Wednesday, 25 August 2010

Cutting the hyperbole

Hyperbole can often get in the way of proper discussion, and it's becoming increasingly unhelpful as a response to the spending cuts being imposed by the UK Government. Opposition politicians, including some in my own party, seem to be unable to refer to spending cuts without prefacing the word with either 'savage' or even better 'slash and burn'. But the words are being used more for the imagery they portray than to make any contribution to a discussion of economics.

The result, unfortunately, is that whilst the opposition are winning the battle of hyperbole, the government are winning the battle of economics. Not because they are right, but because they are keeping to a single clear mantra which people can identify with – "we need to reduce the deficit" – and the opposition are neither challenging that message nor offering any real alternative.

One of the major victories of Thatcherism was her ability to simplify economic arguments for people by comparing the government's budget to a household budget. It was wrong and misleading – national economies don't have to work in such simplistic ways – but it worked, and it's still working today for Cameron. Simply stepping up the hyperbole used in criticising the cuts is likely to be no more effective today than it was in the 1980s.

Part of the problem in trying to put forward an alternative view is that saying that there is nothing inherently wrong with governments running a deficit – even over a lengthy period – feels counter-intuitive; but it is what a lot of governments, of all colours and in many countries, have actually done over many decades.

I wouldn't argue that governments don't need to consider the size of the deficit and the context set by the economic cycle; but the approach of the current government – "there is a deficit, we must cut it" – owes more to ideology than to economics. And the response – "wicked, evil, slash and burn Tories" – owes more to trying to paint a negative image of those doing the cutting than addressing either the ideology or the economics.

What we need to do more of is to explain to people that we have a choice - we can run budget deficits if we want to, provided that we understand why we're doing it, for how long, and what the cost of doing it is. We need to be refuting the basic argument, not simply criticising the consequences.

17 comments:

Siônnyn said...

You are right, John - the implication of the Tories is that a household must balance its budget (and by implication, not get into debt) therefore so should the Government. But at the same time, the Tories encourage people to buy their own houses by taking out mortgages!

Borrowing for capital expenditure is good, and normal, as is borrowing to cover short term unexpected emergencies (such as the credit crunch!) And now, with base rates so low, it is a good time for the UK government to be borrowing to stimulate the economy by bringing forward infrastructure projects - if, that is, they can find anybody willing to lend to them!

The deficit reduction, though, is just a cover for the eternal Tory instinctive urge to bash the poor! Instead of going after the tax avoidance scandal - reputed to be worth between £70Bn and £100Bn per year - and where a few good results would reap huge rewards, they choose to go after benefit claimants (some of whom, admittedly, are dishonest) where it will take many, many hundreds of thousands of good results for them to possibly recoup £6Bn.

This is pure doctrinaire Thatcherism, and the sooner we get full say over our own affairs, the sooner we can be rid of it!

Peter Freeman said...

I can't help but compare the hyperbole of UK politics to the hyperbole here in the US.
Barak Obama, who by our standards is a moderate conservative, is described as a died in the wool socialist hell bent on dragging America into a communist dictatorship. So say the right wing radio talk show hosts and most Republican politicians. The agenda of the right is familiar but the words used in reference to social security, medicaid and similar programs are "Welfare state socialism" of course Republicans argue that the way to solve America's deficit is to do away with such things.
I hope and pray that Wales never experiences what is happening here in California where the race for Governor has hardly anything to do with policies and everything to do with who is telling the biggest lies about their opponent.

Plaid Panteg said...

John,

I agree with the premise of what you are saying. Indeed, I remember being impressed by your attempt to make the case for very little cuts in a blog post prior to the election.

The words such as savage do seem appropriate surely. My understanding, happy to be corrected, is that the current ConDem plans will see the fastest and deepest contraction of public spending since WW2?

The Druid of Anglesey said...

If only there were more politicians like you, John. We are too often prevented from a proper debate on crucial issues, like how best to manage the economy, because a majority of politicians (from all parties) prefer to appeal to peoples' hearts rather than to their minds. As you note, the endless disparaging of the Conservatives in particular as being somehow solely driven by an ideological desire to "bash the poor" robs us of a entirely valid and alternative view of how the economy works and how the lot of everyone may be improved.

