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Don't play it again, Stan

The US base is crucial to operations in Afghanistan, so threats to close it are usually a ploy for m

A little-known Stan in central Asia has the US hanging by a thread. On Tuesday 3 February, Kyrgyzstan threatened to evict all 1,200 US troops stationed there, apparently at Russia’s request, and by Friday the government’s decision was “final”. Washington has used Manas airbase outside the Kyrgyz capital, Bishkek, as a launch pad for crucial operations in Afghanistan since the war there began in 2001. It is the gateway for US and coalition troops into Afghanistan and the sole refuelling point for in-flight aircraft. If its closes, Nato will have to rethink plans to send more troops into the country later this year.

The US-Kyrgyz agreement on Manas has always been troubled. Governance in post-Soviet Kyrgyzstan has been blighted by corruption, and the parliament routinely threatens to kick America out when it is strapped for cash in order to extract millions more in rent. But recent calls by politicians from the ruling Ak Zhol party for the base to go were louder than usual. Richard Hipkin, a British pub manager in Bishkek whose biggest-paying customers work at the base, says: "This is as far down the line as it has ever got."

The furore began when Dmitry Medvedev offered to write off Kyrgyzstan's debts and lend the impoverished nation $2bn if it agreed to close the base. Russia's deputy prime minister, Sergei Ivanov, has denied that this is the case and the Kyrgyz prime minister, Igor Chudinov, is adamant that parliament's decision to vote on the base's future this month has nothing to do with money. Very few believe them. A foreign ministry official says: "The government is just holding out to see if the US will match that offer, but I don't think they can."

Russia can easily buy Kyrgyz acquiesence. The global food crisis, high wheat prices and the credit crunch have hit the republic hard. A national power shortage has also disrupted production and fuelled political tensions, springing the usually disorganised opposition Social Democratic Party into action.

After the collapse of the Soviet Union in 1991, Kyrgyzstan's coal mines were seized by regional clan leaders and fell into disrepair. The bulk of electricity now comes from one hydroelectric power station, which for the past year has been working at very low capacity due to -30° temperatures in winter which have kept water frozen in the mountains, and low rainfall in summer. As the power station almost ground to a halt, most of the country had to survive on six hours of electricity a day at the height of the crisis, in the autumn.

Over shashlik, I unwittingly made my friend Dinara cry by talking about the power cuts and rising poverty. Up the road, huddled around candles at the Metro American bar, private military contractors were downing shots of Russian Parliament vodka, talking about whether it was better to take girls they fancied to Istanbul or the Maldives over Christmas.

The lights in the city are back on for the time being, and the conversation in Metro has changed from holiday plans to career moves. They don't have much to go on. The government issued frequent statements to the local press this past week, saying that the base has to go at some point and Kyrgyzstan wants it to go now, but neither the US embassy and state department nor contractors have yet received an official eviction notice. In previous years, when the government announced it was reviewing the Manas agreement, a handful of protesters gathered in the capital's main Ala-Too Square wearing silk bandanas and yelling "Yankee go home", but not this time.

Public opinion has warmed to the base. Tensions were high in December 2006, when a US serviceman shot dead a Kyrgyz worker suspected of carrying a knife, but around 10,000 locals work there as interpreters, shop staff, truck drivers and builders. The threat of unemployment is of greater concern.

Under the current agreement, Kyrgyzstan must give the US 180 days' notice to get out. If parliament votes to issue that notice, Washington really has nowhere else to go. It has already been thrown out of one Stan. In 2005, neighbouring Uzbekistan ejected the US from a critical airbase at Karshi-Khanabad after its diplomats criticised the Uzbek government for ordering armed forces to open fire on protesters in the eastern city of Andijan, killing hundreds.

Tajikistan and Turkmenistan both border Afghanistan, but Tajikistan's landslide-prone, shoddy roads are a liability, and Turkmenistan is opening up only very slowly after the death in 2006 of Saparmurat Niyazov, the crackpot dictator who banned beards and renamed the days of the week after his family. Iran is out of the question, and Nato has no bargaining chips in the region.

Kyrgyzstan's government is "so damn dumb", bawls Mike Haughland, a barrel-chested Nebraskan who works for Task Force Innovations International, a private company that constructs lavatory blocks and other buildings at the base. Local politicians have not seen the benefit of working with the US military, and the Kremlin's continuing dominance over the region doesn't give them much cause to do so.

The prime minister insists the decision has nothing to do with money.

Very few believe him

An apparent thaw in relations between Russia and the US at the two-day Munich Security Conference, which began on 6 February, did little to resolve the Manas question. Russia has its own base just 60km west of the base, and rumours are that its aircraft might relocate there in a last two fingers up to America.

This article first appeared in the 16 February 2009 issue of the New Statesman, The New Depression

MILES COLE
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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

***

The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

***

In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt