Johann Hari: Britain's not bust. So don't use it as an excuse to impose cuts
The move to slash public spending is based on a faulty reading of economics
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Independent Minds
DARREN DISS
Johann Hari believes that the move to slash public spending is based on a faulty reading of economics
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We thought the fever of this autumn was going to be swine flu, but we were wrong. It has turned out to be National Debt Hysteria. Our entire political class has taken to their beds with this fever, crying for nurse to bring cuts, cuts, cuts. The symptoms are simple: the sufferer becomes convinced that debt levels lower than almost all other wealthy nations, and lower than almost all of modern British history, are "a disaster", and so we must immediately slash our spending. They keep up this wail even though the most qualified doctors, like the winner of this year's Nobel Prize for Economics, Professor Paul Krugman, stand by their beds and tell them this will bring our real sickness, the recession, back with a vengeance.
The hysteria will reach a Cameroonian crescendo today when the Tory leader delivers his party conference speech promising Austerity For All. (Except for millionaires like himself, of course, who will receive a massive inheritance tax cut.) So let's calmly study the patient – and see how this National Debt Hysteria is going to do us far more harm that the real national debt ever could.
Let's start with a few facts that have been forgotten. Britain went into this recession with one of the lowest debt levels in the developed world. According to the International Monetary Fund, Japan's debt in 2008 was 198 per cent of national GDP, Italy's was 104 per cent, Germany's was 76 per cent, France's was 65 per cent, the US's was 61 per cent, and Britain's was 43 per cent. All countries have rapidly increased borrowing during this recession – for very good reasons we'll get to in a second – and Britain has nudged closer to the middle of the league table. But to claim, as Cameron does, that Gordon Brown had "racked up debts in the good times" so we "can't afford more" is simply untrue.
Cameron and George Osborne say that a national debt at 75 per cent of GDP makes a country "bust." Using this measure, the most successful economies in the world are bankrupt, and have been for a long time. Japan has apparently been trebly "bust" since the 1970s, yet it has just elected a government committed to higher public spending. The US, Germany – "bust" and "bust", yet spending more.
Oh, and Britain has been "bust" for almost its entire history since the 1750s if Cameron's standard is right. There have only been two 40-year periods when we had a debt that dipped below Cameron's supposed catastrophe-level: the end of the 19th century, and from the 1970s to now. As the economist Will Hutton puts it: "From 1750 to 1870, Britain won wars, assembled an astonishing navy, built an empire and launched the Industrial Revolution to become the envy of Europe, yet the national debt was consistently above 80 per cent of GDP. Nobody cared. High national debt was a precondition for winning two world wars in the 20th century. Periods when the over-riding preoccupation has been lowering the national debt have coincided with industrial, economic and strategic decline. So it will again."
So is the world – and Britain's history – bankrupt, or is Cameron's reasoning? In all indebted countries, there have always been people who warned that the fiscal sky was about to fall in. In 1752 the philosopher David Hume cried: "Either the nation must destroy public credit, or public credit will destroy the nation." As the great historian Thomas Macaulay explained: "At every stage in the growth of the debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt went on growing, and still bankruptcy and ruin were as remote as ever."
But on the basis of this faulty reading of economics, we are about to dramatically slash our public spending – in a way that will cause real harm, rather than the phantasms conjured by Cameron.
There is a reason why governments should increase spending in a recession, explained by John Maynard Keynes from the 1920s onwards. When the economy sickens, businesses and consumers stop spending except on essentials. This causes demand to fall. If the government cuts back at the same time, then nobody is buying anything – and recession turns into depression. The only way out is for governments to pick up the slack and borrow money to spend on public projects and subsidies that get money running through the economy again. Then, once we are back to work, the government pays down the debt with the proceeds of growth.
This has been demonstrated to work time and again. In a recession, it's irrational for you to rack up debt, but essential for the government to. Keynes called this "the paradox of thrift." Yet Cameron and Osborne deny these truths: Osborne actually claims public spending claimed no role in ending the Great Depression.
What happens if governments – in the middle of rising unemployment – panic about debt and stop stimulating the economy? We don't need to speculate. During the 1930s, Franklin Roosevelt launched a huge stimulus funded by debt, and the economy began to recover. Then, in 1935 and 1936, he was besieged by people offering the Cameron argument: the recovery will be stronger if we cut the debt now. The result was that the depression came back with a nasty slap, and it was only wiped out when the gigantic stimulus of the Second World War sent debt soaring to 119 per cent of GDP. This debt was easily repaid once this stimulus paved the way for the biggest boom in American history.
