More arguments to counter myths about austerity

This post follows on from part 1 here. Here’s three more commonly heard arguments made to justify austerity or policies associated with it.

1) Gordon Brown spent all the money and now there’s none left. Just ask Liam Byrne

This line of argument conjures up a couple of misleading images. The first is that somehow there was a bank vault somewhere full of money which Gordon Brown kept dipping his fingers into and spent without putting any aside for a rainy day. He didn’t “fix the roof while the sun was shining” as right wing buffoons are fond of saying.

This is quite easy to counter. The next time someone says we’ve run out of money, just ask them how that is possible when the government can print money? They’ll probably look at you like you’re mad, and then say something about hyperinflation, but they will have to concede that we can’t actually run out of money.

This moves the conversation onto inflation. Won’t printing money cause inflation? Printing money cannot and does not cause inflation. If the government printed £100bn and just left it in an account at the BoE, how could that be inflationary? It’s the spending of money that can generate inflation, but government money creation is no more inflationary that private money creation by the banks. The inflation comes from too much money chasing too few goods i.e. the constraints are real – the ability to produce goods and services – not financial. Money can and should be created up to the point where the economy is at full employment. If the private sector does not create sufficient money to get us there, the government should make up the shortfall.

The other part of point 1 above I object to is the oft repeated line about Liam Byrne’s famous “no money left” note. If anyone drops this into the conversation, it’s your turn to look at them like their crazy and say i) the note was a joke; and ii) Liam Byrne is a joke.

2) Cutting x will save £y

This is a very common argument we hear, often in relation to welfare cuts e.g. uprating benefits by 1% will save £3bn and this will reduce the deficit by £3bn. That is the gross saving only though. The government may pay out £3bn less to benefit claimants, but this in turn means they have £3bn less income and £3bn less to spend on goods and services in the private economy. Those business then have less sales which means they pay less tax. Because of lower sales, they may need to let staff go. Those staff in turn then may claim benefits, so it’s easy to see that cutting payments to benefit claimants may actually end up increasing the deficit rather than decreasing it.

This is why you hear a lot of right-wingers say that there have been no cuts. They see the deficit rising and think its because the government is not cutting enough, when in fact it’s the cuts themselves that are increasing the deficit, and outcome predicted by many Keynesians.

3) What would you cut?

This is a common response by those in favour of austerity to those arguing against the cuts. There are a couple of unspoken assumptions behind this statement: i) deficit reduction must be a specifically targeted policy and is an end in itself; ii) the only way to achieve this goal is to cut spending and/or increase taxes.

The first assumption is false because it misunderstands what a deficit is and what it tells you. I explained this a bit in part 1. What the government should actually target is unemployment, poverty, living standards etc i.e. things that actually impact upon people’s lives.

The second assumption is also wrong. In fact the opposite is true. I would argue that cutting spending and raising taxes will increase. not decrease the deficit, and any attempt to cut the deficit through austerity will ultimately fail.

With these two things in mind, the question “so what would you cut” should be rejected out of hand. The question we should be asking is how best to reach full employment, how to reduce poverty, increase living standards. Only when we start asking these questions will we start to find solutions which actually bring about economic recovery and reduce the deficit to boot.

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