by Michael Patrick O'Leary
A version of this article appeared in Echelon in August 2013
Post War Britain
The post-World War Two years in Britain have been labelled The Age of Austerity by historians. Britain had to pay for the cost of winning the war. Despite an innate tendency to complain, Britons accepted the situation with some equanimity because of involvement in and commitment to the welfare state. Sir Stafford Cripps, as architect of post-war recovery, was unpopular because of his severe manner (he was once introduced on television as Sir Stifford Crapps). He was not much loved but he was respected and trusted for his integrity. The vegetarian, craggy Cripps seemed to share the pain of the underfed and the ration-book holding housewife (although he was at one time the richest lawyer in England).
The Financial Crisis of 2008
After 2008, most people, even if they could not comprehend the dark arts of hedge funds and leverage, knew the bankers were at fault. Taxpayers’ money was used to bail out the banks that had been recklessly gambling. Then the general public had to endure cuts to public services as the doctrine of austerity hypnotised Europe. The banksters continued to get their bonuses. Worse still, the advice of the reckless gamblers was still heeded. Neo-liberal doctrines of privatisation and de-regulation did not seem to have been discredited by the global harm they had done.
The Harm Austerity Did
In Ireland, voters were able to kick out the Fianna Fáil scoundrels who wrecked the economy. However, the new Fine Gael government was forced to do the bidding of the unelected troika. Encouraging signs of recovery were extinguished by the austerity orthodoxy.The government wanted to show rigorous rectitude. They used taxpayers’ money to pay for the banksters’ “mistakes”. Those taxpayers were not pleased to see tapes showing officials of the Anglo-Irish Bank (whose fraudulent and reckless activities made a major contribution to the Irish collapse) joking about luring the State into giving them billions of euro.
In Greece, there were violent demonstrations and a rise in support for neo-Nazis. Over half of Greek youth are unemployed. Greece’s suicide rate has doubled. Heart attacks have spiked, particularly among women crushed by economic burdens.
Portugal was bailed out on condition that it privatised energy, water, public transport and the national airline. VAT on electricity and gas was increased from 6% to 23%, driving up energy bills; public sector workers’ income has dropped by a quarter; benefits have been slashed by a fifth.
Austerity brought to the UK higher unemployment, higher taxes, and failure of wages to keep pace with prices. A report from the Department for Communities and Local Government showed that a decade of progress in tackling deprivation was reversed in 2009. 198,000 public sector jobs have been lost so far. The Office of Budget Responsibility predicts that, by the beginning of 2018, 929,000 public sector jobs will have gone. This means one public sector worker being sacked every ninety seconds over the next half-decade.
Social solidarity is replaced by self-interest. Posh boys Osborne and Cameron are not perceived to be sharing the nation’s pain. A British social-attitudes survey shows a reduction in sympathy for the poor. The proportion of people who believe that unemployment benefits are too high has risen from 37% in 2000 to 55% in 2010.
Eberhard Lueder, of the European Red Cross, reports that 40 million Europeans are suffering “severe material deprivation”. 116 million EU citizens are judged “at risk of poverty or social exclusion.” The EU currently funds a 500 million euro food aid programme, from which 18 million people in 19 member states benefit.
The number of young adults in work across 26 EU member states is the lowest on record. Stefano Scarpetta of the OECD likened political disenchantment among European youth to the anger that sparked the Arab spring. “That was one of the major triggers, that of political social unrest, that then led to the revolutions in those countries.”
Critics of Mass Austeria
JM Keynes noted in 1937 that “the boom, not the slump, is the right time for austerity at the Treasury.” Nobel economics laureate Paul Krugman is a leading enemy of the “Austerians”. He argues that budget deficits are essential to recovery from a depression. In a recent article in the New York Review of Books, he came up with a powerful piece of ammunition.
An economics paper that “may have had more immediate influence on public debate than any previous paper in the history of economics” has been shown to be erroneous. In “Growth in a Time of Debt,” the Harvard economists Carmen Reinhart and Kenneth Rogoff, had purportedly shown that national economies fall off a cliff once government debt exceeds 90% of GDP. That 90% threshold arose from programming mistakes, data omissions, and peculiar statistical techniques, including an eccentric weighting system. It was not until April 2013 that Reinhart and Rogoff allowed anyone to check their data. They made their spreadsheet available to Thomas Herndon, at the University of Massachusetts. Herndon identified a coding error and showed their data set excluded countries which had emerged from World War II with high debt but still achieved solid growth.
Can Cuts Bring Expansion?
Mark Blyth in his book Austerity: The History of a Dangerous Idea examines the proposition that spending cuts could lead to higher output. Italian economists Alberto Alesina and Silvia Ardagna supplied evidence that large spending cuts created confidence and were followed by expansion rather than, as argued by Keynesians, contraction.
Researchers at the Roosevelt Institute pointed out that none of the alleged examples of austerity leading to expansion of the economy actually took place in the midst of an economic slump; researchers at the IMF found that the Alesina-Ardagna measure of fiscal policy bore little relationship to actual policy changes.
Neil Irwin’s The Alchemists shows how the major advanced countries abruptly switched from Keynesian stimulus to austerity. The crisis in Greece, and the appearance of seemingly rigorous research that supported the Austerian position strengthened the anti-Keynesian cause. It became a moral issue when it was discovered that Greece had been cooking the books. As Krugman puts it: “They had been warning about the dangers of deficit spending; the Greek debacle seemed to show just how dangerous fiscal profligacy can be.” For the Austerians, a depression is a morality thing; for Keynesians, depressions are essentially the result of technical malfunctions which can be cured by stimulus. We could all suffer the Greek fate for our sins.
Collateral Damage- Europe’s Medicine Poisons Others
How do Europe’s ills concern Sri Lanka? In the year of the financial crash, Sri Lanka’s exports to the EU increased by 12.5%. Exports to the UK increased by 7.1 %, while exports to Italy increased by 12.7%. Even without GSP+, the EU still accounts for 30% of Sri Lanka’s exports. Sri Lanka continues to place great importance on attracting tourists from Europe. As belts tighten in Europe, one has to wonder whether Europeans will still be able to afford high Sri Lanka hotel prices. Will consumers be buying less Sri Lankan products as their wages and social security benefits dwindle? Europeans already have tough choice to make about how to spend their money. Sri Lanka needs European economies to recover. If the medicine the Austerians are forcing on EU nations is deadly, Sri Lanka will also feel the pain.