Costs of austerity

It’s not just public sector workers and benefit recipients who are suffering from fiscal austerity. So too now are bank shareholders.

The FT reports that the sharp fall in banking stocks so far this year is due in part to fears of more negative interest rates.  This is because negative rates are in effect a tax on banks: banks have to pay the ECB and BoJ to deposit with it. JP Koning might be right to say that banks will eventually find a way of passing this tax onto others – say, by charging customers for deposits – but stock markets don’t agree with him (yet?).

The link between this and austerity should be obvious. Negative rates are a response to weak economic growth. But growth is weak because fiscal policy isn’t loose enough. A looser fiscal policy would prevent the need for negative rates, thus removing the potential pressure on banks’ profits.

In this sense, the costs of fiscal austerity are widespread. Not only do they fall upon public sector workers and benefit recipients, but they are also being suffered by savers who face nugatory interest rates and bank shareholders (and bankers themselves!) who are hit by fears of a de facto tax.

This poses the question: why isn’t this more widely realized? Why is anti-austerity seen as a minority left-wing position when it would in fact have wider benefits?

One reason, as I’ve said, is that people are lousy at making connections: they just don’t join the dots between fiscal austerity and low interest rates. And our illiterate media don’t help them.

A second reason is that anti-austerity comes as part of a package. A fiscal expansion might be good for bankers. But in many countries, this would come with policies they don’t fancy so much, such as higher taxes and more regulation. For some reason, right-wing anti-austerity isn't on the table. 

A third possibility is Kalecki’s famous one:

Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence…This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.  But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness.  Hence budget deficits necessary to carry out government intervention must be regarded as perilous.  The social function of the doctrine of 'sound finance' is to make the level of employment dependent on the state of confidence.

I confess to being unsure about this: do capitalists really prefer control over policy to economic stability?  However, if you discount this possibility, we are left with an awkward question: why do so many people not favour policies which would seem to be in their own interests?

Comments

[Lord]

Isn't the reason austerity is great for the liquid, until actually faced with the costs through negative rates that is. Liquidity rides high when in short supply, when relative share counts for more than absolute value.

[sam]

Canada's conservative party implemented something like right-wing anti-austerity

[Bob]

Taxing banks really doesn't help the economy. They just put it on the price of a loan after all. The charge to the banks would go on the cost of a loan, not to savers.

Because ... national savings and Gilts.

Eventually people will realise that monetary policy and the rule of the central bank is the biggest ongoing conjuring show in the country - outshining even the mighty Derren Brown.

[SimonF]

Chris,

Sorry to be a bit long winded but a serious question for you: what does NOT austerity look like?

I am a bit more informed than the average person because I read you and a number of other serious blogs and serious publications and I get most of your arguments*, but I am a long way off fully understanding this issue. I also get that the nations accounts aren't like a households accounts and I understand the difference between debt and deficit.

I admit to being a bit of a neo-liberal, by the standards on here anyway, who doesn't like to see large Government, but I accept the need for welfare (my father was brought up in the Bradford slums between the wars) and health being free at the point of delivery.

However, when I read that George Osborne is racking up Government debt and people call it austerity and demand further spending I do wonder where it will end. It seems to me that austerity just means "borrowing and spending less than I would" to most left wingers.

This worries me because my formative years were the late 60s, 70s and early 80s and I definitely remember the pain of trying to curb inflation and I wouldn't want to inflict that on future generations.

So, what if you or Corbyn get it wrong and we end up with more spend than the predicted growth generates in taxes and have to go through the pain of killing inflation again? Is that risk of pain in the future a reasonable trade off against getting it right? Also, how do we guard against what I would regard as a race to the bottom as left wingers outbid each other to be "less austere than thou" because welfare and the NHS will always be rationed?

I realise that it isn't an easy answer but I also think that these are the questions the left has to answer if it is to convince my generation, the biggest Tory voting block (I don't btw), that the left can be trusted again.

*I think you, and Tim Worstall in his Forbes column, are amongst the best at explaining your arguments to the non-initiated in a way that lets us make up our own minds.

[Bob]

Simon, please read this blog

https://alittleecon.wordpress.com/2014/06/03/the-basics-of-modern-monetary-theory/

Long primer:

http://www.3spoken.co.uk/2010/04/primer-on-modern-monetary-theory-mmt.html

"It seems to me that austerity just means "borrowing and spending less than I would" to most left wingers."

In the real world

- we are sovereign in our own fiat currency and can 'afford' anything the government chooses to do - assuming real resources and people to do it.

- If the government spends £100 it will always get £100 back in tax as long as the tax rate is positive. One person's spending is another's income. The tax rate merely determines the number of transactions required before the spending finally disappears in tax.

- If the government doesn't get £100 back in any particular accounting period, that is because somebody somewhere in the private sector has saved some of it. The 'deficit' is therefore nothing more than the accounting counterparty to 'our savings'

- Government gilt issues are merely asset swaps. No new net financial assets are created in the private sector. The cash to buy them had to be issued by the BoE in the first place.