Comparing government finances with household finances may not be an exact match, but the general principles remain the same: borrowed money does have to be eventually repaid. When the Government is paying more in debt interest than the MoD budget (as it currently does) proves that although it might be normal for Governments to run a deficit, the gradual ramping up of debt begins to generate a interest bill which restricts the Government from spending on essentials (like sufficient helicopters and other equipment for our troops for example).

Spirit of BME said...

Mr Dixon,
The first sentence in your last para sums up what is wrong with your analysis.
Government debt is a international commodity and those who buy government debt (China is the biggest investor, in the 70`s it was the Gnomes of Zurich) have to judge if you are sound and a good bet in order to get their dosh back. If not these outside considerations take over the domestic agenda ( but dont tell the voters as this makes HMG look not in control and street cred goes down the pan).
Iceland hit the buffers on this one and if the English debt continued to grow rating agencies will stick an amber light on and governments pay far more for their loot.
So, the decision to run a defict is not really yours to take .

Plaid Panteg said...

Druid,

I would urge you to read Drew Westen's 'The Political Brain'.

A Change of Personnel said...

Politicians appeal to the heart not the head on economic matters, particularly in Wales, because it works. It would be interesting to do a survey to find out how many people decided to vote and voted Labour rather than Plaid Cymru or Lib Dem because of the threat of a repeat of Margaret Thatcher’s legacy.

You rightly make the argument that there is alternative to what the Coalition are doing in reducing the deficit and cutting public services, but the truth is that even though the Tories didn’t win outright they managed to frame the economic argument on their terms forcing the left in the UK and Wales on to the back foot where they haven’t recovered yet.

However you simply won’t get a hearing on an alternative from voters even if they hate what the Government is doing until Gordon Brown’s toxic legacy on the economy is dealt with; it’s the elephant in the room that no one, not even the Labour leadership candidates wants to talk about unless it’s to trash his reputation further.

As for intelligent informed argument on the economy it should be a given in any country, but it needs political leadership on all sides of the argument for it to happen, I’m not holding my breath for it anytime soon.

John Dixon said...

Marcus,

"The words such as savage do seem appropriate surely."

As political knock-about, maybe; as a substitute for economic debate, no.

My point is that I'd sooner debate whether they are necessary or not than whether they are savage or not; the former debate is more constructive than the latter.

Also bear in mind that, if we fall into the trap of knee-jerk reactions like savage and slash and burn, then we're saying much the same as the Labour Party - and never forget that, for all their bluster, Labour's plans were not so very different from those of the Tories. I want to move the discussion away from the yah-boo stuff and into a proper consideration of the economics.

John Dixon said...

Druid,

"the general principles remain the same: borrowed money does have to be eventually repaid."

Yes, of course; but it can also be 'rolled over' into new debt. The USA for instance has had a net public debt for over a century - some years it goes up, some years it goes down depending on whether the annual budget is in deficit or surplus; but the underlying debt is always there.

"the gradual ramping up of debt begins to generate a interest bill which restricts the Government from spending on essentials"

I cannot disagree with that. My argument however is that we have to take a judgement on the extent to which we're prepared to run a deficit accepting the consequences. The debate is being presented at present although there really is 'no alternative', and that is simply not true.

John Dixon said...

Spirit,

For one who generally rails against any acceptance of limitations on Wales' political sovereignty, you seem remarkably willing to cede economic sovereighty to China!

Of course any deficit needs to be financed, and that means borrowing. And of course borrowers will make a judgement about the likely return on their loan, and the level of risk attached - the higher the risk, the higher the return they will seek.

But many of their judgements are made on a relative rather than an absolute basis, by which I mean that they don't look at lending the money to the UK government as a 'yes or no' question, but as a comparison between lending to one government and lending to another and a wuestion of setting the expected level of return. In that sense, of course governments have to be conscious of the need to convince the lenders that they are a safe bet and that will impact on domestic policy.

But that does not mean that we have no choice about domestic policy - to argue that is effectively ceding all control to others. I believe that the current coalition government in London is actually making many of its cuts as a result of an ideological commitment; but they're seeking to blame the 'markets' for what they are doing in order to avoid having to justify it properly. And my basic point is that we should not allow them to get away with that.

John Dixon said...

CoP,

"even though the Tories didn’t win outright they managed to frame the economic argument on their terms"

I agree. It's a major issue. My concern is that by simply reacting with hyperbole, we allow them to continue framing the argument, and that we need a more intelligent response which starts to re-frame the argument.

