Iraq and the apocalypse

Why did a gifted prime minister embark on a course which people far stupider had consistently warned

New Labour being the project it was, we all have memories of special dismay. My own most lowering moment arrived one night in the winter of 2005 when I went to Chatham House in London to listen to a talk by Gordon Brown, given under the patronage of the Guardian in memory of the political journalist Hugo Young. I'd only once seen the Chancellor of the Exchequer in the flesh and I accepted the invitation because I wanted to take a citizen's look at our next prime minister. He raced into the room somewhat late, barely acknowledging the largely friendly audience, and began his speech, which was addressed throughout to the plain surface of the lectern. Repeatedly, in a nervous gesture, he fingered the corners of his apparently unfamiliar typescript, aligning the pages into hospital corners, while motor-mouthing through its words as though he were a solicitor forced to register a particularly arcane codicil. At the end, he refused questions and swept out of the room at the same pace at which he had entered. The subject of his speech had been how to restore public trust in politicians. Never once did he use the word "Iraq".

Next day I was surprised to see the speech reported in the newspapers as though it were a perfectly normal event. Sometimes, you think, the Westminster village is so fascinated with itself that it doesn't even notice when it's being insulted. To an outsider, an infrequent member of the audience at political events, it had been a performance of startling rudeness. But it made its more lasting impression for two quite different reasons.

First, it seemed to represent a sort of desolate milestone beyond which no real honesty was any longer possible in the Labour Party about anything. The speech was intellectually derelict. If you had wanted seriously to address the question of why a gulf had grown up between the electorate and the political establishment in Britain, then the chances are that you would have been obliged at least to mention, if not to address, the widespread impression that your government had altogether abandoned the notion of an independent foreign policy. You would have had to try seriously to speak to the deep divisions created in the country by a bruising Middle Eastern invasion. But beyond that, I left the meeting saddened because Brown's manner - at once neurotic and imperious, like a scratchy clip of Charles Laughton as Claudius - contrasted so sharply with my memory of a night ten years earlier when I had gone to another political lecture for exactly the same reason - to get my first proper look at the previous coming man.

Most gifted politician

The conventional wisdom is to say that Tony Blair "does" sincerity. Like an advocate, it is claimed, he always believes what he says when he's saying it. But this version of Blair as a gifted snake-oil salesman, who happens temporarily to believe in snake oil, sells him way short. On that night in the Queen Elizabeth II Conference Centre, the young Blair gave an admittedly routine address, but in the question-and-answer session afterwards simply dazzled everyone present both by his command of subject matter and by the politeness and directness with which he considered everything that was put to him. Again, the common view is to insist that this degree of eloquence and plausibility is somehow suspect, that fluency must be the mark of someone who is up to no good.

But anyone whose profession is words is committed to believing that thinking and speaking are intimately connected. Writers believe that deftness of expression expresses deftness of mind. In Blair's case, at least in 1995, you were left in no doubt that you were listening to the most gifted politician of the period, someone who, unlike Margaret Thatcher, did not need to resort to childish boasting and bullying in order to make his points.

All administrations become fractious with age. In their hearts, like most of us, they know the case against themselves better than anyone. Again, like most of us, they live with it daily. Margaret Beckett's impatient advice to Ed Stourton to "pack it in", when asked about Britain's complicity in countless unnecessary deaths in the Lebanon and Israel last summer, clearly served, in her mind at least, as a yet more succinct version of her previous injunction on the same subject to Sky News - "Oh for goodness' sake, Adam, leave it alone." But it also offered the most memorable epitaph to carve on the gravestone of this government: "Oh, pack it in." So much has been written, so much speculated in the past 20 years about the contempt the public feels towards politicians, but we hear far less of the reverse - the creeping hatred politicians so plainly nurse for us, the stupid and unseeing voters who seem unable to appreciate the complexity and importance of the paramount issues in a dangerous world.

Lethal miscalculation

For, yes, if we are to say along what fault-line it was that new Labour was destroyed - be it in Iraq, be it in the NHS, be it in the PFIs, be it in the sardine packing of the prisons - then surely all its most egregious mistakes flowed from Tony Blair's conviction that he did not need to take any notice of his own natural supporters - that he was somehow living his life in some far higher atmosphere, at some more mature level of reality where tough judgements had to be made on the basis of largely confidential evidence to which only he, the neo-cons, a couple of dodgy foreign newspaper proprietors and some spies had access. Blair, clearly, had never much liked the Labour Party. He had never thought very highly of those who gave him power. But as time went by, he began to see the popular hostility to his "higher view" as a mark of his virility, a sign that he must be facing up to the "difficult" decisions that we, the lazy and the feckless, spend our lives shirking.

It turned out, of course, to be a delusive analysis, most disastrously in the matter of the Middle East, but it was a strangely alluring one - and a brilliant answer to those of his stupider critics who had set up a straw man by claiming, quite wrongly, that Blair was nothing more profound than a smooth operator obsessed with popularity. How clever of him, then, to prove the opposite - that he gave not a fig for public opinion! Yet in detaching himself from the wisdom of the crowd - the common wisdom, the correct wisdom which could not understand why a mission against al-Qaeda had to be taken into a country where was no trace of al-Qaeda - Blair turned himself into an ungovernable Coriolanus. Here, suddenly, was a man who could not forgive the rest of us for failing so completely to see what he alone sees so clearly. A religious element juiced up the volatile mix of resentment and high stakes. "If I am persecuted I must be right."

This then is the paradox: a man who pronounced at the outset that his only ideology would be "what works" set off on a course which people far stupider and far less gifted than he consistently warned him could not possibly work. They were right. He was wrong. Every day we see the lethal evidence of miscalculation, and while mourning for the innumerable victims, for the Iraqis who today say they cannot walk their children to school without passing dead bodies uncollected in the street, we also mourn a man whose tragedy is far deeper than lazy satirists or commentators allow.

At a moment when the west needed great secular leadership, it was given instead demented religious leadership. A man who arrived in politics as the voice of modernity and reason became, at his own wish, that most ancient and mystic of figures: the prophet unloved in his own country.

There is, in George Bush, his American ally, a shamelessly apocalyptic willingness to admit that judgement on earth means little to him. Bush is happy to tell us he is waiting for judgement in heaven from someone he refers to as his other father. Like many such people in his position, he shows enviably few signs of nerves. The decision of the third umpire does not bother him. In Blair, however, there is still, to his credit, a Catholic nervousness, a haunted quality, a knowledge that the road taken was at least a choice. "I have listened and I have learned," he announced, after a sobering election in 2005, before proceeding wholly to ignore any such lessons in the weeks of the Lebanon war. For us, the spectators, it's been an extraordinary passage of history. Someone of exceptional strengths became caught up in a situation that brought out every one of his exceptional weaknesses. Because it could happen to any of us, the facile dismissiveness of his untested critics seems shallow. But at this time of all others, the west needs democrats as leaders, not martyrs. Pack it in, indeed.

This article first appeared in the 07 May 2007 issue of the New Statesman, Blair: The reckoning

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