Cameron and Osborne would repeat this mistake. When I read their statements to Krugman – the Nobel Prize-winning expert on depressions – he said he was "shocked." I asked if this approach would make the recession worse, and he said: "Yes. For sure." Professor David Blanchflower, until recently on the Bank of England's monetary policy committee, warns that Osborne's cuts could well send unemployment soaring to five million.
Indeed, Cameron's cuts set us up for failure twice over. Stimulus spending can – if it's done well – not only get the immediate economy running again, but set us up for future success. A recent detailed US study by Colombia Teachers' College found that cutting high-school dropout rates in half would generate $45bn in new tax revenues, by saving on welfare payments, imprisonment, and so on. Cameron is proposing to do precisely the opposite. He will end the Educational Maintenance Allowance of £30 a week that makes it possible for poor kids to stay on to sixth form college, setting them up for a lifetime of diminished expectations.
So why is Cameron getting away with it? Partly, of course, it is due to a media that has an allergy to arguments that take more than 30 seconds to explain and a bias to the Tories. But it is also due to a failure by Labour and the Lib Dems. Instead of standing up for the idea of a debt-funded stimulus to get us through the recession, they have panicked and accepted the bogus Tory framing. They have been reduced to whimpering: we do need cuts now, only we'll be a little nicer in the way we do it. It has been a disaster. The British people are not having the looming Cameron slasher flick explained to them: we will only grasp the plot once the film has begun.
The biggest risk to our economy today is not debt, it is the fear of debt. Somebody needs to invent a Tamiflu for our national hysteria before we start frantically cutting into our flesh to carve out a hallucinatory disease.
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Comments
"Johann Hari believes that the move to slash public spending is based on a faulty reading of economics"
And Hari studied economics where and when exactly?
And he spent how many years working in the City or at an economic think tank?
You really have to admire the man's arrogance! A playwright presumes to address the nation on the issue of Britiain's mountain of debt based on, eh, his total ignorance of the subject! Hah! Whoever said Britain is a nation of enthusiastic amateurs was wide of the mark. Based on Hari Britain is a nation of rank amateurs talking utter nonsense about subjects of which they know nothing and believing through pure chuzpaz they can brazen it out.
Back in the real world Darling's prediction of a current account budget deficit in the financial year 2009-10 of £175 billion is already looking hopelessly optimistic. Only a playwright or a bus driver could fail to understand the ernormity of the debt crisis Britain is building up month by month.
Here's hoping Hari never gets anywhere the levers of economic management in Britain. We're in a big enough mess without his tuppence worth of ignorance.
In this situation the government steps in to create extra demand and get the economy going again. One of the great weaknesses of the conservative criticism of public spending. Is their belief that somehow any money spent by the public sector is wasted, it just disappears from the economy. For a start the public sector provides useful services which the private sector relies on. An educated workforce, a transport systems, courts to protect property and enforce contracts. The public sector also places orders with private sector firms. Public sector workers spend their money in the same places as their private sector counterparts. The public sector is part of the economy, not separate from it.
If the government stops spending in the middle of a recession, the deficit will not decrease. The decrease in overall demand caused by lower government spending will lead to more job losses in the private sector. A lower tax take, and the government is back where it began. The deficit can be paid off, when the economy starts to grow; the tax revenue will tend to increase in a growing economy. In that respect you are right, Gordon borrowed when he shouldn't have. However cutting government spending now would be a much bigger mistake. This seems to defy common-sense, that is why it is called a paradox.
Well we can't - there is interest on debt and labour have created masses of it - like they always do.
They know best how to spend other peoples money - its what labour do - piss it away on nothing.
Britain will see a big drop in the standard of living and airheads like hari are to blame.
Sad what happened. The uk ruined by generations of naive, liberal elite politicians more interested in themselves than the people.
I think you should stick to the Daily Mail.
Anyway, 'Cameron' sounds a bit African to me.
As a journalist, he ought to know better than cherrypicking information to suit an argument.
Reducing debt is not the entire solution, but it is a very important component. Brown invented his 40% limit many years ago, presumably based on sound economic advice from "experts", he himself being more of a historian. Using Johann's historical summary, this debt level is a lowish figure, but it must have been deemed important, otherwise why not align it with those other "debt-ridden" economic competitors?
