Austerity, fear and bubblethink

Tim Montgomerie in the Times writes one of the wrongest things I've seen in a while. In trying to defend fiscal austerity he says:

For every green light on the global economic dashboard (eg falling oil prices) there are more red ones (the slowdown of China, the euro crisis, Russia's militarism). And if a crisis does strike again the national credit card we maxed out after 2007 is still pretty maxxed out.

This is horribly mistaken. What's maxxed out is not so much fiscal policy - the UK government's debt-GDP ratio is actually below the OECD average - but monetary policy. Sure, there's room for more QE. But with gilt yields so low already, this couldn't push them down much further. It's unlikely that QE - at least on the scale the Bank would be likely to undertake - could much stimulate the economy sufficiently to offset both more austerity and an adverse global shock*.

By contrast, in the event of such a shock, investors would probably step up still further their demand for safe assets, which would mean that extra government borrowing is easily affordable.

Tim is therefore 100% wrong. The gloomier is the global outlook, the stronger is the case against austerity. As Simon says:

The problem with further fiscal consolidation while interest rates remain at their lower bound is that it makes the economy much more vulnerable to downside risks.

If I were trying to defend austerity, I'd take the exact opposite line to Tim. I'd echo Mark Carney (pdf) in claiming that "global growth is expected to continue" and say that a sunny day is the right time to fix the roof.

Tim's error, though horrible, is not an isolated one. He is echoing something Cameron said a few weeks back.

When intelligent men say something very stupid, ideology is at work. But what is the ideology here?

Part of the answer is that Tim has been sucked into mediamacro bubblethink - a world in which talk of the "national credit card" is taken seriously rather than scorned as sub-literate cretinism. It might be no accident that one of the few prominent politicians to see things as they really are works outside the Westminster bubble.

But perhaps there's something else. As Nick Barlow said the other day, politicians no longer offer any hope. (This might be because of the triumph of neoliberal scepticism about the possibility of successful collective action). What they can do, though, is trade on fear - as Cameron did to the BCC on Tuesday. As Frank Furedi has written, "governments use fear to sustain their authority."

The problem is that, so accustomed has the ruling class become to using fear rather than hope, that they now use it even when it justifies policies which are the exact opposite of those they are advocating.

Whatever the reason, understanding support for austerity requires not an economist but a psychologist.

* OK, it's theoretically possible that the Bank could undertake trillions of pounds of QE, which would stimulate the economy. But would Tories really welcome such a possibility?

Comments

[FromArseToElbow]

One of the signature features of neoliberalism has been its instrumental use of crisis. This is as evident in the UK as in the interventions in developing countries described in Naomi Klein's 'The Shock Doctrine'.

Whereas classical liberalism and its Keynesian inheritors saw crises as occasional events that required special measures, neoliberalism justifies itself through permanent crisis, an idea that it has ultimately borrowed from Marx's concept of permanent revolution (i.e. permanent bourgeois revolution).

Even "when the sun is shining", there is the constant refrain that we are vulnerable to sudden defeat ("the global race"), that as individual entrepreneurs of the self we must constantly strive to keep our heads above water, and that reform is never-ending. The complacency of Macmillan's "we have never had it so good" is now unthinkable.

Montgomerie's ideological purpose is to insist that we can never be free of crises, and therefore special measures, such as austerity, must become the norm.

[Metatone]

Worth noting that "the triumph of neoliberal scepticism about the possibility of successful collective action" is a direct result of putting way too much faith in Hayek's views on information.

The reality is, collapsing all the different issues in a system into one representative variable (price) isn't all that robust. Read Stafford Beer if you want to know why.

Economists however seem to genuflect at Hayek's simplistic views and run to support the case against collective action, quoting Hayek, on a regular basis.

[Metatone]

Admin note: the "Top Blogging" link : "What long-term economics plan?" doesn't seem to be a link at the moment.

[Neil]

Its worth taking a look below the line at the comments on the Times opinion piece, if nothing else it might explain why the conservatives are proposing further austerity- looks mighty popular!

[Jack Johnson]

Read or re-read Toynbee for insight into the current state of politics

[Matt Moore]

I wonder if you were advocating reducing the deficit during the boom Brown / Blair years?

No? Seems like the sun is never shining quite strong enough for the Left.

[chris]

@ Matt - I don't think Labour should have reduced the deficit in the mid-00s, coz the corporate sector then was running a surplus:
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2011/08/labour-shouldnt-apologize.html
However, I am no advocate of big government:
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2009/04/shrink-the-state-a-leftist-aim.html
My main complaint against Tim isn't about austerity per se, but his atrocious defence of it. Less awful arguments would be:
1. Monetary policy isn't impotent at the ZLB: some form of massive QE could work.
2. The corp sector is returning to deficit, and the global outlook is OK, so we can tighten.
3. A smaller state is a decent idea, and austerity is a way to get there.

