Mehdi Hasan

Mehdi Hasan’s polemical take on politics, economics and foreign affairs

Austerity isn't working...

...and there's nothing wrong with saying "I told you so". But is anyone in government listening?

By Mehdi Hasan Published 26 April 2012 15:51

George Osborne carries the Budget box, March 2012. Photograph: Getty Images

Yesterday I returned to London from a family holiday in the United States - where a small stimulus has led to a growing economy and 25 consecutive months of job growth - to discover that the British economy has now re-entered recession, after shrinking a further 0.2 per cent in the first quarter of 2012. Or, as the Tory-supporting Sun put it on its front page today:

Official: Dip's a double

Don't say we didn't warn you. In fact, don't say I didn't warn you.

If any further evidence was needed that austerity isn't working, that cuts don't work, that George Osborne is a "kamikaze chancellor", this is it. Critics of the New Statesman's economics editor, David Blanchflower, must feel rather foolish right now. Once again, Blanchflower and the Keynesians are vindicated while Osborne and the Austerians are humiliated.

Surveying the empirical evidence from across the continent, Yahoo finance blogger Henry Blodget put it best:

IT'S OFFICIAL: Keynes Was Right

Blodget explained:

Now, this is not to say that the global debt-and-deficit situation is not a huge problem. It is. It is merely to say that, of the two painful ways to work our way out of the problem – "austerity now" or "stimulus now and cuts later" – the second one seems more effective.

In other words, based on the experience of the last five years, it seems that Keynes was right and the Austerians are wrong.

As I said, none of this should really come as a surprise to anyone as all of this was predictable - and predicted. As Paul Krugman has noted:

It’s important to understand that what we’re seeing isn’t a failure of orthodox economics. Standard economics in this case – that is, economics based on what the profession has learned these past three generations, and for that matter on most textbooks – was the Keynesian position. The austerity thing was just invented out of thin air and a few dubious historical examples to serve the prejudices of the elite.

And now the results are in: Keynesians have been completely right, Austerians utterly wrong – at vast human cost.

But the Austerians won't give up without a fight. They seem to have two tactics. The first is to blame the lack of growth on anything other than the cuts - be it the euro crisis, the weather, health-and-safety regulations, the family dog, etc, etc. Yesterday I tweeted this quote from City AM editor Allister Heath, from June 2010:

The years ahead will be very tough - but there will be no double-dip recession made in Downing Street.

Heath responded with this tweet:

Unfortunately, I underestimated this government's competence and commitment to supply-side reforms. They haven't delivered.

Good of him to say so. But "supply-side reforms"? Er, the UK economy, like the global economy, is suffering from an epic lack of demand. Households aren't spending, banks aren't lending, companies aren't investing. "Red tape" isn't what's behind the record rate of unemployment or the absence of growth and confidence. The main reason why the UK economy contracted in the first quarter of this year is because there was a 3 per cent decline in the construction sector - driven, of course, by the Chancellor's crazy decision to slash capital spending.

Even Heath's fellow Austerian, the Telegraph's Jeremy Warner, grudgingly acknowledges this point today at the end of a desperate if heavily caveated defence of Osbornomics and "consolidation":

When companies won’t borrow to invest, there’s a strong case for governments to do so in their place. And yet when you look at where the axe is falling hardest, it is on government investment – spending on schools, hospitals, roads, bridges, affordable housing, and so on. This is the easiest thing to chop, so that’s where the coalition has acted first.

In fact, this form of state spending should be doubled, tripled or even quadrupled. . .

Hear, hear!

The second tactic is to pretend that those of us who draw attention to the political and economic significance of this double-dip recession are somehow "enjoying" or taking "pleasure" from the catastrophic (lack of) growth figures. I've had lots of tweets from Tory trolls using this line of attack. This isn't just nonsensical and offensive but a brazen and desperate attempt to try and divert attention away from those damning figures, which deserve highlighting, and away from the Austerians in Westminster and Fleet Street, who deserve criticising.

We're also told by the cuts-defending Austerians that it is "irresponsible" to talk down the UK economy. But I, for one, won't take lessons in "responsibility" from those who happily, shamelessly and opportunistically talked down the economy when they were in opposition, going so far as to claim that the UK was on the verge of defaulting on its debts and making ludicrous comparisons between the British and Greek economies.

