The economic consequences of George Osborne
Posted on Monday 24 May, 2010
Filed Under Economics
TO PARAPHRASE the words of a truly awful 1960s musical hit, this is famously the dawning of the age of austerity. My prediction is that the results of rapidly throwing the Keynesian multiplier into reverse gear will not at all be pretty.
The measures just unveiled by George Osborne can only mean lower national income, less investment and consumption, and higher unemployment.
Forget the glib Con Dem sales pitch promises to ring-fence frontline services. Taking this amount of money out of the economy – and remember that it represents merely the down payment for what is later to come – is going to hurt everybody, and hurt the weakest most of all.
While the complexities are obviously plentiful, the basic reasons why this must be so are easy enough to outline. Government outlays boost overall spending by a multiple of those outlays.
Most of us spend most of every extra pound we get, predominantly on consumption goods. That extra spending encourages employers to take on more workers. These workers get paid, and thereby further increase consumer spending.
True, some of the cash gets saved. So at each step, the growth in spending is smaller than in the previous step, and eventually the stimulus peters out. But in short, the Keynesian multiplier effect ensures that the British economy gets a lot of bang for the government spending buck.
The snag is, the process works the other way round as well. Government cuts reduce overall spending by a multiple of those cuts. So the £6.2bn-worth of savings Osborne has announced is going to make us all a lot more than £6.2m poorer.
Everything about the package underlines the profound commitment to antediluvian Austrian economics that now constitutes the new Treasury orthodoxy.
To counter the inevitable deflationary impact, the Bank of England is likely to expand the money supply and keep interest rates low. Lower interest rates will put back demand for sterling, and thus lower the exchange rate.
Here the hope is that currency devaluation will boost exports, which all else being equal, it should do. But it will also damage businesses that need to import, and will increase the prices of imported food, clothes and other necessities.
Consumer confidence will be clobbered, as people worry about unemployment, which is already 2.5m. The dole queue will lengthen substantially, as many public sector workers are forced to sign on. My partner has already been told she will be one of them.
Consumption will decline, generating a vicious circle of lower sales and profitability. There will be bankruptcies and more jobless, and more reverse gear Keynesianism.
As things stand, UK growth is close to zero and inflation close to 5%. The worst case outcome of the coalition’s bungling will be to exacerbate both problems, with a return to the toxic cocktail that those who can remember the 1970s will know as stagflation.
None of this goes beyond first year economics, so all of the above will be obvious to Osborne and David Laws. Given a world economy in a condition that could easily herald a second global downturn, such a strategy is unforgiveable.
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Dave,
As you say, ‘None of this goes beyond first year economics, so all of the above will be obvious to Osborne and David Laws.’ So what’s really going on here? I never even got to first year economics, so I’d appreciate a little direction here. It seems to me that public money bailed out the banks and now the public are going to pay again with cuts to jobs and services. If as David Harvey argues, neo-liberalism was about capital clawing back the gains made by labour after the war, surely the government’s cuts to public spending will consolidate capital’s hegemony only further. Seen in that light, there is a clear rationale to Osborne and Laws cuts.
As I say, I’m no student of economics but I don’t know how else to explain what’s going on at the moment.
I think Harvey is correct. This is a quite eye popping transfer of wealth from the working class to the capitalist class, and more specifically the financial capitalist class. Though in the modern era the industrial and financial capitalists are often one and the same. The primary reason this can be achieved or they think they can get away with it is the weakness of the Labour movement and the atomisation of the working class. For that the trade union bureaucracy and New Labour must shoulder a great portion of the blame, if not all of it!
We will have to see how the Trade unions now react to these assaults, I am not hopeful. New Labour will be of no use whatsoever. But it does show and should be emphasised that these cuts are built on the assumption of a weak Labour movement ready to accept pay cuts and a rising cost of living.
There is a debate on the left between those who believe profitability is strong and the economic outlook is good meaning these cuts are pure vindictive thievery and those who believe capitalism is facing economic stagnation/barriers to expansion meaning capitalism cannot sustain the development we have seen in recent years. Either way, the only answer out of this mess for the working class is ultimately to overthrow the capitalist class and replace production for profit with production for need. However a trade union defensive battle would be a good start.
But does all government spending have a Keynesian multiplier effect? Clearly, it can’t, or at least not a useful one (military spending is a good example). Presumably, it must be possible to cut government spending and not harm the economy. Whether this is the case here is another matter. Otherwise the argument is that government spending can never be cut, and that all spending is useful.
