Friday 15 January 2010
Johann Hari: Cameronomics have been tried in Ireland - and the result?
The Celtic Tiger had its claws ripped out, and it's shaking at the back of the cage
It is not only David Cameron's glossy, tie-less election poster that has been airbrushed. The ugly spots and oily patches in the Tory leader's policies have also been successfully pixellated out of the public mind – by a Prime Minister with the communications skills of a malfunctioning speak-your-weight machine, by a Labour Party engaged in self-strangulation, and by a malfunctioning media pitched at the intellectual level of the Mr Men books. So nobody sees Cameron's policies; nobody knows. Most of us will only discover them after he has won, when we will wonder why nobody told us this was coming.
For example, a perfect laboratory experiment in Cameronomics has been taking place just next door, in Ireland – but who knows about it? One of the remaining real differences between Labour and the Conservatives is over how governments should behave in a recession. At first glance, David Cameron's proposal sounds like common sense. When times are bad, you – as an individual, or a family – figure out how to cut your spending and pay down your debts. No more fancy nights out. Holiday at home. Put the stuff you don't want on eBay.
Cameron says government should do the same: it should slash its debts, even if that means dramatically slashing spending. This was the view of economics that prevailed until the Great Depression – and it has only just made a comeback.
Gordon Brown has a different view. It has underpinned his economic decisions since the Great Crash of 2008 – but unfortunately, he is such an atrocious communicator that I will have to quote somebody else to explain it. Barack Obama says: "Economists on both the left and right agree that the last thing a government should do in the middle of a recession is to cut back on spending. You see, when this recession began, many families sat around their kitchen table and tried to figure out where they could cut back. That is a completely responsible and understandable reaction. But if every family in America cuts back, then no one is spending any money, which means there are more layoffs, and the economy gets even worse. That's why the government has to step in and temporarily boost spending in order to stimulate demand." You keep stimulating until we are back on our feet – and then you pay back the debt in the good times.
This is, when you first hear it, counter-intuitive. It means governments have to decide to spend more when we as individuals are deciding to spend less. It can seem hard for those of us who are not economists to figure out which of these views is right. Sure, we can listen to people like the Nobel Prize winner for Economics Paul Krugman, who told me he was "shocked" by Cameron's policies and they would worsen the recession "for sure". We can see that the Great Depression got much worse when governments took the Cameron route, and was ended by a giant programme of debt-funded government spending. But the best guide is to look at countries that are trying the Cameron approach and countries that are trying the opposite tactics now, and check the results.
Throughout the nineties and the noughties, Ireland was held up as a poster child by the right. People like John Redwood and (yes) David Cameron said its model of low taxes and almost-total deregulation showed the way forward for Britain. In fact it produced the most corrupt and over-extended banking sector outside Iceland. Just one bank – Anglo Irish – is now on course to receive a €30bn extended bailout, equivalent to every penny of tax collected in the country in 2009. The Celtic Tiger had its claws ripped out, and it's shaking at the back of its cage.
But the Irish government has continued to cleave to Tory solutions. After the crash, its government rejected the case for a stimulus package, and insisted its "number one priority" was to "cut the deficit and get the public finances back in order". It sawed deep into spending on teachers, pupils, the disabled, and childcare. Out of total annual spending of €60bn, they are en route to ditching €15bn. The government is paying off its debt as its first, second and third priority, just as Cameron demands.
So what happened? The economy has collapsed. As the economist Rob Brown writes in the latest issue of the New Statesman, the country is now embarked on "an astonishing 15 per cent shrinkage in the Irish economy overall – the sharpest contraction experienced by any advanced industrial nation in peacetime". Unemployment has soared to 12.5 per cent: it would be even higher if so many young people hadn't left the country. Only 14 per cent of Irish citizens are happy with the government's performance.
By contrast, the countries that have most strongly defied Cameronomics are pulling out of the recession first and fastest. China has ramped up state spending to 88 percent of GDP growth, paid for by increased government debt. This is Brown to the power of a hundred. If Cameron was right, this would be economic suicide, and they would be plummeting down. In fact, the recession there is now over. That's why even right-wing leaders that initially shared Cameron's instincts, like Angela Merkel, are reversing course.
Obviously, this is a crucial debate that will alter your life and mine – but have you heard it plainly expressed anywhere? Cameron states his incorrect case with his usual suave charm, while Labour isn't even putting their correct case at all. Incredibly, there has clearly been a decision by the Government that explaining the case for Keynesianism is too complicated, so they won't even try. When they are challenged about the deficit, they should reply: "Yes, we absolutely have increased the deficit. That is what you should do in a recession. And we will keep on increasing the deficit and stimulating the economy until this nightmare is over. Look at Ireland. Is that what you want?" (If they were smarter still, they'd use the stimulus money on launching Britain on a massive, labour-intensive transition to renewable energy sources, solving two crises at once.)
Instead, Labour offers a mumbled, evasive pledge that they too will cut the deficit, just a bit later. Without hearing the case for Keynesianism, this just sounds like incompetence or evasiveness. They have set themselves an artificial target of cutting it by half in the next four years. This throws away their best argument – and the theory that has guided their response to the recession from the start. If the global economy gets worse, we will need a lot more stimulus, funded by borrowing, to stave off terrible pain.
The idea that we can't do this because we have maxed-out the national credit card is simply false. For almost the entire time since the 1750s, Britain's national debt – now at 80 per cent of GDP – has been as high or higher than today. Japan's is currently 198 per cent, and they have no problem getting international loans at reasonable rates.
Why won't Labour say so? Why make it seem like Cameron is on to something, when he is so wrong? Brown seems to think that matching the Tory language in this way cleverly "neutralises" their argument. It doesn't. It makes it seem like they were right all along.
There are too many people's lives at stake to continue with this empty fact-free conversation. Labour's policies have been bitterly disappointing – but David Cameron's set us up for economic disaster. When will we start to say so?
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