One of the presenters on ITV1's Daybreak programme tried this "You're far too pleased about the recession" tactic this morning, in an interview with Ed Balls. The shadow chancellor's response, however, was spot on:

Interviewer: Well let’s talk about that then, talk about the recession, we are in a double dip recession, I guess you’re sitting there saying: ‘I told you so’?

Balls: Well I sat here on this sofa, one and two years ago and said if the government tries to cut spending and raise taxes too quickly, faster then other countries it will backfire. And the thing which makes me angry is that George Osborne and David Cameron were so personally just dismissive, they just said it was rubbish and now we are back in recession. Their plan has categorically failed, families and businesses are now really paying the price. That self-defeating austerity has put us through such pain and we need an alternative plan. We’ve got to get jobs and growth moving, they should’ve done this much earlier.

Showing anger at the coalition's arrogance, incompetence and failure to listen or respond is the right response to such questions. Now is the time for the Labour leadership to sit on the fence or split the difference or triangulate; now is the moment to channel the public's anger and discontent. It seems to be working for President Obama.

Remember: we are not all in this together. And the argument over the cuts isn't just about politics or economics; it's about real people's lives and livelihoods. Britons are suffering. According to new figures from the Trussell Trust charity, for example, the number of people visiting foodbanks for emergency food in the UK has doubled in the last year, to over 128,000 people.

So let's be clear: Ed Miliband is doing a fine job on phone-hacking, the Murdochs and Huntgate but these aren't the issues that will win him the next general election. The economy was, is and will continue to be the defining issue of this parliament - and, as yesterday's GDP figures conclusively demonstrate, the coalition government has made a mess of it. If the Labour leader is able to stand before voters in May 2015 and pull a Reagan, Cameron and Clegg will be in big trouble. And Osborne's much-hyped reputation as a master strategist will be buried for good.

Tags: George Osborne David Cameron John Maynard Keynes Ed Balls

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44 comments

Wed, 2012-05-23 17:01 — John Cheese (not verified)

Eventually socialists run out of other people's money...US U6 Unemployment rate is about 20%- many, many are out of work or underemployed- this alone will get obama dumped in November. Government infrastructure is a big thing to even slightly turn direction- I would not want to be a Brit or German right now- tied to the Euro & your weaker brothers- do you enjoy supporting French retirees at age 62? May the force be with you...

Tue, 2012-05-01 15:10 — Will Podmore (not verified)

Nobel Prize-winner Paul Krugman estimates that cutting budgets by 1 per cent of GDP reduces GDP by around 1.25 per cent.
The government is running down the economy.
As the Telegraph's Jeremy Warner wisely wrote, "When companies won’t borrow to invest, there’s a strong case for governments to do so in their place. And yet when you look at where the axe is falling hardest, it is on government investment – spending on schools, hospitals, roads, bridges, affordable housing, and so on. This is the easiest thing to chop, so that’s where the coalition has acted first.
In fact, this form of state spending should be doubled, tripled or even quadrupled. . ."
How long has the Coalition to be in office before its supporters accept that it has any responsibility for the economy?
The 'blame it all on Labour' tactic is always a diminishing asset!

Fri, 2012-04-27 22:19 — mbrecker (not verified)

Hasan needs to do his homework before he posts.

The real unemployment rate in the States is still above 20%. Not the "official govt. number".
The total national debt is over $15 trillion.
Student debt is now over $1 trillion.
To get social service help in many cities, you have to literally be bankrupt and have nothing BEFORE you can apply. Expect a 2-3 week wait for a decision (no gurantees). Then, it's short-term help, if at best.
Food bank usage is at an all-time high. How many homeless people have you seen today on London streets?
Kenysan, Austrian and neo-classical economists are all wrong for two reasons:
The total global debt can never be repaid.
Austerity cuts won't help.
There will be no more bailouts. Where will govts. get the money? Will they go to the IMF or ECB as the Germans are kicking and screaming to try and stop it?

Many businesses just don't trust the govt., or the two main parties. What has Milliband done to restore that trust? If Labour really wants a "bold and visionary plan for the future", start by admitting that the debt can never be repaid. This means we'll have to write it off, nationalize the banks, recapitalize the system and then start over.