A point not mentioned was Brown's deliberate avoidance of balancing budgets, even when global growth ran for a decade. He insisted on spending at a higher rate than GDP growth on public services, based on his misguided belief that there would be "no more boom and bust" - that growth was "hard-wired" into his system, apparently.
But that could only continue - if it ever could - if the global economy's growth was similarly guaranteed. Of course it wasn't and couldn't be.
Debt was ballooning everywhere, except in a few places like Australia which had paid off its debts and had sound banks regulated properly by the RBA. Meanwhile, Brown was hosing money up against the wall at a colossal rate, while the outcomes were diminishing in quality - medical, hospital, education - but where components of the cost of living, like transport, energy, communications, etc were skyrocketing.
Another point not addressed here, and without quoted comment from Krugman, is the future growth of the economy. When you have a very unbalanced economy like Britain's, heavily dependent on finance, insurance, tourism, etc, but weak in manufacturing and exports, "you have to ask yourself a question". Where's the growth coming from?
Treasury and Darling give no detail (and the CBI are troubled) - they can't, because their projections are not calculated from basics. They use long-term trend figures and historical outcomes from previous recessions. But this is an atypical recession - it's a global recession, probably better described as a massive economic correction.
Brown is caught with twin deficits - budget and trade - and the numbers are accumulating. Without proper economic growth, with substantial exports, the massive debt cannot be serviced without spending cuts. That rate of growth is unlikely, so cuts are necessary.
Everyone, including Johann, knows that billions are wasted each year on unproductive uses. By cutting that down or out, the money can be used to generate wealth and improve services...not paying for an army of public servants producing unnecessary reports.
Businesses have been hamstrung for decades by a mountain of costly regulation, legislation and taxes, and struggle to keep afloat with their employees. This is where the wealth comes from. Johann's claim about unemployment is presumably based mainly on public sector losses, though the private sector would also be affected by government cuts.
The challenge is to focus on wealth production at the expense of administration, but that is not being helped by an inadequate education system. Very few seem to advocate a return to or a move towards a version of grammar schools and those times. I don't think many have disputed the access to good education and outcomes in those times, but it seems they are right out of favour - maybe it's hindered by some people bandying about words like "elitism", though many were happy to enjoy top uni educations themselves.
The UK has lower business taxes than the rest of Europe.
The regulation and legislation tends to be there to protect the rest of us, particularly employees and consumers, from practices that most would find abhorrent, but which directors of large companies feel they ought to be entitled to get away with.
In difficult times like these, debt will always increase through interest, unless the balance is paid down. And can't it compound!
Unfortunately, many assets will have simultaneously reduced in value (e.g. house prices and business values ). Result? As Wilkins Micawber said, "Misery". Or, "repossession, repossession!", administration or bankrupcy.
Governments have the "luxury" of spreading the pain and the repayments over longer periods than with household budgets, but that only prolongs the agony - or doesn't Johann recognize that?
But perhaps the key to all this is the Growth Rate. Where will the growth come from? Can Britain obtain a good share of it? How long will that last?
For if growth is L-shaped, then that debt gets increasingly painful and possibly unmanageable (IMF, anybody?) - something that economists, like Krugman, and non-economists, like Hari, have to consider...not just put the problem on the backburner for the next government to handle.
Hasn't the UK been slipping down the international ladder in virtually everything these last 12 years, because problems are covered up, lied about or simply ignored as false or ignorant claims by the Tories?
Quite so. Here's an idea. All journalists must post their CV and the research with internet links to sources that they use to reach their "understanding" of the subject they are reporting on.
Hysteria recedes when the witch hunters are driven from the village for John it is people like you that have created this infantile hysteria that poisons every political subject and debate. For people rely on the media, and they are failed, I would say deliberately lied to, by it.
Regular readers of my comments will know I try and establish facts. I feel very lonely in the slavering mob! Still, the Indy should have some factual information is my feeling.
On UK debt btw, quite correct. We are not bust. The net public + private assets of the UK are? Never see that data do we! Frankly its probably because "we" are not interested as its too difficult and would prefer some shallow witch hunt instead. So fall empires. They rot from within, from the head.
Do they only pay the minimum wage?
Yet another load of complete drivel courtesy of Mr. Hari.
-the UK had debt/GDP of some 150% around 1950;
-in 1950 you needed over 14 Swiss francs to but 1 pound, now it's just over 1.6 francs;
-the UK's inflation rate since the 1950s has been 4.5 times that of Switzerland, making a basket of goods costing 1 pounds around 1950 cost 18 quid now, compared to an increase from 1 fanc to 4.5 francs for the swiss.
