Cameron's lousy defence

In today's Guardian, David Cameron commits one of the most atrocious non sequiturs I've ever seen.

He begins from a reasonable premise - that "wider problems in the global economy pose a real risk to our recovery at home": emerging markets are slowing down; the euro area is close to recession; and uncertainty in Russia and the middle east might also depress growth. But then comes this:

As the global economy faces greater uncertainty, it is more important than ever that we send a clear message to the world that Britain is not going to waver on dealing with its debts. This stability is vital in attracting the business and international investment that delivers growth and jobs, and which keeps long-term interest rates low.

This is precisely the opposite inference we should draw if we believe, as Cameron does, that "red warning lights are once again flashing on the dashboard of the global economy."

If the world economy slows, exports won't pick up the slack created by restraint in public spending. And nor will investment, because uncertainty usually depresses capital spending.

What's more, uncertainty reduces gilt yields because investors seek out safer assets; it is this, more than confidence in fiscal policy, that explains why long-term interest rates are low*. This makes government borrowing more affordable.

The claim that there are big troubles in the world economy is a reason to support a looser fiscal policy, not austerity.

Nor is it adequate to claim, as Cameron does, that we should use monetary policy rather than fiscal policy to support growth. It's likely that quantitative easing - which is of dubious merit anyway - would be less effective now that it was in 2009, for two reasons:

 - Gilt yields are lower now than they were then. This means they have less far to fall in response to Bank buying.

 - Tail risk for the UK economy is probably smaller now. This blocks one of the mechanisms whereby QE works - its signal that the Bank is determined to avert the risk of catastrophe.

As a defence of austerity, Cameron's argument stinks. A far better defence would be to play down the risks to the world economy - eg by pointing to the likelihood of decent US growth and of the ECB doing enough to stimulate the euro area - and claim that the economy is strong enough to withstand austerity.

You might think that what Cameron is doing here is simply preparing his excuses in advance. If the UK economy does slow down, he can use the excuse of wimpering schoolboys down the years: "a big boy did it."

Even this, though, won't wash. As I said when Vince Cable tried to blame weak growth in 2012 on the euro crisis, a policy that works only if everything turns out well is not really a policy at all. Surprises are inevitable, and a good policy - in government, business or investing - is one that is resilient to bad surprises. Adverse developments overseas, then, are no defence whatsoever of austerity.

To be honest, I'm rather embarrassed to point all this out, as it is so trivially obvious. However, in our hyperreal economy in which "media macro" has displaced basic economic logic, arguments such as this feeble effort from Cameron are in danger of achieving a credibility they don't deserve.   

* I say this simply because since June 2010 bond yields have fallen around the world.

Comments

[Guano]

I wonder if Cameron is trying to push the TTIP as a remedy for the world economy slow-down, rather than austerity per se.

[Hamish Atkinson]

No, he's positioning himself as the financially-prudent one to the UK electorate. The UK electorate as a whole simply doesn't understand the counter-intuitive relationship between austerity and GDP growth/deficit reduction.

Rather, your average swing voter thinks of government finances in terms of a household's budget: If you have less money coming in, you cut costs to balance the household's budget, or find a second job to bring more in.

Cameron is saying to his target voters: Weak growth in the world economy means, there is no second job available. Trust me, I'll keep a tight reign on the country's credit card spending in the meantime.

It's a persuasive argument, and easier for voters to swallow than Milliband saying "This country's GDP growth has been lacking _because_ of the Coalition's austerity policies" even thought the latter is actually true.

[Ben]

Atkinson go to the top of the class. Not sure why our illustrious blogger is picking apart the finer points of Cameron's ramblings. What's next? A blow by blow account of why Boris is disingenuous.

The only way out of this is if voters start thinking *and* start behaving morally. So not much hope.

[An Alien Visitor]

The BBC propaganda outfit have been talking up the economy for ages now, in between trashing the image of Ed Miliband. This morning they covered a story that workers are feeling poorer than this time last year by going to a factory where workers had just received a very modest above inflation pay rise! This would be like covering the child abuse scandals by going to visit some children who were very very happy!

[Keith]

Chris and other macro experts should get modern economics on the compulsory part of the national curriculum.

As ben and H Atkinson indicate this is just appealing to ignorance. Citizens without the necessary education cannot evaluate policy choices. So are open to manipulation by political figures.

[Icarus Green]

Ha, there's a possibility Cameron is playing some kind of meta drinking game with his golf club buddies where he keeps crow-baring solving the deficit as an answer to every problem.

Unemployment? Deficit.

Growth? Deficit

Innovation? Deficit.

Welfare? Deficit.

Preservation of arctic fauna? Deficit.

[Chris]

From what he says if sounds like he thinks that Economy = Government Finances, and that he understands neither.

My gut feeling is that he is simply trying to sound knowledgeable in sound bites to the majority whilst continuing with his agenda to dismantle the state.

[Ben]

Chris - I actually wouldn't have a massive problem with rolling back some of the state. We have a big state with big housing benefit spending because we have a corrupt banking sector who are looting. To roll back the state one must fix banking. This would be truly redistributive (unlike Nu Labour fake redistribution) as it would be a change in favour of the working man.

But we can't do this as the UK would instantly implode. The UK is the equivalent of a match factory in a high oxygen environment where all they know how to do is make matches. Short term it makes sense to carry on. Long term you are all toast.

[Pension60]

Austerity in a recession is not happening. Billions are wasted on welfare admin just to leave millions to starve, even unto death. The cost of admin means austerity has never happened as the Tories have spent as much since 2010 as Labour did in 13 years of rule.

Benefit will need to be for life in old age
as the state pension is lost forever for huge numbers
of women born from 1953 and men born from 1951
and for the bulk of the rest massively reduced
from the even lowest state pension of all rich nations bar poor Mexico.
https://you.38degrees.org.uk/petitions/state-pension-at-60-now

If the new and unique Greens' policy since their Spring Conference 2014 has been in place in 2008, then just maybe we would have sprung back from recession fast:

- unique Citizen Income, automatic, non-withdrawable

- Bettered State Pension, with a full state pension for all citizens, leaving no citizen with nil state pension as coming with the flat rate pension, the biggest con in UK history.
https://you.38degrees.org.uk/petitions/state-pension-at-60-now

[Hamish Atkinson]

"get modern economics on the compulsory part of the national curriculum"
Ha ha ahah. I think you're onto a loser there Keith:
https://www.youtube.com/watch?v=YKiFoEwPQNU

[ThomasH]

I wish the writer would explain the difference between "fiscal policy" and the increase in public investment that ought to result from the application of orthodox investment decision making: investing in projects which have positive net present values when discounted at the lower long term borrowing rates.

[hanno achenbach]

As a continental European, I do not care when Cameron talks nonsense - he's doing it all the time.

However, so is Chris Dillon when he writes:

"What's more, uncertainty reduces gilt yields because investors seek out safer assets; it is this, more than confidence in fiscal policy, that explains why long-term interest rates are low*. This makes government borrowing more affordable."

If bonds are uncertain, yields will be higher, cf. Greek bonds.

Of co