Can you name one reputable U.K. economist or politician that's proposed this? No. Can you name one in the States that's proposed this? Again, no. Why? Because doing the right thing is "political suicide"? With all of Galloway's fans going on about how great he is, has HE had the political courage to propose this? No. Instead, it's just endless hype about is he a Muslim or isn't he?

Labour wants the public's vote? Try actually being bold for a change.

Fri, 2012-04-27 20:43 — Mrs.Josephine Hyde-Hartley (not verified)

There's no sense in comparing the USA with 375 million people ( or thereabouts) and the UK. And besides, I understand there's more Mexicans now exiting the USA than Mexicans trying to get in.. which is telling, I think.

And austerity, which in my view is the equivalent to fasting and prayer - is working as we can see there's no demand. People who are managing not to go under but yet can't find or spare the resources to forge ahead by throwing money about - make no demands. They are treading water so to speak..perhaps watching and waiting..you know, like it says in the Bible.

i suppose in one sense it was a form of austerity that set off the whole sub-prime housing crash back in 2007..I read that people in America discovered they could simply throw the keys of houses they couldn't afford back to the banks, knowing after five years of being austerely bankrupt they could pick themselves up, dust themselves down, and start all over again ( as the song goes).

Mon, 2012-04-30 16:07 — Yohann (not verified)

I totally agree; it's about time we shifted the discourse from Keynsian/Austrian to classic Judeo-Christian economics.

After all;

''Paul had decided to sail past Ephesus to avoid spending time in the province of Asia, for he was in a hurry to reach Jerusalem, if possible, by the day of Pentecost.'' - Acts 20:16

In other words, Paul thought ''spending'' was a bad idea; i.e. government spending.

Check, Mate, Mehdi.

Fri, 2012-04-27 19:20 — UVP (not verified)

"I underestimated this government's competence and commitment to supply-side reforms"

Trickle-down fairy tale economics can never fail, it can only be failed.

Fri, 2012-04-27 16:38 — grytpype (not verified)

The austerity drive is just part of an overall effort by ultra-wealthy global elites to destroy the public programs that provide security to the non-rich (which they see as useless to themselves) and drive down wages (reducing their costs).

It's the end of the mass affluence and security we have had since WW2 and the beginning of a crude subsistence lifestyle for the non-ultra-wealthy population.

Fri, 2012-04-27 15:45 — ClemtheGem (not verified)

The point now is for all of us who believe that this economic mismanagement is not working to fight for change.
Ed M and Ed B are looking more and more credible with each passing day. Look at PMQs - Ham-Face and Gideon get ever more shrill, whilst Ed n Ed quietly re-state the case for growth. It would be stupid of Labour to publish an alternative Budget right now - the election will be in 2015.
http://clemthegem.wordpress.com

Fri, 2012-04-27 15:58 — Bill23 (not verified)

Arn't you bothered bythe fact that Balls didn't understand that the dollar is the world currency. Or that printing money to keep the EU alive will devalue all of our pensions.

Fri, 2012-04-27 15:13 — Fraziel1

Austerity is not working and we most definitely are not all in it together.Problem is i do not like or trust labour. Ed Miliband as PM? makes me laugh thiking about it. No matter how well he is doing just now ( and he should be further ahead in the polls), he will never win an outright majority. I hate the tories but i still would not vote for Ed Miliband. And of course there is Europe, immigration and the welfare state. Labour are totally out of touch with the electorate on all of these issues. Put simply, labour have no chance of winning with Miliband and Balls in charge.Anyone thinks otherwise is kidding themselves on. @Robert Taggart, you are an idiot. Many civil servants earn peanuts and do bloody important jobs. Only a moron and a scum bag wants people thrown out of work and to lose their homes, especially when there are no jobs for them to get. let's hope it happens to you first.

Fri, 2012-04-27 16:30 — Phil Perspective

Are you of the left or right? Just wondering.

Fri, 2012-04-27 16:16 — Smithington (not verified)

Now just apply the semi- compassionate logic regarding civil servants that caused you to call Robert Taggart a moron (on that matter absolutely correct) to people with skin that's a different colour to yours and you might be on the right track.

