The Politics of Austerity

Michael Hill

Introduction

• Invited to review ‘comparatively’ the politics of austerity.

• Opted for a very limited historical comparison within UK.

• After wider contextual remarks will focus on three episodes: 1929-31, 1945-51, 1976-90

What do we mean by austerity?• In terms of the ‘politics of austerity’ there are two different issues. • (1) about austerity as applied to government • (2) government requiring austerity of citizens• In that second sense that Mark Blythe defines austerity as ‘ a form

of voluntary deflation in which the economy adjusts though reduction of wages, prices and public spending to restore competitiveness, which is (supposedly) best achieved by cutting the state’s budgets, debts and deficits’ (Blythe, 2013, p. 2).

• However, even then there is a need to pause to ask: on whom is government imposing austerity? On us all, on the poor, on bankers etc?

Government debt

• All complicated by dramatic impact of wars .• ‘public assets and liabilities have generally

represented very limited amounts compared with... private wealth’ (Piketty, 2014, p. 126, from whom the next table is imperfectly copied.

• Can we see some sort of correlation between ‘austerity’ and public debt. Answer: No

UK Public Assets and Debt (two come together at 90% of national income in 2010)

Austerity politics in three periods in modern British history

• The period of Ramsay Macdonald’s Labour Government from 1929-1931) in which political concern about unemployment as a management of the economy issue emerged.

• The post-1945 clash between welfare goals and the post conflict impoverishment of government and society.

• The debate about limits to government expenditure associated with the rise of the neo-liberalism in the 1970s.

•

Three periods compared

• In the first of those periods the dominant idea was still that the government could do little to manage the economy in ways that advanced welfare.

• In the second one austerity (in both senses) posed massive political problems about re-balancing public accounts and achieving post-war prosperity for a clearly welfare oriented government.

• The third period then is notable for the emergence of views about economic management which, whilst not involving simple reversions to austerity in the first sense, nevertheless challenged the idea that governments could engineer welfare through the management of the economy.

1929-31• Massive economic problems following on return to Gold Standard. • The leaders of the Labour government elected in 1929 had

supported the return to the Gold Standard and the Chancellor, Philip Snowden was deeply wedded to ‘nineteenth century economics’.

• Tentative arguments for public investments came from the Liberal Party influenced by Keynes.

• Skidelsky ends his account of Macdonald’s 1929-31 government with:

Socialism was impossible and capitalism was doomed: there was nothing to do but govern without conviction a system it did not believe in but saw no prospect of changing. It struggled to defend the working class as long as it knew how, and when it could defend them no longer it resigned (1967, p. 434).

Austerity 1945-51• The period from 1945-51 has been described as the ‘age of austerity’.

But what is being identified is the social effect of a long and devastating war.

• The Chancellor of the Exchequer between 1947 and 1950, Stafford Cripps, seemed to have become personally identified with austerity as a consequence of his own life style and attitudes. But behind this was a politics of austerity very different to that in the period before the war or in more recent times.

• The war generated a debt burden even greater than the First World War (well above 200% of GDP) and that the United States immediately revoked the generous terms for its loans to the UK at the end of the war. Nevertheless the Labour government was committed to its pledges on social policy, and to the ideal of building a fairer social order

Policies 1945-51• Strenuous effort to minimise public austerity in a context of a new (post-

Keynesian) ideological atmosphere that saw government austerity as less essential.

• Cripps success in keeping the inflation rate down rested upon success in persuading the trade unions not to try to exploit labour scarcities. ‘In the 1948 Budget the TUC was sweetened by Cripps’s once-for-all capital levy’ (Dell).

• No return to the gold standard, but rates of exchange were fixed in terms of a hard to maintain relationship to the dollar. Devaluation resisted for a long while but occurred in September 1949.

• Cripps argued then:We have decided upon these steps because we are determined not to try and

solve our problem at the cost of heavy unemployment, or by attacking the social services that have expanded over the last few years (quoted in Kynaston 2007, p. 350).

1976 onwards – A new ‘age of austerity’?

Keynote quotes1. We used to think that you could spend your way out of a recession

and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists... (James Callaghan, quoted in Cassidy, 2009, p. 79).

2. Economic policy is ‘precisely the opposite of that assigned to it by the conventional post-war wisdom. It is the conquest of inflation, and not the pursuit of growth and employment, which is or should be the objective of macroeconomic policy. And it is the creation of conditions conducive to growth and employment, and not the suppression of price rises, which is or should be the objective of microeconomic policy. (Nigel Lawson, 1984, quoted in Dell pp. 499-500).

Government as the problem not the solution?: 1976-89

1. The development of new approaches to economic management, involving trying to minimise government interference with market forces, which bore some resemblance to the use of the gold standard in earlier times.

2. The development of ‘public choice’ theories which dismissed government concerns with public welfare as self-interested behaviour productive of inflation.

3. A related theme, not necessarily expressed in public choice terms, about government activity crowding out more ‘productive’ activity.

4. Denial of the importance of the fall outs from new ways of managing the economy, including particularly a stance on unemployment which explicitly or implicitly blamed the victims for their predicament.

Conclusions • A contrast was made between the inter-war period when there was an orthodox

view that governments should balance the books, and that taxation levels should be contained, and the post Second World War period when the quest to achieve social progress and preserve relative equality was seen to override that view. Then from the mid-1970s onward there was a distinct shift (better described as ideological than simply a paradigm shift) to one that accepted a role for government in enforcing austerity with comparative indifference the victims of that action.

• The trends in public debt, public expenditure and taxation owe much more to the impact of war than anything else, and there was no dramatic reversal in this respect in the 1970s. What is however striking about the 1970s relative to the other periods is the difficulties about the rate of inflation. It is true to say that post Keynesian policies dealt with that problem but they did so at the expense of worsening unemployment.

• My brief not to bring the story up to date, question is whether we can learn from contrasting approaches to austerity.