Can't take the heat

Washington ground to a halt in a recent heatwave. What better proof of how America's infrastructure

This week, I vowed, I would do something unprecedented in modern times: I would not write a single word about the shenanigans of B****k or Mc***n or H*****y, or even about this year's presidential election at all. I intend to keep my word, too, with just one proviso: to say that the subject I have chosen to write about, notwithstanding its tragicomic aspects, should be exercising the mind of the next US president perhaps more than any other single issue.

The fact that I sat in my top-floor office in a puddle of sweat for most of the second week of this month because the air-conditioning had failed, for example, is hardly something I would expect the candidates to lose too much sleep over - even when the temperature inside crept past 110 degrees. For me, it all culminated in a visit from Bill, my friendly air-conditioning technician, on the morning of Friday the 13th.

What he told me symbolised much more than the strangely confused and angry mood that consumes America when the mere subject of "energy conservation" comes up. The ramifications went far beyond my usually nicely cooled, breezy office. Even America's outrageous hogging of the world's energy supplies - it comprises just 5 per cent of the world's population but uses 23 per cent of its energy resources - no longer seemed that surprising, let alone outrageous. It was what was going on around me and Bill as we spoke early that morning that brought home something I have been noticing with increasing alarm over the past two decades: the sheer fragility of America's crumbling infrastructures.

To my American readers: please do not get too angry with me when I say this, but the rapidity of the deterioration of your country's infra structures often reminds me of an extensive tour of the Soviet Union I undertook in 1986 - when I saw for myself, in places such as industrial Ukraine and Siberia and St Petersburg, that the Soviet Union had already had its day. For just as Bill and I were having our grim conversation early that Friday morning - and unknown to either of us at the time - the heart of the capital of the most powerful nation on earth, less than a mile from where we stood, had been plunged into the kind of chaos one might envisage in, say, New Delhi on a very, very bad day.

Because of the temperature, an underground train had earlier derailed as a result of what was described as a "heat-buckle" on the tracks. Two separate fires on the subway system were then triggered that morning by faulty "stud bolts". Terrified, sweaty commuters sprinted up stationary escalators while, from above, all they could hear was ambulance, police and fire sirens zigzagging frantically around them.

In the meantime, a switch in an electrical sub-station sizzled out, cutting power throughout central Washington - including, yes, the White House. "It was like each man for himself . . . like a third world country," next day's Washington Post quoted 34-year-old David Zaidain, "a city planner who was stunned by the level of anarchy he encountered while walking to work", as saying. Pedestrians were struck by cars at junctions where traffic lights were not working (although, miraculously, nobody was killed).

That one fused switch alone left 12,000 customers - which, in power company terminology, can mean one family house or a block of offices with thousands of workers - without power, the very prospect of which sent wealthy Washingtonians scurrying to book cool rooms or suites at the Four Seasons.

Most were not so lucky: every day, according to the Galvin Electricity Initiative, half a million Americans spend at least two hours without power, at an annual cost to the nation of at least $150bn. And yet, with conditions like those in DC on Friday-the-13th and the politicians who created them, Americans are scared of al-Qaeda? Bush et al scoffed at the prospect of the US joining the 174 other nations that ratified the Kyoto Accord, on the grounds that industrial giants such as China would then be able to take advantage of decent Americans doing the right thing.

Back in my office, I was not surprised when Bill pronounced my air-conditioning unit to be finished, but I was amazed to be told that, in order to replace it, we would need a much bigger unit that would have to be hoisted on to the roof by a crane; the street would have to be closed, a licence obtained beforehand to do so, and the roof strengthened to take the new weight.

Hadn't miniaturisation come to air-conditioning units, I asked Bill incredulously? Surely China, or some other poor smog-infested country, now churned out trillions of tiny units that cost next to nothing so that the likes of me could sit and work in comfort? No, he told me: because of emissions laws overseen by the Environmental Protection Agency, air-conditioning units had become much bigger rather than smaller.

This, in fact, is a neatly illustrative little allegory that demonstrates just how rabidly right-wing America has become in recent decades. The EPA has become a symbol of soppy lefty hand-wringing to so many Americans, yet it was proposed and signed into law in 1970 by none other than President Richard Nixon.

The lesson? All that do-gooding just means that you - the decent guy - now have to fuss around with licences and cranes while the likes of China, India and France (the French are always guilty of something truly diabolical) get away with murder.

Central truism

This is the one central truism about the United States that most Brits (particularly Blair, Brown and co) fail to understand: that (Nixon's noble exception notwithstanding) Americans instinctively reject strong government or regulatory rule, with the result that the government frequently fails to cope with problems or disasters (whether they be of the magnitude of Hurricane Katrina in 2005, or the ridiculous DC dramas on 13 June, or the collapse last August of the busy commuter I-35W bridge over the Mississippi in central Minneapolis, which led to 13 deaths).

The first of three official reports into why that bridge collapsed illustrates succinctly what I am saying. The reasons, in the words of Construction Bulletin of 16 June, were that "the Minnesota Department of Transportation missed opportunities to detect potentially fatal problems, lacked money which led to poor decisions, did not have the leadership to properly address a variety of projects, and did not document or follow up on its inspections . . ." The structure was only 40 years old, but for 17 successive years had been deemed to be in "poor" corrosive condition by inspectors; the American Society of Civil Engineers, which should know what it is talking about, estimates that some $1.7trn is now needed to repair America's crumbling infrastructure.

There are some hopeful signs, however. In March this year, Americans drove 11 billion fewer miles than they did in March 2007; they also took 10.3 billion trips on public transport in 2007, the highest total for 50 years. In other words, they may not be as genetically predisposed against public transport as many think. Indeed, Americans are outraged that a (US) gallon of petrol (the equivalent of 3.7 litres) now costs (at my local station last Monday, at least) between $4.19 and $4.49; I didn't have the heart to tell anyone that petrol was selling in Britain at around £1.18 a litre, almost double that.

Should anybody doubt my warnings about US infrastructure or comparisons with the Soviet Union of two or more decades ago, I recommend Fareed Zakaria's excellent The Post-American World. Zakaria, editor of Newsweek International, tells us that although the US remains militarily and economically the most powerful nation on earth, its role is changing. The world's wealthiest person is not American, but Mexican, he says; the world's tallest building is in Taipei and will soon be overshadowed by one in Dubai; Bollywood now makes more films and sells more tickets than Hollywood. And where do you go if you want to shop away to your heart's content at the world's biggest shopping mall? Beijing, of course.

Please don't write to me to say that, because I don't want to work in 110 degrees, I am part of the problem. I know that; I don't claim any moral superiority. I can report, too, that after I told Bill to mend my unit as best he could, he shook his head but said he would try - and that I am now sitting at my desk in blissfully cooled air, but doubtless still pumping out carbon dioxide to an extent that would certainly get me a deserved scolding from Dick Nixon.

Fareed Zakaria tells us, incidentally, that 48 million air conditioners were made in 2005 in, er, China - compared with 200 in 1978. It's just that these modern ones, you see, are big and designed to compete in the world market, and . . . Need I go on?

Andrew Stephen was appointed US Editor of the New Statesman in 2001, having been its Washington correspondent and weekly columnist since 1998. He is a regular contributor to BBC news programs and to The Sunday Times Magazine. He has also written for a variety of US newspapers including The New York Times Op-Ed pages. He came to the US in 1989 to be Washington Bureau Chief of The Observer and in 1992 was made Foreign Correspondent of the Year by the American Overseas Press Club for his coverage.

This article first appeared in the 23 June 2008 issue of the New Statesman, Truly, madly, politically

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