[An Alien Visitor]

"A smaller state is a decent idea"

I would argue that a smaller private sector is also a good idea. do we have a mechanism for achieving this?

[Roy Lonergan]

@An Alien Visitor The mechanism is vote Tory.

[Blissex]

«the national credit card we maxed out after 2007 is still pretty maxxed out.»

I don't really understand why ever out blogger interprets this as meaning that the *government's* "credit card" is maxed out. The UK government's credit card is indeed far from being maxed out, but the private sector one, at several times GDP, seems a rather different story.

The UK's private sector debt is amazingly huge, and at the "little people" level every survey shows that a large percentage of families have huge levels of expensive debt.

Part of this of course fed by the ever rising South East property prices, which as collateral underpin ever ballooning levels of mortgage and remortgage debt. Part of this fed by high levels of unsecured debt.

As long as the financial sector can make lots of money to fill the bonus pools of their management by enjoying huge spreads between nugatory costs of funding from "friend of friends" Bank of England, and much higher rates from mortgagees and unsecured borrowers desperate to compensate their falling earnings.

«trillions of pounds of QE, which would stimulate the economy. But would Tories really welcome such a possibility?»

If it boosts asset valuations and makes for bigger spreads for bigger bonus pools in finance companies it seems to me something that the Tories would welcome: because they are on the side of "hard working" rentiers and against "lazy parasites" working people.

[Blissex]

«If it boosts asset valuations and makes for bigger spreads for bigger bonus pools in finance companies it seems to me something that the Tories would welcome»

I have already expressed my insight that "conservative" means the boosting of the interests of insiders (incumbents) rather than the misleading "politically correct" frippery of Corey Robin's "reaction against emancipation".

"Conservative" parties and politicians pay only lip service to "conservation" of past mores, or to reaction to "emancipation"; they are far from conservating and reactionary when it comes to boosting the interests of the insiders that they represent and tho sponsor them.

Of course what counts as insider (incumbent) changes with time, and there are even many different categories of insiders at any one time, which accounts for both the evolution of "conservative" party coalition and their diversity.

Given this premise, and in relation to the current topic, I have come to realize that contemporary "conservative" parties in Anglo-American cultures are sponsored by and represent mostly *leverage* insiders, that is insiders who benefits from taking advantage of high and increasing debt leverage.

Sure, there are factions in "conservative" parties that represent the interests of business insiders (incumbents), or even of landed gentry insiders (incumbents), but even those get sacrificed if necessary to make life easier and better for insiders to leveraged borrowing and the asset stripping profits it delivers.

That is what "conservatism" is really about today: boosting the interests of insiders who profit from asset stripping with leveraged borrowing.

[Blissex]

«the Tories would welcome: because they are on the side of "hard working" rentiers»

As to this Osborne's "tory pensioner bonds" at 4% are a good example.

And BTW they are meant to give tory pensioner with a chunk of cash a warm feeling of being taken care of, but not for the national elections, as there is no chance they will be voting other than Tory, but for the likely leadership contest after the elections: 60% of Tory members are over 60, and obviously many are not those so poor that they have no chunk of cash to invest.

Osborne is sending a "I care about you" message courtesy of taxpayers not to random pensioners, but really to those in the South East who have cash and are very likely thus to vote in the leadership nominations.

[Tom Streithorst]

You once quoted Kalecki saying "But obstinate ignorance is usually a manifestation of underlying political motives."

Austerity may slow the economy, hurt workers and entrepreneurs, but from the perspective of rentiers, it is better than the prospect of inflation.

I think we have to accept that it isn't mere ignorance that promotes austerity (although ignorance certainly plays a part) but rather the perceived class interest of creditors.

[Blissex]

«rather the perceived class interest of creditors»

That "creditors" may sound right but not so much, because those rentiers who benefit from low interest rates and high leverage include many owners of real assets and debtors of financial assets, that is for example owners of real estate bought with mortgages.

These rentiers are large *cash* debtors and have benefited a lot from austerity polices that have driven down the nominal cost of debt and thus up the valuation of property bought with that debt.

There are different types of rentiers, such as those long property or those long cash, and austerity is not having the same consequences.

[Matt Moore]

@ Chris

The link you shared is a complete eye-opener for me. Is there a word for people who think that way? Or is it just you?!

[chris]

@ Matt - thanks! I call myself a left libertarian, which is a conventional Marxian position (tho not the only one!)
This big pdf contains a collection of relevant essays:
http://radgeek.com/gt/2011/10/Markets-Not-Capitalism-2011-Chartier-and-Johnson.pdf

[Calum]

>> in the event of such a shock, investors would probably step up still further their demand for safe assets

The only difficulty here is that there is more than one currency available. The only thing that makes a fiat currency bond a safe asset is trust that there will be no default and no hyperinflation.