British politics today is dominated by a lie. This lie is making it significantly more likely you will lose your job, your business, or your home. The lie gives a false explanation for how we came to be in this crisis, and prescribes a medicine that will worsen our disease. Yet it is hardly being challenged – except by some of the world’s most distinguished Nobel Prize winning economists.
Here’s the lie. We are in a debt crisis. Our national debt is dangerously and historically high. We are being threatened by the international bond markets. The way out is to eradicate our deficit rapidly. Only that will restore “confidence”, and therefore economic growth. Every step of this program is false, and endangers you.
Let’s start with a fact that should be on billboards across the land. As a proportion of GDP, Britain’s national debt has been higher than it is now for 200 of the past 250 years. Read that sentence again. Check it on any graph by any historian. Since 1750, there have only been two brief 30-year periods when our debt has been lower than it is now. So we can afford to run a deficit, if that has a positive effect – which we’ll get to in a minute. If we are “bust” today, as George Osborne has claimed, then we have almost always been bust. We were bust when we pioneered the Industrial Revolution. We were bust when we ruled a quarter of the world. We were bust when we beat the Nazis. We were bust when we built the NHS. Or is it George Osborne’s economics that are bust?
Our debt is not high by historical standards, and ……… it is not high by international standards. For example, Japan’s national debt is three times bigger than ours, and they are still borrowing at good rates.
David Cameron claims that, despite these facts, they need to cut our deficit by slashing our spending because the bond markets demand it. If they do not obey, then our national credit rating will be downgraded, and we will have to pay much higher interest on our loans. But here’s the flaw in that plan. That’s not what the bond markets say. Not at all. Professor Paul Krugman, the Nobel Prize-winning economist whose predictions have consistently proved right through this crisis, says Cameron is conjuring up “invisible bond vigilantes” who “don’t exist.” Who is the bond market really punishing? It’s the countries that cut too fast, and so kill their economic growth. The last two nations to be down-graded were Ireland and Spain, who followed Cameron’s script to the letter.
It turns out that cutting our deficit rapidly doesn’t cause an increase in “confidence” and so save the economy. Professor Krugman mocks this idea by calling it “The Confidence Fairy,” and goes through the historical record to show she doesn’t exist. Cutting doesn’t create fairy-magic. No: it has a very different effect.
Here’s what we learned during the Great Depression, when our view of economics was revolutionized by John Maynard Keynes. In a recession, private individuals like you and me, perfectly sensibly, cut back our spending. We go out less, we buy less, we save more. This causes a huge fall in private demand, and with it a huge fall in economic activity. If, at the very same time, the government cuts back, then overall demand collapses, and a recession becomes a depression. That’s why the government has to do something counter-intuitive. It has to borrow and spend more, to apply jump-leads to the economy. This prevents economic collapse. Instead of spending a fortune on dealing with mass unemployment and economic break-down, with all the misery that causes, it spends the money on restoring growth. Keynes called it “the paradox of thrift”: when the people spend less, the government has to spend more.
Wherever it has been tried, it has worked. Look at the last Great Depression. The Great Crash of 1929 was followed by a US President, Herbert Hoover, who did everything Cameron demands. He cut spending and paid off the debt. The recession grew and grew. Then Franklin Roosevelt was elected and listened to Keynes. He ramped up spending – and unemployment fell, and the economy swelled. Then in 1936 he started listening to the Cameron debt-shriekers of his day. The result? The economy collapsed again. It was only the gigantic spending of the Second World War that finally ended it.
It is working now. There are enough countries in the world trying enough different economic solutions that we examine them like laboratories. which countries have come out of this recession fastest? They are the ones like South Korea, which have had by far the biggest stimulus packages, paid for with (yes) higher debt. Which countries have fallen furthest and shattered most severely? The ones that tried to pay down their debts immediately with huge cuts.
Indeed, there’s an irony here. It turns out that if all you do is fixate on paying your deficit now now now, and so you smother your economic growth, you will end up not being able to pay your debts off anyway. That’s what just happened to our nearest neighbor Ireland, may she rest in peace. And it’s what has happened throughout British history. Professors Victoria Chick and Ann Pettifor conducted a detailed study of the last ten recessions, and they found that consistently “fiscal consolidation increases rather than reduces the level of public debt as a share of GDP.” Think of it this way. It’s as if tomorrow you became so panicked about your mortgage that you decided to pay it all off in one year, by ceasing to buy food and water. You get sick, and your house gets repossessed.
So debt isn’t the problem. Debt is part of the cure. The facts suggest need to spend more, not less, to get the economy back to life – and pay back the debt in the good times, when we will be able to afford it.
I am not a doctrinaire defender of the last Labour government. I think Tony Blair should be in prison, and Gordon Brown will be damned by history for his role in deregulating the banks – the real cause of this crisis. But to claim that this crisis was caused by Labour “racking up debt” is simply false. When the Great Crash hit, Britain had the second-lowest debt in the G7 club of leading economies. To react to a recession by increasing spending, and so keeping the economy afloat, is the only rational response. The real criticism is that they didn’t go anything like far enough, and now Ed Miliband’s Labour Party is now too cowardly to defy the false conventional wisdom and make the case for fiscal stimulus, instead promising merely slower, smarter cuts.
The real reason why David Cameron is imposing these massive cuts has nothing to do with the national debt or the deficit. It is because he regards himself as, in his words, “the child of Thatcher”, and he wants to pursue her agenda harder and faster than she ever dreamed. He can do the difficult job of selling that to the British people if he wishes – but he should stop doing it on the basis of a swollen, suppurating lie.
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