The Economist: austerity in 2010 "threatened recovery"

The coalition against austerity is overwhelming.

It feels as though a rubicon has been somewhat crossed: it is now, undoubtedly, mainstream opinion that fiscal consolidation – austerity, to you or me – in the immediate aftermath of the greatest financial crisis in 80 years was a terrible idea.

The Economist's Free Exchange column was never particularly supportive of austerity, occasionally going against the grain of the magazine's main editorial line to do so. But this week is a particularly strong attack on the idea.

In the print column, Ryan Avent focuses on the IMF's declaration that, in times of crisis, the fiscal multiplier could be several times higher than previously thought, and takes a look at wider research in the area:

What that means is that austerity may hurt much more at some times than others. In a 2010 paper Alan Auerbach and Yuriy Gorodnichenko of the University of California, Berkeley argued that the fiscal multiplier may be negative during booms, meaning that spending cuts actually raise growth. In recessions, by contrast, it could be as high as 2.5. A study by Lawrence Christiano, Martin Eichenbaum and Sergio Rebelo of Northwestern University suggested that although the multiplier may hover at around 1 normally, it could rise to more than 3 when interest rates fall to near zero, leaving the central bank with less room to act.

We called the IMF's realisation that it had severely underestimated the multiplier the most important 68 words in its world economic outlook, and it appears Avent agrees.

In the blog which accompanies the column, he doubles down on the claimtwitter):

Policymakers suffered from a striking lack of perspective in opting to pursue broad austerity beginning in 2010. It was clear at the time that some economies needed to begin cutting debts immediately and that lots of economies would need to bring debt down eventually. But a look at global conditions should have indicated that the normal cushions against fiscal cuts were weaker than normal or absent. And so the decision by countries not facing immediate market pressure to start cutting alongside those that were seriously undermined the consolidation efforts of economies in truly dire straits and threatened recovery.

Avent has much more to say, particularly on the failure of central banks to play their role correctly, and both columns are well worth reading in full.

It's always hard to argue about what ought to have happened. Politically, everyone will point out that it holds little weight: no party can win an election based on the claim that they would have been better if they had won the last one; instead, they have to present forward-looking visions, and explain why the country will be better in five years time under them.

And economically, whether or not austerity was right is now meaningless; it happened, and failed, but the circumstances are changing daily. We are (far too slowly) climbing out of depression, and at some point the arguments for fiscal consolidation will get stronger, and a new discussion will need to be had.

Nonetheless, it is worth repeating: George Osborne was wrong, emphatically, obviously and inarguably. His decisions hurt the economy and the nation entirely unnecessarily, and he refused every possible opportunity to ameliorate that damage. Plan A isn't just failing, it has failed. Yet there has been no contrition, no apology, and not even a hint of understanding. All there is is a lesson for future Chancellors: Don't Do This.

Sad Osborne is sad, but not about austerity. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Brexit will hike energy prices - progressive campaigners should seize the opportunity

Winter is Coming. 

Friday 24th June 2016 was a beautiful day. Blue sky and highs of 22 degrees greeted Londoners as they awoke to the news that Britain had voted to leave the EU.  

Yet the sunny weather was at odds with the mood of the capital, which was largely in favour of Remain. And even more so with the prospect of an expensive, uncertain and potentially dirty energy future. 

For not only are prominent members of the Leave leadership well known climate sceptics - with Boris Johnson playing down human impact upon the weather, Nigel Farage admitting he doesn’t “have a clue” about global warming, and Owen Paterson advocating scrapping the Climate Change Act altogether - but Brexit looks set to harm more than just our plans to reduce emissions.

Far from delivering the Leave campaign’s promise of a cheaper and more secure energy supply, it is likely that the referendum’s outcome will cause bills to rise and investment in new infrastructure to delay -  regardless of whether or not we opt to stay within Europe’s internal energy market.

Here’s why: 

1. Rising cost of imports

With the UK importing around 50% of our gas supply, any fall in the value of sterling are likely to push up the wholesale price of fuel and drive up charges - offsetting Boris Johnson’s promise to remove VAT on energy bills.

2. Less funding for energy development

Pulling out of the EU will also require us to give up valuable funding. According to a Chatham House report, not only was the UK set to receive €1.9bn for climate change adaptation and risk prevention, but €1.6bn had also been earmarked to support the transition to a low carbon economy.

3.  Investment uncertainty & capital flight

EU countries currently account for over half of all foreign direct investment in UK energy infrastructure. And while the chairman of EDF energy, the French state giant that is building the planned nuclear plant at Hinkley Point, has said Brexit would have “no impact” on the project’s future, Angus Brendan MacNeil, chair of the energy and climate select committee, believes last week’s vote undermines all such certainty; “anything could happen”, he says.

4. Compromised security

According to a report by the Institute for European Environmental Policy (the IEEP), an independent UK stands less chance of securing favourable bilateral deals with non-EU countries. A situation that carries particular weight with regard to Russia, from whom the UK receives 16% of its energy imports.

5. A divided energy supply

Brexiteers have argued that leaving the EU will strengthen our indigenous energy sources. And is a belief supported by some industry officials: “leaving the EU could ultimately signal a more prosperous future for the UK North Sea”, said Peter Searle of Airswift, the global energy workforce provider, last Friday.

However, not only is North Sea oil and gas already a mature energy arena, but the renewed prospect of Scottish independence could yet throw the above optimism into free fall, with Scotland expected to secure the lion’s share of UK offshore reserves. On top of this, the prospect for protecting the UK’s nascent renewable industry is also looking rocky. “Dreadful” was the word Natalie Bennett used to describe the Conservative’s current record on green policy, while a special government audit committee agreed that UK environment policy was likely to be better off within the EU than without.

The Brexiteer’s promise to deliver, in Andrea Leadsom’s words, the “freedom to keep bills down”, thus looks likely to inflict financial pain on those least able to pay. And consumers could start to feel the effects by the Autumn, when the cold weather closes in and the Conservatives, perhaps appropriately, plan to begin Brexit negotiations in earnest.

Those pressing for full withdrawal from EU ties and trade, may write off price hikes as short term pain for long term gain. While those wishing to protect our place within EU markets may seize on them, as they did during referendum campaign, as an argument to maintain the status quo. Conservative secretary of state for energy and climate change, Amber Rudd, has already warned that leaving the internal energy market could cause energy costs “to rocket by at least half a billion pounds a year”.

But progressive forces might be able to use arguments on energy to do even more than this - to set out the case for an approach to energy policy in which economics is not automatically set against ideals.

Technological innovation could help. HSBC has predicted that plans for additional interconnectors to the continent and Ireland could lower the wholesale market price for baseload electricity by as much as 7% - a physical example of just how linked our international interests are. 

Closer to home, projects that prioritise reducing emission through tackling energy poverty -  from energy efficiency schemes to campaigns for publicly owned energy companies - may provide a means of helping heal the some of the deeper divides that the referendum campaign has exposed.

If the failure of Remain shows anything, it’s that economic arguments alone will not always win the day and that a sense of justice – or injustice – is still equally powerful. Luckily, if played right, the debate over energy and the environment might yet be able to win on both.

 

India Bourke is the New Statesman's editorial assistant.