Has the PM been taking tips from his Party Chairman?

David Cameron was in Brussels the other day for a meeting of EU leaders. He was quoted as saying this:

“When I first came here as prime minister five years ago, Britain and Greece were virtually in the same boat, we had similar sized budget deficits. The reason we are in a different position is we took long-term difficult decisions and we had all of the hard work and effort of the British people. I am determined we do not go backwards.”

As whoppers go, this is Shapps-esque. If only Greece had had a #longtermeconomicplan, all would be rosy now. The sun would be starting to shine once more. To say this is ‘misleading’, doesn’t really begin to cover it. Greece is a member of the Eurozone. We are not. When the crisis hit Greece, its options were much more limited than ours, and ot was forced into accepting a bailout. The conditions attached to this bailout included austerity several orders of magnitude greater than we have seen here. The on Greece’s economy are quite nicely subsidised in this infographic (found here):

Troika

So for Cameron to claim the difference between the two countries today is the ‘tough decisions’ taken by his Government is kind of insulting to both the Greek people and to the intelligence of all of us.

The real reason why the UK is in a lot better shape is firstly because we are not in the Euro and as a consequence of this did not need to go down the fiscal austerity road. Greece did go down that road in a big way, and the results are plain to see. It’s maybe to Cameron’s credit that the Government eased off on the cuts after 2012 (while still needlessly clobbering to poorest), but to admit that would be to admit everything they’ve said in the past five years has been a lie.

Greece’s new Finance Minister on his ‘modest proposal’ for the Eurozone

Here is a nice video of Greece’s new Finance Minister Yanis Varoufakis being interviewed in Italy late last year before Syriza came to power. He talks about his ideas for resolving the Eurozone crises (plural) within the confines of  the current rules of the EU. These, he first set out in a paper entitled “A Modest Proposal for Resolving the Eurozone Crisis” (since updated). Notice how scathing he is of the President of the European Commission in particular. In his new role, he needs to be a little more diplomatic perhaps, but it will be interesting to see how he deals with the leaders of the Eurozone as they try to prevent Syriza from pursuing the policies it has a mandate to deliver.

Varoufakis was in Downing Street for a meeting with George Osborne today. It’s interesting to compare and contrast the two men. Varoufakis is a serious economist who has interesting ideas and talks in specifics, while Osborne speaks mainly in platitudes with no background knowledge of the economy whatsoever. Here’s the vid. The interviewer is Italian, but the interview is in English.

Is Greece about to implement its own job guarantee?

Syriza swept to power in Greece last week, falling just 2 seats short of a majority after polling around 36%. 5 or 6 years ago, they were polling just 5%. The mainstream left party PASOC have gone the other way, polling over 40% on winning power in 2009, they polled less than 5% last week, a remarkable turnaround which shows just how fast things can change when countries are placed under severe economic stress.

Syriza now have a mandate to affect real change for the people of Greece. Whether they do, or even can within the confines of the Euro remains to be seen, but there have been some positive early signs. The appointment of ‘heterodox’ economist Yanis Varoufakis as finance minister is intriguing, and a central plank of Syriza’s platform is to do something to tackle the dire employment situation in Greece. Unemployment peak at oaround 28%, and remains at over 25%, while youth employment went as high as 60% in early 2013.

The New York Times reports on Syriza’s plan to use a direct public employment scheme to create 300,000 jobs. The program is due to be headed up by the deputy minister of Labour and Social Solidarity, Rania Antonopoulos, also a scholar at the Levy Institute of Bard College. Last year, she co-authored a paper on this issue entitled “Responding to the unemployment challenge: A job guarantee proposal for Greece”. It proposes the creation of jobs consisting of:

“…paid employment for 12 months per year on work project selected through a community-level consultative process from among the following areas: physical and informational public infrastructure; environmental interventions; social service provisioning; and educational and cultural enrichment. The positions would carry full legal labor rights, including normal time off. Eligibility would be extended to all of the unemployed,with a point system creating a rank order among applicants. Preference would be given to the long-term unemployed; those with low household income; members of households in which all adults are unemployed; and, finally, to workers according to the age composition of the unemployed, with the majority being over 30 years of age.”

The authors estimate that directly creating 300,000 jobs (at a minimum wage of 750 Euros a month) would create a further 120,000 private sector job indirectly through the multiplier effect, and although the net cost would be relatively high at around 1% of GDP, the act of creating the jobs would actually reduce the debt/GDP ratio, which is the supposed purpose of austerity, but which in fact has had the opposite effect.

If a policy like this could be implemented and successfully so, it would create a good example for the rest of Europe, and the whole continent is crying out for positive action on employment, including here. There are some who probably fear this good example, and so will try to prevent Greece’s experiment with democracy from being a success. It will be fascinating to see how the next few months play out.

