Austerity economics: how we were misled

Hindsight is wonderful thing in economics. Knowing exactly what should have been done at certain cross road in history to avert catastrophe has been the subject of many books and PhD thesis. The Former US Defence Secretary Robert S. McNamara once said that “historians are not interested in counterfactuals. The what might have beens.” Economists certainly are. Economists use the data from lead indicators, current indicators and lag indicators to work out exactly what the state of the economy is and what would be the best course of action. Sometimes this is simple, growth is low interest rates are cut and households have more money. Thus aggregate demand is boosted and there is a spike in growth. Usually it is much more complicated than that and the data shows no clear path to be taken out of a crisis.

In the absence of knowing for certain what needs be done, politics often comes into play in making the decision. In other words, the debate becomes about what should be done. The root of all politics is philosophy. Governments decided on a philosophy of marketization or state intervention and from this their politics and the economics follows. By the time this reaches the public in the form of social pressures it often appears that the facts have been twisted to be in line with the philosophy.

With the benefit of hindsight we can see that the Thatcher government’s curtailing of union powers was philosophical and not economic. It stemmed from her government’s ideological commitment to neo-liberalism and not a genuine need to decrease union powers to make the economy more prosperous and therefore grow faster. At the time it was sold as such but now we can see how the economics flowed from the politics and that the politics had its root in her philosophical views.

It is no longer fashionable for parties to have a clear ideology but there is still philosophy at the root of their politics. Nearly two years into the coalition government, with the benefit of hindsight, we can start to see how the philosophy has guided the economics and where the mistakes were made.

Austerity is the economics of the coalition government. In the campaign there was also a commitment to opening public services to market competition but this has been less forthcoming, especially with the woes associated with NHS reforms. When George Osborne became Chancellor he offered us a simple economic parable, cut the state and the private sector will grow. Two years later with growth lacklustre at best, unemployment higher than it has been at any point under Labour and the country teetering on the brink of another recession this parable seems more like a fairy tale - or a coma fantasy. In years to come Osborne’s austerity program will be seen as a result of his philosophical commitment to neo-liberalism rather than a response to the economic necessity of cutting the budget deficit. This goes hand in hand with his proposals to open public services to competition from private firms. Right now the philosophy is still being sold as economics, but it is politicians who are driving the economics and their philosophy which drives them.

Sociology is applied economics and the social consequence of economics facts - such as rising number of the unemployed – are seen in urban decay and public order offences. Last August’s riots were in essence the application of economic factors to the population and as incomes continue to fall and more and more people are out of work social breakdown becomes more likely.

Social breakdown is also in evidence in Greece were rioting against the government’s austerity program has become a feature of daily life. The Greek coalition government is attempting to impose a gruelling program of public sector cuts in order to secure essential funds from the European Central Bank and the International Monetary Fund to prevent a default on their sovereign debt. However with the Greek economy entering its fifth consecutive year of recession and the most recent data indicating that this recession is depending and not improving, austerity does not seem like the best course of action. Couple this with evidence from the UK that our recovery has faltered since the beginning of our program of cuts and the case for austerity in Greece looks pretty week. Of course the pressure for austerity emanates from the ECB and IMF and their control of the bail out money. These bodies, the IMF especially, also have philosophical ties to neo-liberalism and use their status as the world’s creditor to pressure their own political agenda. Economic good comes behind a philosophical world view and social consequences to the ordinary Greeks comes last of all. Hence the neo-liberal agenda of the IMF and others leads to rioting on the streets of Athens.

Austerity was sold to the public as economics when in actual fact it is a philosophy; a philosophy which the data – the life blood of economics – does not support. Until economists can see the future, they will always need philosophy and politics to guide them. Yet philosophy and politics need be informed the data of economic reality and must consider the social consequences of their actions. Philosophy and Politics are essential to governance, as they are a vision to aim for and a direction to travel in. Even this blog, ostensibly an economics blog, frequently wonders into politics and philosophy.

Hindsight is useful for knowing exactly which economic policy should have been adopted at a cross roads - like the one Britain and the Euro face. Lacking hindsight in the present we must always be aware that sometimes when politicians are selling us economic necessity they are in fact selling us their philosophical desires.