Show Hide image

The end of a dream

Unreality is the defining feature of the fashionable ideas of the past decade. Perhaps only a more s

To look back on the ideas that shaped the past decade is to survey a scene of wreckage. Ten years ago, the best and the brightest were believers in the "Washington consensus" - the idea that the debt-fuelled free market that had existed in the US for little more than a decade was the only economic system consistent with the imperatives of modernity, and destined to spread universally.

It was not only the neocon right that believed this. Centre-left parties, whose historical role had been to set limits on free markets, bought in to this idea with enthusiasm. When Bill Clinton and Tony Blair embraced neoliberal economics, they did more than triangulate policies for the sake of electoral advantage. They endorsed the belief that a bubble engineered by Alan Greenspan at the end of the 1990s, when he lowered interest rates to artificial levels after the blow-up of a hedge fund, represented a new era in economic history. Both the triangulating politicians and many left-of-centre commentators became convinced that, for all practical purposes, neoliberal capitalism was indestructible.

For anyone with a sense of history, the idea that a post-cold-war bubble embodied a new world order was obviously absurd. The built-in instability of capitalism had not gone away - it had been accentuated, as the US and other western economies became ever more dependent on unsustainable debt. Far from being in­destructible, the neoliberal market order was highly fragile. But millennial fantasies regarding a short-lived variety of capitalism were far from being the only delusional beliefs that helped shape events during the decade.

Closely related was liberal interventionism - the policy, set out by Tony Blair in his 1999 Chicago speech on foreign policy, of using military force to spread liberal democracy. Here the delusions were multilayered, and first among them was a dream about America. Again, it was not only the right that bought in to a fantasy. For large sections of the left, the US in the first decade of the century had a role similar to that played in the progressive imagination by the USSR in earlier periods: for all its faults, the US was the world's emancipatory power, and the current embodiment of the best human hopes.

The delusive quality of this view lay not so much in the comical notion that universal freedom could be spearheaded by the witless figure of George W Bush, as in an unrealistic estimate of America's position in the world. US imperial overstretch had already been identified in 1987 by Paul Kennedy in his book The Rise and Fall of the Great Powers, but this weakness was forgotten in the triumphalism that surrounded the collapse of the Soviet Union. Not only did the US lack the skills needed to maintain its imperial role, but increasingly it was a role the US could not afford. Both these facts were brutally confirmed in the invasion of Iraq. Confident that liberal democracy would emerge of its own accord once tyranny had been overthrown, the Bush administration was unprepared for the sectarian warfare and near-anarchy that predictably erupted when Saddam Hussein's regime was destroyed. It was equally unprepared for the ruinous cost of the war, which was launched on the assumption that the price of oil would fall after regime change, setting off another global boom and making the entire exercise self-financing. The actual result was that the Americans racked up even more debt and the decline of US power accelerated.

Fashionable theories of globalisation had the effect of blocking the perception of American decline. From the late 1990s onwards, the idea that globalisation and Americanisation were one and the same became something like conventional wisdom, the New York Times correspondent Thomas Friedman pushing the equation in his bestselling books The Lexus and the Olive Tree (1999) and The World Is Flat (2005). The actual effect of globalisation is to transfer economic power to emerging countries with different models of capitalism, but for those who shared Friedman's dreamworld, globalisation was no more than the Anglo-American free market writ large. It was a notion that could persist only so long as the crisis was confined to powerless countries on the periphery of the system, such as Argentina and Thailand. It began to dissipate when the US financial system itself started to implode from mid-2007 onwards. Having run down and sold off much of its productive base, the US found itself the centre of a type of finance capitalism that was practically bankrupt.

It is not often that large-scale crises are due to intellectual error, but a single erroneous belief runs through all of the successive delusions of the past decade. With few exceptions, both left and right seem to think that history is a directional process whose end point - after many unfortunate detours - will be the worldwide duplication of people very like themselves. At the end of the decade, opinion-formers in Britain, the United States and continental Europe still imagine that the normal pattern of historical development leads eventually to an idealised version of western society, just as Francis Fukuyama forecast 20 years ago.