Countering myths about the reasons for austerity

The idea for this post came to me while watching Question Time last night and seeing the bizarre sight of Lib Dem Ed Davey and ‘celebrity’ MP Nadine Dorries teaming up to roll out the usual reasons why austerity was and is the only course of action available.

A lot of people on the left seem to concede that the economic crisis did mean that urgent action was required to reduce the deficit, and their policy proposals operate within those parameters. Alternative policies generally include raising taxes on the rich and cracking down on tax avoidance. Some even agree that we should get rid of universal benefits to save money. Every proposal seems to be of the form that “we will cut this or raise taxes on that to pay for this.”

This is a very unsuccessful strategy in my view because it implicitly accepts a lot of the myths that have grown up around how the economy works. These myths are repeated ad nauseum by politicians to the point now that they have almost become received wisdom. Unless the counter argument to austerity is altered to reflect the reality of the way the economy actually works, the deficit hawks will win every time.

I’m going to split this post into two parts. Here’s the first three (of six) common talking points you will have heard from those in favour of austerity and how you can counter them.

1) The UK could end up like Greece

On the face of it, this is a scary thought. Greece had a large deficit and the interest rates on its debts soared to the point where it became – to all intents and purposes – bankrupt. In reality though there is zero prospect of the UK ever becoming like Greece. If someone says there is, the appropriate response is to laugh in their face.

Greece joined a currency union with significantly wealthier nations which led to them using an overvalued (for them) currency over which they had no control leading to them having a massive competitive disadvantage. This led to ever increasing deficits and meant when the financial crisis struck, they were unable to pull any of the policy levers available to countries with their own currency like the UK. They couldn’t devalue, couldn’t change interest rates and most importantly couldn’t issue money. The lack of these tools means the ability of Greece to borrow on international markets very much depends upon the markets assessment of their ability to repay, and so bankruptcy becomes a very real risk.

The mere fact that the UK does issue its own currency, doesn’t borrow in others and its exchange rate floats means it could never end up like Greece.

2) The Coalition inherited the worst deficit in the Western world

Answer: No it didn’t. It inherited the largest deficit*. This is not the same thing at all. A deficit, whether large or small is neither a good or a bad thing. It could be either, but at the end of the day, all the deficit is, is an outcome, and all it tells you is that the non-government sector (the private sector here, plus the trade deficit) is running a surplus. The government’s deficit is the mirror image of the non-government surplus. A graphical representation of this can be found here. To a large extent the government has no control over its budget outcome. It depends upon the saving preferences of the private sector.

The appropriate response for the government to take when faced with excess private sector savings would be to either accommodate them by maintaining an expansionary fiscal stance, or to seek to confiscate some of the surplus through taxation (more difficult). Seeking to reduce the Government’s deficit while the private sector are still paying down debt, simply undermines those efforts and prolongs the slump unnecessarily. This is what we see now.

3) If we hadn’t implemented austerity, the markets would have panicked, interest rates would have gone up.

The underlying assumption here is that markets alone set bond rates based upon their view of the ‘credibility’ of the government’s fiscal stance. To a degree this is true for countries in the Eurozone for the reasons cited at point 1, but for a country like the UK, it’s just nonsense. For a start, countries that issue their own currencies like the UK present no involuntary default risk. Zero.

Secondly, even mainstream economic theory doesn’t say that markets set interest rates in the way politicians want us to believe. Jonathan Portes wrote a very good blog post on this topic in September here. Basically, long term interest rates are thought to be based on expectations about future short term rates. Short term rates are set by the Bank of England, and the Bank can make it clear what their thinking on future rates will be. The markets expect future rates to be low, so long term rates now are low. Nothing to do with the markets having ‘confidence’ in the government’s economic policies. Because markets don’t behave the way politicians suggest, there is no reason to believe alternative fiscal policies would place upward pressure on interest rates.

Part 2 will discuss these further common points we often hear related to austerity:

  • Gordon Brown spent all the money and now there’s none left. Just ask Liam Byrne
  • Cutting x will save £y
  • What would you cut?

*EDIT: A reader has pointed out that the US actually had the largest deficit in 2010, and the UK only the 2nd largest (h/t Richard Evans via Twitter), but my point still stands. Many politicians continue to claim the UK’s deficit was the worst, including Ed Davey on Question Time this week . So another counter argument is that the US had a higher deficit in 2010, but took a different path. It’s deficit has now shrunk from around 11.4% of GDP in 2010, to about 7% last year. The US economy grew by 3.1% in Q3 of 2012. Although the US lost its AAA credit rating, the interest rate of US government debt has remained very low.