The UK is running a structural (i.e. post-recession, normal growth) deficit of at least 100 billion a year, or 4,250 pounds per person working in the private sector.
Inflation is on its way. I do hope that Mr Hari has an indexed pension.
PS Mr Krugman himself wrote in one of his papers that fiscal stimulus can only help a country out of a slump if you apply some aggressive assumptions. (type "liquidity trap Krugman" into a search engine and read it towards the end).
By the time he has finished pissing our money against a wall the interest payments on the debt will be around £50 billion a year.
Maybe its time to buy some Euros and gold........maybe its already to late.....
On the basis of the post-crisis period, spurred in large part by the regulatory climate in this country (and not just U.S. imports) I would say the current administration has shown a level of incompetence and worse in many respects, and luck and judgement in others. It is time for a new approach and some fresh thinking and that is what I think many people will turn to the opposition parties for. And, to be frank, Jonathan, there is no more money left, no matter how you parse it, or spread the load to our great-great-great (and likely to be deeply ungrateful) grandchildren. Most countries are now beginning to eye the stimulus exit, and it is time we did too.
What to do about our legions of zombie banks is another topic, but I want to keep this short.
Would the last person to lose their job or leave the country after Dave and George are elected please switch off the lights?
I wouldn't accuse others of making ignorant comments if that's the best you have to offer.
Now let's deal with deficits and spending.
You are both right and wrong ,thats the economist bit UK debt appeared to be low but only if you ignore the off balance sheet items ,the problem with that is the people who loan the money don't .
There is this stupid idea that all spending is good ,if it is wasted and then requires repayment of debt then it is a drag long.term on the economy.
Finally on borrowing we are in competition with other states and companies to raise this money ,the crowding out effect as other shave noted gives rise to higher interest rates and a shortage of credit again a drag on the economy.
I have commented before that I wouldn't have started from here and the choices are difficult but remember this is a credit based crisis and until deleveraging and bad assets are out of the system growth will be insipid .
Finally all deficits are base on revenue as well as expenditure .The Uk tax system is highly geared to produce ratcheted marginal income based on growth particularly in asset values.Someone shot that goose so deficits will bring tax increases and the consumer(more wise than Govt) is preparing for that hence demand depressed as well as the savings issue related to debt and confidence.
I offer you one question about future growth ,was past growth in gdp overstated if the financial services growth was overstated by unreal assets maybe the tax system was also .
The way out ,long haul and or the debts (Govt consumer company) are inflated away wish I could be more optimistic but we are not getting out of here easily.Please do not keep believing the Govt line
they got us here(and Krugman et al) and there isn't a magic Keynsian solution. The governor of the BoE said in evidence to the treasury committee our improvement in gdp growth was due to end of destocking, sterling devaluation(exports) and extrordinary monetary policy .No mention of fiscal stimulus and isn't the Govt intending to remove the Vat cut and didn't they raise some taxes so they are not being consistent.
1. Labour did not rack up debt during the good times. In fact we entered the recession with a historically low level of debt.
2. We do not have an exceptionally large level of debt now. The UK natioanl debt is not high when compared to UK debt levels historically, or the debt levels of other major economies.
3. Cutting spending in times of recession makes things worse. This was not only demonstrated in the USA during the great depression, but by the last Tory government in the 80s.
The increasing level of dbt is certainly something to monitor and be concerned about, but it is certainly nothing to panic over.
Please dopn't be too light on debt.
http://www.prosperityuk.com/prosper
All this frothing-at-the-mouth over something which few understand is crazy.
"I care not what puppet is placed upon the throne of England
to rule the Empire on which the sun never sets.
The man who controls Britain's money supply controls the
British Empire, and I control the British money supply."
- Nathan Mayer Rothschild, in 1815,
once he had established a firm grip on the Bank
of England
Ours is not a debt of honour but rather a debt based on ignorance and the willful connivance
of those who are charged with economic governance.
Those who are about to retort "...but the BOE was nationalised back in the forties...", don't
bother. The 'front of office' may so have been, but the back-room boys still pull the strings.
Don't be fooled by the name, the Bank of England is not "Englands Bank", it's just a name.
