Economic Policy for Lemmings

Economics is a complex study because economies are systems reliant on many variables which interact with each other in ways that are difficult to interpret. As an economist what you tend to do is to have a basic belief about how the interactions work and a particular focus on variables you think matter most. A Keynesian, for example, would focus strongly on effective demand and its interaction with government spending. A neoclassical would focus on tax cuts for the wealthy as a stimulus to economic activity. A green economist would make energy a key variable in their consideration, as well as money.

But surely we must be consistent in our basic understanding of how economies work. So if we think that spending cuts can lead to recession in one country this must be the case for another country that also has a similar level of economic development and is also a capitalist economy? I ask this question because of the bizarrely inconsistent reporting of the emergency debate in the US about whether to rush voluntarily over the 'fiscal cliff'. In 2011 Congress passed the Fiscal Control Act, limiting politicians' freedom to make economic policy, and particularly prohibiting any policy that would increase the country's enormous debt.

It is an indication of the atrophied state of US democracy and the poor quality of its politicians that they can only make policy by tying their own hands at some future date. If the do not agree today then both sides will lose: there will be a rollback of Bush's tax breaks for the wealthy matched by cuts in spending on programmes for the vulnerable, including Medicare.

The political fight between politicians who have had to accumulate vast sums of campaign funding just to reach office is an unseemly and unrepresentative one, but the reporting of the potential consequences of 'falling off the cliff' is more troubling. The BBC reports baldly that the spending cuts could 'trigger a US slowdown' that might also lead to an intensification of the recession in the global economy. If this is so easy to see from the perspective of the other side of the Atlantic, why is it so hard to see that similar policies to cut public spending are also destructive to our own economy? As US politicians are criticised for stumbling towards the edge of the cliff, why are the same journalists not criticising the lemming-like instincts of Osborne and chums who gleefully decided to push us all over that cliff in their first budget proposals?

As I said earlier, it is hard to explain how economies work, and much harder to predict future economic outcomes. That is precisely why it matters to have a basic theory of how the main variables interact. If you think that public spending cuts lead to recession then you should say that clearly, and as clearly at home as when critiquing somebody else's economy. What we have seen so far in terms of public-spending cuts has been just the overture: the huge cuts to disability payments, housing benefits and transfers to local authorities represent significant withdrawal of effective demand. The consequences for the national economy will be a year of even deeper recession in 2013.
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It's the System, Stupid!

So the Eurozone is on the brink of slipping back into Recession. The latest growth figures indicate the growing inequality that the single currency is causing between Europe's countries. The quaterly rates of growth range from -1.3% in Hungary to +1.3% in Finland.Meanwhile, annual rates of growth in 2012 compared with the same quarter in 2011 are truly shocking. Greece is showing a contraction of 6.2%, while the Portuguese economy contracted by 2.2%. The Netherlands shrank by 1.3%, while the UK is registering at zero. In the case of Greece, Spain and the countries that are showing disturbing rates of contraction, the austerity measures are the key cause of this. The failure to understand this appears to be wilful stupidity.

The first graphic indicates the relationship between government withdrawal of investment and the failure of growth. We can clearly see the economy take a nose-dive in 2008, then return to stability and slow growth as a result of Labour's stimulus policies, before nose-diving again once the Tories were elected. Do these politicians really not understand, or refuse to understand, the nature of economies as complex system, and the importance of multiplier effects? This refusal is a type of ideological blindness which is devastating all sectors of the UK economy and destroying jobs and livelihoods.

Why is it so easy for politicians to convince voters of this mistaken view of how an economy works? I think the answer lies partly in people's unwillingess to think systemically, and in this it is related to the problem we face as Greens of persuading people to think about ecological systems. As far as the economy is concerned, I have produced two graphics, which I hope help to explain how Osborne and his ilk have the economy completely wrong. We need to encourage people to stretch their minds to seeing the economy as a system, not as a linear series of transactions.

The first graphic represents the Osborne view of economics: a view that was, until recently, accepted as hegemonic by most media outlets. The first assumption of this model is that wealth is only created in the private sector. Tax then removes this wealth and feeds it to the greedy public sector, which destroys it. What remains stimulates consumption-based economic activity. If the money paid via tax to the public sector could be shrunk, as in the right-hand panel, then the private sector would expand and the economy would be more successful.

The second graphic represents the economy as a dynamic system, with public, private and third sectors all interacting. Wealth is generated in private, public and third sectors. Taxation is paid on all economic interactions, and that taxation becomes investment in further activity in all three of the sectors. Conclusion: the way to revive the economy is to increase the circulation of wealth and stimulate greater activity.

This is not a complicated argument, and it requires only a short application of mental effort to realise that the first model is simplistic and wrong. It is some combination of mental laziness and ideological perversion that prevents the majority of European citizens from grasping this - and demanding economic policies that respond to it.

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Interest, Money, but No Employment for Keynesian Scholars

Keynes was an example of that rare thing: a sociable and entertaining economist. Not only was he married to a Russian ballerina, he was a member of the Bloomsbury set and a friend of Virginia Woolf. According to a biopic of Wittgenstein by Derek Jarman that I watched recently, he also wore rather natty and colourful clothes. The film, with a script by Terry Eagleton, is well worth watching.

How glamorous this all seems compared to the life of an academic economist today. The poor quality of work is surely related to the absence of creativity and joy. Now Keynes has even been excluded from the conference celebrating the 75th annivesary of his own major work, The General Theory of Employment, Interest and Money. The work cannot be ignored, but its relevance in this time of crisis is so threatening that only those who oppose it were invited, according to a scathing critique by Ann Pettifor. Tweet