The Ernst & Young Item club reckon that, although the economy has escaped recession, it will grow by only 0.4% this year.
We can’t blame the euro crisis for this. For one thing, exports have held up relatively well, so far. And for another thing, one argument against austerity was and is that it gives us less “wiggle room” if the economy does suffer shocks.
Instead, the natural inference is that Osborne’s fiscal austerity has been more expensive than anticipated. One estimate of this extra cost is equivalent to £150 per month per household*.
This poses the question. If austerity has been significantly more costly than expected, why hasn’t it caused more public outrage, and more doubts about its efficacy amongst coalition supporters?
I suspect there are two reasons.
One is the status quo bias. Costs that are actually incurred by existing policies are often more tolerable than the same costs considered as potential effects of alternative policies. This bias causes people to tolerate policies which they might have rejected, had they known their actual costs.
It’s not just UK austerity for which this is true. If you had told Spaniards and Greeks that joining the euro would cause a short-lived housing boom and then years of stagnation or worse, they might well have rejected the idea. But now these costs are being borne, people are (more or less) putting up with them.
A second reason lies in the “painting the target” effect. If you fire a bullet into a wall, you can paint the bullseye onto the wall, and then claim to have hit it. In this way, supporters of austerity point to low gilt yields and claim the policy has averted a debt crisis - oblivious to the fact that low gilt yields are largely a reflection of weak economic activity.
Again, there’s nothing unusual about today’s austerity here. A similar post hoc rationalization is often applied to the Thatcher recession of 1980-81. This was not supposed to happen. The hope was that monetary targets would lead to lower inflation expectations and hence to lower inflation without a serious recession; for this reason David Smith wrote that “by the end of 1981, Britain‘s monetarist experiment appeared to have been an unmitigated disaster.” (The Rise and Fall of Monetarism, p105) It is only with hindsight that we credit Thatcher with breaking workers‘ power, thus enabling a recovery in capitalists’ animal spirits and investment. But this is a “painting the target” syndrome.
These thoughts might seem mundane. But they have an important implication. If costs and benefits, once borne, are regarded very differently from how we’d regard them in anticipation, then what use is cost-benefit analysis?
* GDP in Q1 was probably 3% below the OBR’s June 2010 forecast. That’s around £11.8bn (money GDP in Q4 was £380.5bn.) There are 26.3m households in the UK, and £11.8bn divided by 26.3m gives us £448.67. Divide by three and we can call it £150.