- Interest paid is just 'government spending' like any other. It is entirely voluntary and bond issues could be stopped tomorrow with little impact if bond interest was seen as not the best use of public money.

[Bob]

"but I accept the need for welfare"

What need for welfare? Once there is enough work for all who need it, then you can scrap welfare.

Then those that don't want to work can stand the consequences and those that do can earn a living wage for themselves and their families.

At the moment the two are lumped together and you have no way of telling them apart.

So rather than whining about it, create some jobs that pay a living wage:

http://www.3spoken.co.uk/2015/11/job-guarantee-jobs-for-people.html

[Calgacus]

SimonF:

The inflation of those years was almost entirely due to the oil crises. The problems were exacerbated by the supposed cures - high interest rates, high unemployment. Raising unemployment may occasionally disinflate in the short run, but in the long run it is inflationary. And the UK seriously suffered from a long, extremely foolish & destructive obsession to keep up the foreign exchange value of the pound.

The pattern of spending - basically top-down in the US & UK was important - it was more inflationary. There are basically no examples that I can think of of an advanced nation experiencing serious or sustained inflation due to bottom-up pro-employment spending of the kind that Keynes & MMT recommended -as opposed to the top-down-tending postwar Keynesians, who for all their faults were far in advance of today's economists.

Basically, the main point is that there is no reason ever for a single person to be unemployed. For unemploying people doesn't make anybody better off - it just may make some people relatively better off. Just the same way that human sacrifice (or even slavery really - consider Frederick Douglass's surprised first observations on the wealth of the US North) doesn't make anyone or any society better off. Jobs are not "welfare" - they're jobs, and all of everyone's wealth is provided by everyone else's work.

Is that risk of pain in the future a reasonable trade off against getting it right?
The illiterate and innumerate economists of today's "dark age of macroeconomics" simply don't do their math right. Abba Lerner answered your question long ago: Such arguments are like avoiding getting a little wet from a possible gentle rain by jumping into a lake right now.

In general, though, an openminded "Tory" outlook has much to recommend it. While it is given too short a shrift in much exposition of MMT / FF / Keynesian economics - it is encompassed and considered in the theory.

[George Carty]

Isn't the cause of our ballooning national (public + private) debt the fact that way too much of our money has been drained away into the central banks of mercantilist nations, mostly in East Asia?

The current "austerity" versus "stimulus" debate is merely about how that excessive debt is distributed between the domestic government, household and corporate sector: the real problem is the CURRENT ACCOUNT deficit stupid!

[Ralph Musgrave]

I second Bob's answer to Simon F.

[Bob]

"the real problem is the CURRENT ACCOUNT deficit stupid!"

There has been a lot of talk in the MMT community about this recently. For example Bill Mitchell's post:

http://bilbo.economicoutlook.net/blog/?p=32931

And this post questioning mainstream assumptions:

http://www.3spoken.co.uk/2015/11/why-economists-fail-at-foreign.html

"the fact that way too much of our money has been drained away"

That's fixed exchange rate thinking. A floating exchange rate is a one in one out operation. If you swap £s for $s you need someone in the other direction or the trade doesn't happen. So the ownership tag changes.

There really isn't much difference between someone saving in £s in Northern Ireland and the Republic of Ireland. Both cause a paradox of thrift effect that can be offset by government spending into the economy.

It'd be interesting to know how much of the capital flow comes from monetary creation - aka loans.

Borrowing in GBP to buy USD assets ought to alter the FX supply/demand balance and push the GBP down (a classic carry).

The open question for me is how does the market settle in aggregate, how much does bank lending play a part in that, and what would happen if you restricted lending by policy (say making loans for currency sales/purchase of foreign assets unenforceable).

If that is enforceable then purchase of foreign assets would require either equity or foreign sourced loans.

I would be interested to hear commentators views' on this, such as "blissex" and Ralph Musgrave.

[Keith]

The underlying problem may be, to answer your question, that demand stimulus violates the assumption that the Market knows best. This is the assumption all elite politicians have been indoctrinated into. And graduates in business and Finance since 1989. More Public spending to create jobs and restructure the national and local economy is a social democratic idea which involves the belief of market failure needing a state directed correction. Not a temporary one either but a permanent one. Economists and policy/ political elites may say they accept Market failure is a reality but their actions indicate they think the economy works by a godlike invisible hand which no one should try to contradict on pain of hell fire. The logic of Social democracy is that Politicians assume responsibility for outcomes rather than act as passive regulators. Elites seem unwilling to accept this obligation as they would piss off their pay masters and be open to rejection if the results disappoint. Neo -liberalism has the ironic attraction for politicians of providing a way to avoid responsibility for outcomes. May be having an excuse for doing nothing useful is what Politicians like about Thatcherism. Blame the poor or immigrants, it is so much easier.