The Druid of Anglesey said...

John,

Thanks for your reply. In the interests therefore of "moving the discussion away from the yah-boo stuff and into a proper consideration of the economics", I think this quote from Nouriel Roubini, professor of economics at NYU and widely recognised as having correctly predicted the credit crisis, is illuminating:

"The policy dilemma is that you are damned if you do and damned if you don't. You have large budget deficits, there has been a large monetisation of these deficits, near zero rates, Quantitative Easing. On one side if you exit too soon in terms of fiscal stimulus and the recovery is still too weak there is a risk that you fall back into recession and deflation. On the other side, if you don't want to make that mistake, you say "no, lets maintain this stimulus", then deficits and debt are becoming already large - 10% of GDP deficits in most advanced economies, public debt rising towards 100% plus in the next few years, therefore either you have a fiscal trainwreck down the line, or you monetise these debts and eventually youre going to have high inflation and high loan rates are going to begin and crowd out the recovery. So its an extremely delicate trade off in this debate between growth now and fiscal and monetary austerity now."

http://audiovideo.economist.com/?fr_story=418e83e62a2bea334f2ca8ca9da3765ed3268ff4&rf=bm

John Dixon said...

Druid,

Yes, I've heard about friend Roubini before, and the praise he's been getting for having got his prediction right. I'm tempted to suggest that if a large enough number of economists make enough predictions, then one of them will eventually make the right one. The problem is that we never know which of them is right until after the event. And there's no good empirical evidence that being proved (retrospectively) right on one prediction makes any other predictions from the same source more reliable.

However, the phrase in the quotation about "it's an extremely delicate trade off" is an important one, and tends to confirm that the situation is by no means as black and white as it's being presented. There is a political and economic judgement to be made. It's certainly a more open question than the 'no alternative' line being promoted by the government would suggest.

The Druid of Anglesey said...

John,

"However, the phrase in the quotation about "it's an extremely delicate trade off" is an important one, and tends to confirm that the situation is by no means as black and white as it's being presented."

Roubini here is speaking in abstract about the dilemma of whether to continue spending or to begin reining in the debt *considering all other things to be equal*. And this is the point: If we believe we are now through the credit crisis and that there are no other global economic shocks in store for us then it can be argued that we can continue to run a deficit at its current level.

However, if we believe that there is possibly more structural global economic problems to come then the balance of the equation moves dramatically towards the need for prudence now to improve government finances so as to allow the Government more policy leeway (for proper stimulus for example) if there is another big economic shock. Roubini for instance is predicting a further global crisis possibly as early as 2012, this time caused by worthless pension funds.

Whether he is right or not, there is no doubt that Western World's reliance on debt to fuel huge consumption plus the lack of financial regulation will almost certainly bring us more problems in the future. Germany is a good example to us here. As the WSJ reported yesterday: "Ahead of the global financial crisis [Germany] had avoided joining the frenzy of consumer borrowing and had kept public spending on a tight leash. When Chancellor Angela Merkel opted in 2009 for a significant post-crisis German stimulus she did so in the knowledge that her country could afford it.

So, she advocated stimulus for those who could afford it, restraint from countries already up to their necks in debt and subsequent austerity all round, or sensible control of public spending, to clear the way for expansion. This was viewed by the French and U.S. governments as deeply dangerous. Wasn't it tantamount to the rebirth of so-called "voodoo economics"? With Germany recording some extraordinary growth figures this month
—equivalent to more than 9% on an annualized basis—her former critics in the U.S. and European critics could do with a little of that magic."

http://online.wsj.com/article/SB10001424052748703447004575449833330184788.html

Lets not forget that Gordon Brown's King Canute like insistence that his economic genius had abolished boom and bust was one of the prime reasons why the UK's finances were in such poor shape when the Credit Crisis did strike.

John Dixon said...

Druid,

"there is no doubt that Western World's reliance on debt to fuel huge consumption plus the lack of financial regulation will almost certainly bring us more problems in the future"

Actually, I'd agree with that. (And I'd add in that pressure on natural resources and environmental systems is another factor which is pushing us towards a fall.) But the reliance on 'debt' in this context is wider than the issue of government debt only. We are currently locked into an economic system which inherently depends on debt; whilst debt will no doubt cause problems for us in the future, elimination of debt would probably collapse the whole edifice.