Fri, 2012-04-27 14:58 — John Martin (not verified)

There are a million reasons for an economic forecast working out to be wrong. The OBR, David Smith and others consistently underate downside risks. The latest excuse is the ONS gets it wrong: it under-estimates growth. Howver, while this explanation might explain total output it cannot explain trend growth. The first thing to recognise is that Osborne's strategy doesn't work. Until you do this there is no Plan B. The question: what would you do should first be directed at Osborne.

Fri, 2012-04-27 13:49 — Quattro Man (not verified)

Fortunatley for David Cameron & George Osborne, the opposition is a joke, with no clear strategy or idea of what to do, and everyone blames Labour for the mess we are in anyway.

So whilst you can all work yourselves into fits of frenzy. Nobody cares, you had your chance with the economy, you blew it big time and have no credibility with the electorate.

Even if you are right, still nobody cares. It must be so frustrating for you, hilarious for me.

PS. Mehdi...you must learn to write your own articles, this cutting and pasting lark is silly. You can do better, please try.

Fri, 2012-04-27 13:42 — Super Huey (not verified)

""austerity now" or "stimulus now and cuts later""

Isn't the opposite also true?... if you borrow massive amounts now, knowing that already Britains debt and deficit is the highest in the EU (thanks to Labour), you'd be building an even bigger deficit. Although this 'may' stimulate growth and jobs in the short term as shown in the US how long would it take to repay the money we owe. Remember that the interest we need to pay back will be gigantic. Wouldn't the cuts after the recovery have to be even greater?

If borrowing now is the way forward, shouldn't the US be in a much stronger position than they are now? I mean they borrowed nearly a $trillion (?) from China

Either way austerity or not we as a country are pretty doomed! and I don't think Labour has an answer either.

Fri, 2012-04-27 13:06 — silentfp (not verified)

Current policies are not working, true, but 2 points:
1) The USA is not a model of how to fix it - the job figures headlines look good, but that's partly due to "seasonal adjustments" in perpituity and partly due to low wage Mcjobs. And the US deficit is growing massively.
2) I want to like Ed Balls, but the Labour alternative is simplistic, as no-one mentions that to get back to regular GDP growth, the corporate /govt culture needs to return to the ideas of investment in assets & infrastructure yielding long-term rewards. Too much of GDP is still made of Services and Financial products that have no longevity in terms of economic benefit.

Fri, 2012-04-27 22:17 — Anthony J (not verified)

"I want to like Ed Balls, but the Labour alternative is simplistic"so a five point plan for growth is simplistic, whereas Mr Osborne's cut, cut and cut again is not.

Fri, 2012-04-27 12:57 — Johan Stumpe (not verified)

The Labour party never followed Keynes, except Mosley, who left the Labour party because he believed Keynes. Maybe you do not know it, but Keynes is dead for 66 years and 6 days now. He can not defend himself against your stupidity.

But really, how much deficit do you accept for 1 % growth? 15%, 20%, 50%?

Fri, 2012-04-27 11:44 — Red Meggie (not verified)

Remember 1982? Howe had deliberately created a reserve army of the unemployed and Thatcher was miles behind in the polls. Everybody was predicting she was going to be out on her arse - but she wasn't for turning. Then came the Falklands and Victor Crewe (supposedly independent psephologist) et al did their best to hammer home the message that there was a cross over between her stand against the generals and her resolution in the economy - we all know what that led to (in case you don't it was the destruction of many communities, the creation of an underclass and a scar on our society).
Osborne, being one of those sad Tory idealogues sees himself like that - any sign of a plan B will betray his Thatcherite dream of being proved right against the naysayers. He is like one of those ideological fundamentalists were the evidence before them is clear - they conclude that it is the real world that is wrong - his theoretical one is correct.

Fri, 2012-04-27 12:08 — Eric Somers (not verified)

If anyone wants to know what the squawking of ideological fundamentalists who cannot accept the reality they are facing looks like, see many of the comments below.

Fri, 2012-04-27 12:02 — Bill23 (not verified)

The vast majority would say it's the keep on feeding the monkeys big government plan that is ideological.
To use the US example, in the local store you will see 4 or 5 city (council) permits which allow the store to trade - if it can be bothered. The only problem it that without exception all the goods are poisoned with additives. Each individual item will be safe, but together they will make you sick despite the government permits. The smart Americans shop at unregulated farmers markets; everybody else wonders why their belly is ballooning!