[SimonF]

@Bob,

Well I've read your links and also been to the Modern Money Mechanics website, it was probably time I read a bit more about it anyway as it keeps cropping up.

I'm not convinced about it and I think you'll have a lot of time convincing the general public. It looks to me like a load of circular arguments being used to justify ever increasing Government spending, which is why the left like the idea I suppose.

But I note that even MMT has a limit on Government spending:

"This is not to say there are no restrictions on government spending. There clearly are – the quantity of real goods and services available for sale including all the unemployed labour. Further, it is important to understand that while the national government issuing a fiat currency is not financially constrained, its spending decisions (and taxation and borrowing decisions) impact on interest rates, economic growth, private investment, and price level movements."

which leads me to wonder that that limitation is at the moment.

As for your other link on full employment, my first thought was "give 'em spoons". Flippancy aside, what do you do if they don't want to do the Government appointed job? We've done away with slavery and I don't believe we'll wthdraw benefits and let them die on the streets, well apart from the Daily Mail perhaps, and you'd find me leading the charge to the barricades if we ever got to that point. Also, being forced to do a job you hate can be just as detrimental to the health as being in the long term unemployed.

Anyway, neither of the ideas answers the simple question I posed, what does NOT austerity look like in terms of deficit spending?

[Bob]

"Anyway, neither of the ideas answers the simple question I posed, what does NOT austerity look like in terms of deficit spending?"

Probably higher deficits - as people can save more and pay down debts. Why is that a bad thing? I can't really help people who can't see the flow and savings mechanics.

Deficits are not under the government's control, and besides it just a number. Who cares what the deficit is? Another metaphor may be in order:

http://www.3spoken.co.uk/2011/01/how-governments-super-platinum-credit.html

"Flippancy aside, what do you do if they don't want to do the Government appointed job?"

They don't get paid as much, if anything, by the state. At that point its really up to the charities - which YOU can contribute to if they feel that people not reciprocating in society need to be supported regardless.

"Also, being forced to do a job you hate can be just as detrimental to the health as being in the long term unemployed."

Jobs will be *fitted* to people as much as possible. If you refuse the job everyone has bent over backwards to make for you then you don't get paid. Simple as.

I can see government jobs at the living wage as eliminating a lot of crap jobs in the private sector via simple competition, with firms forced to automate work or pay higher wages.

And creating jobs where people live solves a micro problem -companies have to innovate their management and control techniques to take the work to where the people are. Hence why without it we have massive commute times, clogged roads and overloaded trains.

Open borders will be restricted to countries with the same social infrastructure as you - Job Guarantee, Universal Healthcare etc . Otherwise you go through a visa like the rest of the world outside the EU.

"being used to justify ever increasing Government spending, which is why the left like the idea I suppose."

Essentially you either have increased government spending, or you have confiscated savings from rich people - either via stock market collapses as we are seeing now, or vastly increased wealth taxation.

Got to sort out that paradox of thrift one way or another - and lending ever more money from banks as been shown not to work.

What are you people on the right-libertarian side proposing to do with all the people you sack and whose lives you ruin for "efficient" government, who then have to search a for a minimum wage job throughout the entire globe or at least the EU.

[gastro george]

"... what does NOT austerity look like in terms of deficit spending?"

You can make a perfectly reasonable argument that increased government expenditure will reduce the deficit, as it will lead to higher growth.

[SimonF]

OK, I'm obviously asking the question in the wrong way.

At the moment the (Tory)Government is spending x and this isn't enough for some people and they call it austerity. What they want is the Government to increase spending by y by borrowing more which, in the short term at least, will increase the deficit. I accept the argument that this extra spending will improve the economic situation and that will eventually reduce the deficit, maybe to zero and we even start paying down debt. Whether that is a good thing we can argue about later.

So, what is the value of y that means we are no longer in austerity? I'm not arguing we shouldn't do it, I'd just like to know what it is.

BTW, whenever I do political compass I come out as left libertarian, probably not as left as Chris but I'm definitely in that quadrant.

[Luis Enrique]

Simon F

well it's not a binary thing, and the deficit itself is not the right measure of austerity. For example if you think multipliers are large enough, you could cut the heck out of discretionary departmental government spending* and see the deficit rise if that does enough damage to the economy. Similarly perhaps you might be able to reduce the deficit by spending more.

* as opposed to automatic stabilisers like unemployment benefits - although that's complicated because you can try to cut these too, but even if you make payouts smaller if unemployment rises, total bill likely to too.

My answer to your question would be based on trends in government departmental spending - probably not in absolute terms because some things need to rise over time just to stay still - so maybe shares of GDP (although that's not perfect because denominator problematic, plus with ageing population we might expect NHS/GDP to be trending upwards) - and define austerity as falling govt spend/GDP. I think you could say we are no longer in austerity when the government has stopped telling departments to cut planned spending.