But whereas this confidence-boosting notion was still genuinely believed a decade ago, today it is a kind of comfort blanket against an unfamiliar world. The reality, which is that western power is in retreat nearly everywhere, is insistently denied. Yet the rise of China means more than the emergence of a new great power. Its deeper import is that the ideologies of the past century - neoliberalism just as much as communism - are obsolete. Belief systems in which the categories of western religion are reproduced in the guise of pseudo-science, they are redundant in a world where the most rapidly advancing nation state has never been monotheist. Western societies are well worth defending, but they are not a model for all of humankind. In future they will be only one of several versions of tolerable modernity.

For secular western intellectuals to accept this fact would rob their life of meaning. Huddled in the tattered blanket of historical teleology, which tells them they are the leading lights of humanity, they screen out any development that demonstrates their increasing irrelevance. Religion is resurgent in many parts of the world, not least emerging powers such as Brazil and China, but for the secular intelligentsia this is just an unfortunate lag, a temporary setback in humanity's slow march to join them on the sunlit uplands of reason. The hysterical stridency of evangelical atheism - one of the most characteristic phenomena of the Noughties - is symptomatic of a pervasive cognitive dissonance. Like everyone else, these intellectuals assert their beliefs all the more adamantly when the only reason for holding them is a well-founded suspicion that they are not true.

Unreality is the defining feature of the ideas that have been in vogue over the past decade. The grandiose delusions with which the new century began have not been abandoned. Instead, they have been shrunk to a size at which they can still be maintained. The small world of British politics provides many examples of this tendency. Rather than acknowledge that neoliberalism has failed, politicians in all three main parties are seizing on a succession of intellectual gimmicks for solutions to the problems that the ideology has created. Gladwell's blink, Sunstein and Thaler's nudge, the wisdom of crowds - these and other ephemera of the airport bookstore are being taken up, promoted and then forgotten in the floundering attempt to deal with a crisis that is only in its early stages.

The intellectual default of politicians cannot be remedied by returning to the ideologies of the past. It is shared by much of the public, and comes from a chronic inability to engage with reality. Perhaps only a more serious crisis will overturn the delusive fancies on which so many policies are based. A run on sterling in the event of a hung parliament after the next general election; the cataclysmic defeat that will follow Barack Obama's decision to reinforce inevitable failure in Afghanistan; a spiral in oil prices after a flare-up over Iran; the collapse of the dollar as the world finally loses patience with American solipsism - any one of these eventualities, together with others that cannot be foreseen, could be a catalyst for rethinking.

But the omens are not encouraging. The make-believe that surrounds climate change - epitomised in the empty statements of intent regarding unachievable goals that will be the only outcome of the Copenhagen meeting - shows that the biggest challenge for the future is being evaded. It looks as if we may be wandering in the ruins of the Noughties for some time.

John Gray is the New Statesman's lead book reviewer. A new edition of his "False Dawn: the Delusions of Global Capitalism", which first appeared in 1998, was published by Granta Books in October (£8.99)

The ideas that shaped a decade

Neoliberalism: Three policies central to the neoliberal "Washington consensus" were low taxation, privatisation and the deregulation of financial services. Key thinkers: Friedrich Hayek, Milton Friedman, Robert Nozick.

Neoconservatism: The term was originally applied to disillusioned liberal critics of the welfare state. By the beginning of the 21st century, neoconservatism was associated principally with an aggressive US foreign policy. Key thinkers: Henry "Scoop" Jackson, Leo Strauss.

Political Islam: "Islamism", or political Islam, is dominated by two distinct and extreme strands of thought: the Salafist or Saudi Wahhabi tradition; and the work of Sayyid Qutb, who saw Islam as a political movement based on Quranic principles and from whom Osama Bin Laden derived the doctrine of violent jihad. Key thinkers: Sayyid Qutb, Mohammad Ibn Abdul Wahhab, Ayman al-Zawahiri.

John Gray is the New Statesman’s lead book reviewer. His latest book is The Soul of the Marionette: A Short Enquiry into Human Freedom.

This article first appeared in the 14 December 2009 issue of the New Statesman, The Muslim Jesus

MILES COLE
Show Hide image

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