• Our Politicians Are Not Up To It

    The revelation that Growth in a Time of Debt, the influential 2010 paper by leading economists Reinhart and Rogoff, was vitiated by basic errors has removed one of the last credible underpinnings of the contention that austerity – and reducing the deficit at all costs – is the proper response to recession.

    But it is not just miscreant economists who have egg on their face; it is our political leaders too. The translation of the Reinhart/Rogoff findings into a simple ‘rule’ that a debt to GDP ratio exceeding a tipping point of precisely 90% produces a precipitate slump in economic growth has been the intellectual foundation of policies advocated and implemented by politicians across the western world. The two economists have frequently been cited as champions of austerity by Paul Ryan, the Republican vice-presidential candidate, by Olli Rehn, the European Commission’s economic chief, and by George Osborne, among many others.

    How did these luminaries come to accept and implement such a literally counter-productive policy? The answer is that there are very few politicians who are competent to make their own judgments on major economic issues. What most of them do is cast around for arguments that support their own political prejudices – and that is all the easier if those arguments are offered from within the comfortable confines of current orthodoxy.

    Reinhart and Rogoff were endorsed and applied (mistakes and all) because it is what political leaders wanted – on political grounds – to hear, and because it accorded with the ‘free-market’ doctrines that have dominated western economies for nearly four decades. A George Osborne, for example, found that the supposed ‘90% rule’ gave him all the scope he needed to justify and target the true aims of his policy – smaller government and ‘rolling back the state’.

    The dependence of political leaders on advice – especially on economics – is not new; but it matters more than ever today as the dangers of such dependence become clearer. While the austerity message is increasingly contested on grounds of historical experience, Keynesian economics, and the need to establish the direction of causality in respect of any postulated correlation, the thinking of most people is still corralled by those powerful forces which seized control of the global economy decades ago.

    There can be little surprise that advice from these quarters is extremely congenial to right-wing politicians. For most of them, economics is a simple business. They see no distinction between running a country’s economy and their own experience of running a business. Even when they think about the wider economy, their decades-long experience of monetarism leads them to believe that the essence of a successful macro-economic policy is a backward-looking insistence on stability and getting government out of the way. They are simply unfamiliar with the kind of thinking that has allowed other economies to grow and prosper.

    It is less easy to explain why politicians from the left of centre have been equally unwilling or unable to think for themselves. But the sad truth is that most simply assume, like Tony Blair, that economics is a difficult and technical business that can safely be left to the bankers, and is therefore no longer their responsibility. They tell themselves that the economic process is probably immutable anyway, and that the real business of politics is in any case about other issues. They place more value on the plaudits of the powerful than on the reproaches of the dispossessed.

    Even a Gordon Brown – who was widely thought for a time to be a master of economic policy – can now be seen to have been merely a prisoner of his orthodox advisers. He, at least, seems to have had the intellectual capacity to re-think his position to some extent since he left office.

    The dead hand of long-established orthodoxy continues to weigh down on the current Labour leadership. Even Eds Miliband and Balls, who clearly have some understanding of what is needed, find themselves constrained by the fear that anything too overt by way of new thinking will open them up to damaging attack. They have to move cautiously; and that inhibits them from developing and advancing a fully comprehensive and coherent alternative policy.

    The result is that our political establishment offers no one able and willing to break new ground, to consider, let alone advocate or act on, neglected issues that are nevertheless of great importance. Where, for example, is the debate about the need to improve competitiveness if we are to grow without running into the constraints of inflation and trade deficits? What about rejecting destructive austerity in favour of replacing – as the Japanese are doing – the banks’ monopoly over credit created for non-productive purposes with credit created by the central bank and directed – not into banks’ balance sheets – but in accordance with an agreed industrial strategy into productive investment? What about restoring macro-economic strategy as the responsibility of an accountable democratic government rather than leaving it as the preserve of an ‘independent’ central bank? And, above all, what about making full employment, on economic as well as social grounds, the central goal of policy?

    Bryan Gould

    24 April 2013

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