Toolan
However where John Hari misses the point, as does almost everyone else, is that this is not a recession like any that have happened previously. We are not back in the 1930s or the '80s or whenever. This recession fundamentally was caused by an overreaching world economy coming to a brief but very damaging collision with reality - that is the reality of the planet to provide us with sufficient resources at a price we could afford, to continue our incontinent expansion. That was why in mid 2008 oil, coal, steel, concrete, nickel, copper, chromium, lead, gold all surged in price to levels never before seen, tripling, quadrupling, quintupling over a matter of a few short years. We saw, for a very short time, the Club of Rome's "Limits to Growth",
This being so, it is futile now to expect John Hari's policies to work, even supposing we were able to "stimulate" the economy to something like it was prior to 2008, we would then find ourselves back at the start of another global collapse.
We have to really start thinking a little bit more cleverly than we are if we are going to get out of this mess without a great deal of suffering and sorrow.
But no matter – it sounds caring and no doubt played well to focus groups, and that's enough to make it Labour policy.
As I rather suspected, the picture is a bit more complex. It doesn’t really support either his bullishness or the semi hysteria of much of the political class.
The UKs debt has indeed been lower than any other G7 nation from the early 1980s until about now.
It is set to overtake Canada, Germany and France but remain marginally below the USA and well below Italy and Japan.
If we look at the periods where countries have had abnormally high debt levels – Italy since the early 1980s, Japan since the early 1990s, and Canada from the mid 80s until a few years ago, all of these have been periods of relatively poor economic performance.
Debt may be a symptom rather than a cause of poor performance, but the evidence suggests that it does nothing to fix it, at least in the short term.
My tentative conclusion: Tory talk of sharp cuts now is irresponsible. The Lib Dem and Labour approaches are probably realistic.
In the long term though we need to accept that the deficit is not the strategic cause of our current mess. That lies more with the structure of the economy – and the inherent instabilities.
All of the parties need to spend more time addressing this.
selling gold at the bottom of the market;
and bailing out bankrupt banks which should have been treated by their own standards;
oopps I nearly for got totally incompetent government
Oh. An invocation of Paul Krugman. A nice eye-opened on Krugman's economic stance can be found here: http://blog.mises.org/archives/010710.a
You do like your high horse, don't you?
But this does not take into account PFI projects (some £70 billion), or our underfunded pension system, and whatever other "off balance sheet" debt the politicians have been hiding for years.
All the same, he's right about the risk of unemployment going bananas if Cameron and Osbourne get their way.
This is like 1937 America. FDR had put some money into the economy in the early 1930s, but when it looked like the worst was over he turned off the taps. The USA plunged back into the depression and only WW2 fixed things. The USA has been a war economy ever since.
Sorry Mr Hari, but you miss an important point;.. debt has to be servicable. It's o.k
making these comparisons , but are they real ? This country has worked it's way
out of debt before, after WW2, when there was an appetite for growth.
Personally I havn't got your youthful optimism.
If we get away , with a flat line for ten years, pay off some of these debts, to me
that will be a "good job " in the circumstances and,
Unlike some who want the free market at full tilt, this will lead to a take over
mentality...............................
havn't we lost enough already ?
Recession is analgous with a drowning swimmer - in a recession you're sinking .... one ... two then five ... then ten feet under water. The recession ends and you stop sinking ... but your'e still ten feet under water for God's sake! Your'e still drowning and your'e weighted down with lead ballast representing all the public and private debt.
We're in for a long haul bumping along the bottom of the trough. None of it is helped by the global drift of economic activity away from the west to the BRIC countries; nor by the mess that Brown has created over the past 12 years deliberately creating ... [gerrymandering I believe it's called] .... a dependent electorate of public servant jobsworths - "it's more than my job's worth to vote against Labour" - and benefit junkies. In doing so he has hidden the true unemployed total of 6 million. He also DELIBERATELY scuppered our unique private pension system with his 5 billion a year tax raid. This was designed to [a] help finance his dependent electorate and [b] to make pensioners also dependent on the Labour government. The tax credit system is another refinement of this deliberate ploy. He thought it was all going to be paid for by milking the complex bubbles in the financial derivatives market..... and these could never burst since he'd abolished boom and bust! It was ... and is ....nothing short of treason......."orf with 'is head Ma'am"
Even those who rely on antediluvian similes for their economic guidance must realise that you don't rob a debtor when he's trying to get his bus fare for work together.
And, as has been remarked by many, the Uk Economy is not directly comparable to a corner shop.
France has survived the recession quite well partly because she has a high level of public spending: this is not the time to slash ours.