Before long, we’ll have Europe in the news again, as soon as everyone comes back from vacation (Hey America, remember vacation?). Greece, which is destined to be the first member state to exit the euro, requested a two-year extension of their austerity program, which would allow the government to temper it somewhat and get in a position to meet the deficit targets. Or at least that’s the theory. But with the country shedding 6.2% in GDP on an annualized basis, maintaining the kind of tax receipts necessary to close the deficit seems impossible. And therefore, even a slower austerity puts Greece into the same death spiral.
There are signs, however, at an intellectual level, that those who followed European leaders down this austerity path have finally begun to reject it, starting in the UK.
On 14 February 2010, 20 prominent economists wrote to the Sunday Times in support of George Osborne’s deficit reduction strategy. They said: “… in order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a Parliament, and there is a compelling case, all else equal, for the first measures beginning to take effect in the 2010/11 fiscal year.” The Chancellor hailed their letter as a “really significant moment in the economic debate”.
Two and a half years later, the UK is mired in a double-dip recession and Osborne is set to borrow £11.8bn more than Labour planned. For this week’s issue of the New Statesman (out tomorrow), we asked the 20 whether they regretted signing the letter and what they would do to stimulate growth. Of those who replied, only one, Albert Marcet of Barcelona Graduate School of Economics, was willing to repeat his endorsement of Osborne. Nine urged the Chancellor to abandon his opposition to fiscal stimulus and to promote growth through tax cuts and higher infrastructure spending, while others merely said “no comment” or were “on holiday”.
With the UK able to borrow at the lowest interest rates for 300 years (largely owing to its non-membership of the euro and its independent monetary policy), the signatories are both surprised and dismayed at Osborne’s failure to invest for growth. Since he entered the Treasury, the Chancellor has cut investment spending by £24.4bn, a net reduction of 48 per cent.
The UK really is a case of ideology trumping sanity. George Osborne does not deny that the country has its lowest borrowing costs in 300 years. And yet the economy remains mired in depression. You would think this would cause a resetting in viewpoints, that maybe lowering the interest rate isn’t the end-all be-all of economic theory, especially in the midst of a recession. That hasn’t happened to George Osborne, but it has to all of his economist supporters.
I get the sense that policymakers in the pro-austerity regions have completely lost the plot, and are now pressing forward out of a disinclination to admit they were ever wrong. You can reason from this take that we are ruled by psychopaths. I’m not going to get in the way of you and your conclusions.