Fri, 2012-04-27 10:40 — Bill23 (not verified)

Frankly, when you went there you should have got out of the hotel and had a look around. The US has the same problem as the EU; excessive government spending, and it's hard to believe anybody could be so blinkered.
Re austerity, just because there seems to be no way of getting money into peoples pockets, dosn't meen that it is a good idea to feed it into the government machine; look at spain. Also the pound is rising against the dollar.
I don't know why people think it's a good idea to print money, but look at Europe for gods sake, and open your eyes.

Sat, 2012-04-28 02:10 — Lordwhorfin (not verified)

I'm sorry, you have absolutely no idea of what you are blathering on about. I am a US resident (citizen) and the issue here is that the federal stimulus was are too small. Put down the Economist and the Pink 'Un and step away from the Kool-Aid fountain.

The other interlocutor is correct: without the stimulus, the US would be a disaster zone now.

Sun, 2012-04-29 07:57 — Bill23 (not verified)

Read first, I wasn't talking to you. Can Labour party supporters read, does Balls stick it up his nose, can such an ignorant party ever win an election.

Fri, 2012-04-27 16:15 — give me break (not verified)

You're joking, right? State governments slashed spending. The federal stimulus was the only reason we didn't go into a double dip recession ourselves.

Sun, 2012-04-29 08:00 — Bill23 (not verified)

I'll make it simple. Giving money to people, good. Giving money to government, bad.

Fri, 2012-04-27 09:33 — Des Demona (not verified)

And 90% of the cuts still to come! I seriously believe this is the most incompetent, clueless government in my lifetime.

Fri, 2012-04-27 06:57 — rain (not verified)

Where is our alternative to austerity, what is the positive alternative to which Labour aspires? What is the socialist alternative to responsible government? Labour’s task is too civilize capitalism rather than, in however far distant a future, its suppression: the political-left, has at many times in many diverse cultures and continents tried to create their own Utopian alternative to Capitalism, only to end in the killing fields and the gulag: our own Labour’s party’s obsession with big government ended in massive debt and a barely avoided economic collapse: few trust Labour with the economy, many may-not like it, be most understand the reasons for austerity. The Labour party are lying to themselves, and to the public if they say otherwise, the majority fully understand Labour would be doing much the same if still in government.

Fri, 2012-04-27 01:35 — Danny Blanchflower (not verified)

Great column Mehdi my old friend, and thanks for the kind words.
It's not as if we didn't warn Slasher that he was going to destroy growth but he knew best. It is now clear he didn't.
Danny Blanchflower

Thu, 2012-04-26 23:54 — Agent (not verified)

Can anyone point to a single thing this coalition gov. has made a success of?

Seems to me that when they aren't running away or resigning they are cocking something up.

To paraphrase Churchill it is: A calamity wrapped in a disaster inside a catastrophe.

Thu, 2012-04-26 20:45 — BenM (not verified)

Such epic failure of the crank creed of supply side economics yet still its blinkered acolytes have enough gall to continue to make fools out of themselves on a blog about the Tories' double dip recession.

Keepers of the faith, for that is what supply side economics is, won't be outdone by awkward stuff like facts and data it seems.

Sad sad people.

Thu, 2012-04-26 20:09 — Indu Pendent

Oh Mehdi!
"Once again, Blanchflower and the Keynesians are vindicated while Osborne and the Austerians are humiliated".

You've obviously not read Danny's various NS articles. He's stated he does not support the general stimulus you claim he does - you are undermining his reputation as people will pick up on what you have written. He supports targeted stimulus with a measurable economic return but that is not what you have said.

Say sorry.

Since the economic U turn of Miliband and Balls, Labour's economic policy is Plan A (they will make cuts even if they wont define them before the election). I dont know which political party you are supporting by implying Labour wish to borrow and spend but its not Progress. Are you part of Meacher and crackpots party within a party?

Thu, 2012-04-26 19:59 — djptek (not verified)

What is with you guys? When is somebody going to take a GLOBAL view of the situation? Yes, socialism should defend benefits but if they are financed by an economy based on cheap production overseas by workers who have never even heard of benefits then we are talking national socialism and that is wrong, wrong, wrong .Austerity is relative.

