Sunday, 5 March 2017

The Boy Who Cried Austerity

You have all heard it  and most of you believe it: in its blatant disregard for the poor, always championing the capitalists' interest, the Coalition (and now the disgraceful Tories) have sought to violently cut back government spending, cut welfare provisions and raise taxes to reduce the budget deficit, ultimately reducing the government's debt. This 'Austerity Delusion' is allegedly hurting the poor, the disabled and anyone else I'm supposed to care for.

Everybody knows the fable (or ancient story) of a boy who cried wolf; after a few times of crying wolf nobody would believe him anymore, whether or not there was an actual wolf. We have now reached the exact opposite point: the boy yet again cries 'austerity', and everyone believes him, irrespective of whether there is any cutting of government spending going on.
The entire argument of people like Varoufakis, Stiglitz, KrugmanSkidelsky, every second editorial at The Guardian and more surprisingly the Financial Times, predicting various degrees of doom and gloom relies on the assumption that Austerity is taking place! Obviously, as most reasonable economists I don't give much for this story in the first place, but for now I'm simply concerned with whether or not Austerity is happening: the dispute is only relevant beyond the ivory tower of economics insofar as there really is any cutting of government spending going on. Like good economists, let's have a look at what the data tells us.

The Coalition rode in on grand Tory horses in their two latest parliamentary victories, decrying that they would cut spending, hoping to inspire Thatcher-like admiration. Of course, in that they failed too. They promised openly that vital sectors of the government services should be protected, efficiency would ensure, and that the 80/20 split between spending cuts and tax increases would be adherred to. And when we look at the experience over the last decade or so, it looks like they succeeded; Some sectors of government spending have seen a cut to their budgets and Government expenditure as a share of GDP has indeed been falling quite significantly: 

But  and this is important  the major spike in the chart 2007-2009 is due to what economists call 'Automatic Stabilizers': during recessions expenditures increase as more people are unemployed and so claim unemployment benefits etc, and at the same time the economy is shrinking (reducing the denominator in the share Gov Expenditure/GDP). The correct adjusted comparison should be to some pre-crisis year (say 41.3%) at which point the 2015 figures (42.8%) are still above what they were before they crisis, meaning the following: if a falling share of spending as share of GDP is really due to Westminister cutting back  Austerity  they're not even back to square one yet (i.e. they're not doing a very good job). 

Indeed, we have to go back to the mid-1980s to find a time period where the British government consumed a larger share of the economy than it does today. I'm not making this up, the Institute for Fiscal Studies made the same point in a 2014 report concerning only one part of the government's expenditure  social security: 
"On current forecasts, spending [on social security] will fall to 11.2% of national income by 2018–19, as the economy recovers, although that would still leave spending as a greater share of national income than in any year before 2008–09." 
Indeed, real expenditure on social security has increased during every 5-year period the report considers (back to 1958-59, Fig. 2), most of them outstripping the growth of the real economy. So, I hear you think, maybe this is simply because of an ageing population and pension payments take up a larger share of the population now than in the 1960s? Nope. Not true for the social security expenditures in isolation (since pensions as a proportion of that budget increased only until the 1970s, see Fig. 4, p. 10), nor for overall government spending; in real terms (adjusted for price-inflation), total government expenditure since the turn of the millenium has been higher than it currently is on only two occassions, and that by a meager £2.3bn (0.3% of UK Government spending, i.e. nothing):

And I'm supposed to believe that this is some kind of Austerity?

This puts sob stories and sentimental outrage about austerity in perspective. At best, what the Coalition/Tory governments have done in recent years is curbing the steady and continous increases in real government expenditure, making that trend level off rather than continue. More convincingly, what we see is the automatic stabilizers working in the opposite direction, as they always do during different phases of the economic cycles.

If failing to increase the government's share of the economy is considered "Austerity" or "free-market fundamentalism", the logical conclusion of what these people believe is the following: all spending should be done by the government, and any deviation from that plan is anathema to marxist student protestors, The Guardian editorials and the Krugmans of the world. These proponents should be more honest: if you want to profess your love for complete socialist central planning  why don't you say so, instead of running around virtue-signalling your affection for the poor by inventing stories about how the government is cutting government spending. They cry 'Austerity', roll around in a puddle of victimhood pretending to advance the causes of the poor. They're not. And they're remarkably wrong in both analysis and data. 

The entire Keynes-Stimulus-Paradox-of-Thrift and Austerity-Kills indigation falls apart once we take a look at the data: no austerity in sight. On the contrary, the data is much more consistent with what the historian Robert Higgs of the Independent Institute calls 'Ratchet Effect'; whenever government spending is ramped up by wars, crises or some imagined ill, it never falls back down to where it began. The outcome is what we see in the data; higher and higher lows, government spending, however measured, increasing over time.

As Neo does in the Matrix, you have to see the simple truth: there is no austerity.

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