For the long term, we need a plan to move to a sustainable economic system where we are not forever spending tomorrow's income on today's consumption, and where we are living within environmental limits. Anyone who pretends that that will be easy is kidding themselves; we've hardly begun as a society to think about the implications.

One of my concerns about the response to the current crisis is that it is, essentially, short term in nature - an attempt at a quick fix so that we can get back to 'business as usual' as rapidly as possible. Taking that view will indeed fuel another crisis at some point, of that I am convinced.

A focus on the rapid reduction of government debt is taking an unnecessarily narrow view of the total situation; and reducing government debt will not reduce the world's reliance on debt to fuel consumerism (indeed, in the short term, it might actually force some people to increase their levels of personal debt).

"Lets not forget that Gordon Brown's King Canute like insistence that his economic genius had abolished boom and bust was one of the prime reasons why the UK's finances were in such poor shape when the Credit Crisis did strike."

On that I wouldn't agree. Canute-like certainly; but more in terms of his unwillingness or inability to understand the huge risks being taken with derivatives and other financial instruments which the people trading in them didn't fully understand themselves. And in that, sadly, he wasn't alone.

The Druid of Anglesey said...

Thank you for your reply, though I note you studiously avoid answering the thrust of my argument, namely that reducing the deficit is the most prudent course of action if we fear there may be more structural economic problems to come - especially as you seem to agree that such problems are in the pipeline.

"whilst debt will no doubt cause problems for us in the future, elimination of debt would probably collapse the whole edifice."

I find it hard to understand how reducing our debt will "collapse the whole edifice'. Even at the Government's current pace the National Debt will continue to rise all the way up to the next election in 5 yrs time.

"For the long term, we need a plan to move to a sustainable economic system where we are not forever spending tomorrow's income on today's consumption, and where we are living within environmental limits. Anyone who pretends that that will be easy is kidding themselves; we've hardly begun as a society to think about the implications."

I agree with you. And as your original post states, screaming "savage cuts" etc prevents us from having this entirely necessary debate.

"Canute-like certainly; but more in terms of his unwillingness or inability to understand the huge risks being taken with derivatives and other financial instruments which the people trading in them didn't fully understand themselves. And in that, sadly, he wasn't alone."

You are right about derivatives etc. However my point is that Gordon Brown, convinced that he had ended the business cycle, started to borrow unnecessarily huge sums of money well before the economic crisis struck:

2002 - £19bn

2003 - £34bn

2004 - £36bn

2005 - £41bn

2006 - £30bn

2007 - £33bn

2008 - £61bn

2009 - £142bn


(source:http://www.guardian.co.uk/news/datablog/2010/apr/22/uk-deficit-government-borrowing)

As a result when the crisis struck (whatever ones views on Keynesian economics) the Government found themselves unable to implement a stimulus programme of sufficient size to make any difference to the economy; as a result they merely carried on spending at previous levels with no effect at all on the economy except to further ramp up debt with future generations will have to pay.

John Dixon said...

Druid,

"Studiously avoiding"? Moi?

I don't disagree with reducing the deficit. That's something which is, of course, prudent. But the amount, speed and method of reduction are all open to much more debate than they are getting. I do not believe that we need the level of cuts in public spending which we're seeing in the timescales in which they're being made, and I don't accept the argument that there is no alternative.

"I find it hard to understand how reducing our debt will 'collapse the whole edifice'. Even at the Government's current pace the National Debt will continue to rise all the way up to the next election in 5 yrs time."

The comment which I made there related to the section in your previous comment about "Western World's reliance on debt to fuel huge consumption". 'Debt' in the sense of fuelling consumption is not government debt as I see it. I took that as a widening of the debate to the overall dependence of the economy on debt; it is in that sense that elimination of debt would destroy the economy. Western economies depend on debt.

"started to borrow unnecessarily huge sums of money well before the economic crisis struck:"

I don't doubt your figures, but I wouldn't agree with this interpretation of them. Prior to 2008, the levels of budget deficit as a proportion of GDP were not particularly high in historical terms. And they followed a period (1999-2003) which saw, I think, the largest and most sustained budget surplus certainly since the 1970s, and I suspect for longer than that (haven't had the time to dig out the longer term figures). 2008 and 2009 were certainly unsustainably high, but they relate to the period of the crisis, where one would expect the numbers to rise.