constrained in what they can do in this regard) is nothing like that of a household. A housewife can’t create legal tender, as governments can, nor can she grant that authority to third parties as the govt has done with the Bank of England and the privately owned high street banks. You’re bang on about the effects of forever paying interest though, it’s unsustainable. For more on this subject, see http://www.economania.co.uk and http://www.positivemoney.org. Read and be surprised!
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Intresting…Dxxx
I spend too much time trying to work out which of the ‘ many politicians seem genuinely in the dark still’. The level of economic illiteracy is shameful amongst MPs.. but in the end, the only one that matters is the Chancellor … or as Billyboy says ‘his handlers’. Essentially, I agree that many of the political elite accept without question the ‘imperative’ of deficit reduction’ and rest of the neoclassical mythologies 🙂
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