Thu, 2012-04-26 19:54 — Indu Pendent

Mehdi
"small stimulus " Hmm. Which do you mean, the US $10 Trillion debt or the US deficit?

Do you think the £600Bn borrowed by Labour in 11 years was a "small stimulus"? Please could you say what we got for the money (apart from £600Bn debt and the biggest deficit of the major economies)?

As a kid did you believe in things which dont really exit? Which out of these do you no longer believe in: father christmas, 3 bears, tooth fairy and magic state fairy?

Fri, 2012-04-27 16:21 — KeithOK (not verified)

If you pretend that the entire deficit is a stimulus (or worse yet, the entire debt), then you do come up with a large stimulus. But of course, there was a large deficit before any stimulus program enacted (and debt incurred in the past provides no stimulus).

If you define stimulus as it was defined by people like Professor Krugman who were calling for a larger stimulus, and as it was defined in actually creating a stimulus program, yes it was a small stimulus.

But you're always free to pretend otherwise.

Fri, 2012-04-27 11:24 — Bosworth (not verified)

Over 11 years for the entire country, yes it is. It looks like you are overawed by the size of the number. Although you personally may not have seen anything for the money, those who got support for their children through Sure Start, those who got support to get them off the streets and the patients who were treaetd more quickly by a better NHS certainly felt the benefit. People are not numbers and if we have governments that follow economic policies that treat them as just that then we are on a slippery slope to hell.

Fri, 2012-04-27 21:21 — Indu Pendent

£60Bn is enough to give the lowest 6 million people £10k each!!!
Where did the other £540Bn go? It certainly wasnt spent on the NHS. It was enough to buy all the people you mention a house and a private school education. And all they got was child benefit, a little extra social security, Sure Start which didnt work, and an 50% pay rises for all doctors with them doing less work. Half of all people leave school without GCSE maths and English - £10Bn was enough to half this.

I dont think you graps what an enormous amount of money it is. Dont forget the £600bn was on top of all the extra taxes they collected and North Sea oil will peaked under the last government.

So you defend what they did then?

Thu, 2012-04-26 19:30 — V. Ilyich (not verified)

The City AM editor "underestimated this government's competence" and hence was optimistic about economic growth prospects?!

Shurely shome mishtake...

Thu, 2012-04-26 18:34 — representingthemambo (not verified)

A word or two for the first two commenters:

You haven't actually read the article have you?

More here:

http://representingthemambo.wordpress.com/2012/04/25/3273/

Thu, 2012-04-26 18:34 — representingthemambo (not verified)

A word or two for the first two commenters:

You haven't actually read the article have you?

More here:

http://representingthemambo.wordpress.com/2012/04/25/3273/

Thu, 2012-04-26 20:23 — zemplar (not verified)

Yes, I have read it, and the link you provided. And your point is?

Thu, 2012-04-26 18:12 — zemplar (not verified)

There hasn't been any austerity in this country since WWII - it's not working because it doesn't exist. Tightening your belt a little? "Waaahh! Waaahhh! Boo Hoo! Whine! It's austerity!" The idea that there is any is total nonsense and you know it.

Nor are we back in recession - we never left it in the first place. The economy will continue to crawl on its belly for years to come. The country needs to take on a proper depression to fix its problems, instead of papering over the cracks. I blame the Tories, Labour, and the Lib Dems. Have I left anyone out? I also blame YOU. Yes, YOU, dear reader, for taking on more debt than you could afford. You're a grade-A idiot.

Only when the huge amount of public and private debt has been reduced in some significant way, and taxes are cut for EVERYONE - substantially - will any growth even begin to return. That could take twenty years, probably more, with the current way of doing things politically. They're all sh*t.

Cue whingeing and whining.

Fri, 2012-04-27 10:45 — Bill23 (not verified)

Seems to me the only quick solution would be to stop paying council tax, so that government is forced to deal with the problem.
Stop feeding the monkeys

Thu, 2012-04-26 17:24 — Robert Taggart

Ofcourse it be not working - it has not started !
When we see lame-brain non-job former 'civil' servants queueing for their benefits - then one will believe in austerity.
BRING IT ON !