In any case, Labour, give or take a few months and a few quid here and there, would have brought in almost identical spending cuts. After all, we are talking about a neoliberal solution, not a Left one. Perversely, the unions and many on the “Left” would have argued for Labour’s almost identical cuts.
Yes, David Harvey is quite right: neoliberalism is class war. I think even Warren Buffet and George Soros agree.
For all the pre election rhetoric the Lib/Dems ,in accepting the results of Osbourne’s amateurish analysis, are now complicit in the class war. Not before time the middle classes may find themselves the targets for political retribution. Isolated, irrelevant and financially busted the mc may seek out the greens or milibands new labour party, the Lib Dems are finished then. Cable to resign in a hundred days..bets on!
I have never met a person that owned up to being a Lib Dem. I always thought they were the Tory back up boys. They have proved me right. The battle is about to commence when parliament opens.
Great stuff Dave. Clear as a bell. For those who need more persuasion I can’t recommend enough this very readable piece from Mike Whitney on Counterpunch: ” Meltdown in the EU”
http://www.counterpunch.org/whitney05212010.html
Very short excerpt: ” A nation cannot starve itself to prosperity nor can it shrink its way to growth. Austerity is fine for monks, but bad for the economy.
Deficit cutting during a downturn creates bigger deficits, higher unemployment, greater economic contraction, and more suffering. Every country that follows the IMF’s prescription for belt-tightening, undergoes a mini-Depression. That’s because it’s bad economics (or, rather) politically-driven economics. By weakening the state, private industry and speculators hope to grab public assets on the cheap and force privatization of public services. These are the real objectives behind the austerity measures. “
jock mc Troosers. Your last two sentences summed it up. But it is nothing new is it! Jings Crivens Help Ma Boab. No one seems to be offering alternatives except the looney left. So we have the cuts.
Sightly off-thread but has anyone else noticed that the BBC’s business and economic coverage is now even more supine than before the start of the “crisis”? You would have thought recent events would have led them to their review “News = Brunswick PR” churning, but no, now its full-on Market propaganda 24/7. It’s only matched and supported by their greatfully supportive handling of our new super a-political “National Government”.
*”Propaganda is a form of communication that is aimed at influencing the attitude of a community toward some cause or position. As opposed to impartially providing information.”
Let the sunshine in.
Keynesian economics does rely on governments being able to pay back the debts in the good times that they incur in the bad,deficit expansion means that taxpayers (workers) owe even more to government bond-holders (finance capitalists). If the markets fear that they government won’t have the strength to squeeze the working class enough when the time comes to pay back their loans, they want a much higher return to finance a government if they fear for their returns. Which is why the Lib Dems have been forced into their volte-face, though there is obviously a level of dishonesty involved, it is a sign that the Keynesian multiplier is not just a win-win for all classes, at some point the workers have to pay to restore profitability.
I didn’t notice that much of an Age of Plenty.
The problem with those advocating neolibralist economics (and the politics that support it) is that they actually believe their own propaganda: that capitalism “works” if free markets are allowed to operate with minimal government intervention. They therefore have no adequate response to crises such as the Wall St crash and the Great Depression or the recent financial melt down. At times like these capitalism has to be rescued from itself.
The problem with the Keynesian response as described above (more state intervention and regulation and greater government debt to maintain demand)is that, although it accepts that boom and bust are inherent in capitalism, it believes a form of capitalism can be maintained giving continuous economic growth and allowing governments to redistribute wealth in order to reduce extremes of inequality.
The lessons of the 1970s point to the fact that capital will reject even the modest redistribution offered by social democracy. And the idea that capitalism can provide unlimited growth is being increasing questioned, not least by the environmental movement (is it three or five planets worth of resources required to meet consumption needs of ‘western’ lifestyles?). If our objective is simply a return to post-war social democracy we are lost. Capitalism will eat itself and us with it.
I don’t have any problems with reformism, but surely the reforms ought to be aiming at transformation rather than saving the unsustainable and inequitable?
The problem with those advocating Keynesian economics (and the politics that support it) is that they actually believe their own propaganda: that capitalism “works” if free markets are allowed to operate with a degree of government intervention.
On “a truly awful 1960s musical hit”, after his arrest for protesting CIA recruitment at the University of Massachusetts in the 80s, Abbie Hoffman related this experience:
I said, “You folks know any freedom songs or anything?” And they said, “Oh yeah.” They knew every song from Hair. They started singing all these songs from Hair. And I’m saying, “What the hell are you singing?” Hair was a Broadway show. It was a rip-off, a fake; they were wearing wigs.” They’re saying, “What are you talking about Abbie, it’s a movie, it’s a good movie.”