How the News: Distorts the economy
Simon Pitt |
Saturday 20th June
One thing I revisit on this site is how the news claims to be an impartial quest for truth but is actually a sensationalist freak show.
At the moment a narrative is playing out in the news about the economy, creating a dichotomy between two sides: those that believe it is important to do something about the budget deficit and those that believe the Conservative spending cuts are too damaging to people on low incomes. You might say you are anti-austerity if you’re on the Left, and if you are on the Right, you would call your views financially responsible.
These views are not mutually exclusive, but the news has turned them into opposing camps and means that reaching an agreement is impossible. There is no attempt at meet in the middle and actually solve anything, instead the news tries to find a "winner". Usually this results in one inconclusive argument after another.
Not only is it impossible to reconcile these two sides when they are presented as oppositions, but it also misrepresents the truth. This allows members of each side to ignore the other. The Right can disregard the Left as financially irresponsible; the Left can ignore the Right as attacking the poor.
The difference between the deficit and the debt
The debt is actually quite a simple issue, but the media presentation is a mess of big numbers that even confuses David Cameron.
The National Debt is the total amount of money the UK Government owes. It owes it to people that have bought bonds from the Government. In fact, if you have any Premium Bonds you are one of the people the Government owes money to. Most of the debt, though, is owed to insurance companies and pension funds.
The Government Budget Deficit is the shortfall between how much money the Government receives (mainly from taxation) and how much it spends (mainly on public services). The Government pays for this shortfall by selling more bonds. And those increase the National Debt. The thing about the deficit is that unlike the debt it is not a single figure. It is a rate. For example, the deficit in April 2014 was £71 billion per year, but in August 2009, it was £206 billion per year. The deficit is the rate the debt is increasing.
Some people say these numbers and then sit back as if they’ve won the argument. "See," they say, "the deficit and debt are big. Therefore it’s a problem and we should do something about it."
But there’s nothing intrinsically wrong with being in debt, despite the quasi-Christian moralising of the Right. Remember we’re using that money to pay for things like hospitals and teachers. Who cares if you’re using money you don’t have if you’re using it to save someone’s life?
The problem is we have to pay this money back. With interest. And that interest is money we could use to fund public services, instead of paying back private companies.
Clearly, using public money to pay interest is a bad thing. This feels like something we have cross party agreement on. If you’re on the Right, you’d use that money to reduce taxes, if you’re on the Left you’d pay for public services.
The Conservatives have done an excellent job of telling this narrative. And the news has run with stories about the debt and deficit, albeit mixing up and conflating the two. But they’ve make it clear that it’s bad.
This is where it starts to break down. The Conservatives say they have to cut public services to reduce the deficit. You might not agree that they should cut the services, but most people agree paying less interest would be good. The problem is, their story doesn’t hold up to scrutiny. Yes, they’ve cut benefits, but they’ve also cut income tax and removed tax on savings. If cutting the deficit is so important, why are we cutting tax on savings? Shouldn’t we keep that tax and put the money we earn from it towards the deficit?
By opposing "austerity", the Left are dignifying the Conservative Government’s policies as "austerity measures" when they’re clearly nothing of the sort. Austerity means reducing the deficit by increasing tax or by decreasing spending (ideally, a little of both). But the Conservatives aren’t doing that at all. They’re decreasing spending and decreasing tax. This isn’t austerity at all, but typical Right wing reduction of the state. It’s what the Conservatives would have done whether there had been a deficit or not.
Reducing the deficit
So, we’ve all agreed that paying interest to private insurance companies isn’t a good idea (except for those of you who run insurance companies). But we don’t know the best way to do this. We’re aiming for using the money we have as effectively as we can. The Government makes money from tax. That’s painful and we don’t like that. But it uses the money to build roads and help people who are down on their luck. And we like that. We need to find a way to maximise the latter and minimise the former.
Let’s put to one side discussion about public sector efficiency and assume that the more money you have the more value you get. That’s a fair assumption. I’m not saying it’s a linear relationship, just that overall more money is better. After all, even if you do more with less, you’d do even more with more.
It is a logical fallacy that debt is inherently bad. Let’s say I lend you £100 and charge you 1% interest. You invest that and manage to get 5% interest. Although you have to pay me £1, you earn £5. It’s a net gain for you of 4%. If you ever find yourself in this situation, you should borrow as much money as you possibly can.
Debt is only bad when the cost of the interest is greater than the value that you got from the money.
Now, you could say, all Government debt is good because we use the money for funding things like the NHS and Social Welfare, and that those things are so valuable that it doesn’t matter what the cost of the debt is. This is an argument some on the Left use and often what the Right are responding to. There is a moral integrity to this, but the Right can disregard it by saying that eventually you will be too much in debt and then you won’t be able to do any good at all.
But what if borrowing not only allowed us to do good things, but also earned more tax to pay back the debt.
This is where stimulus packages come into play. You invest money in public services, even if it means increasing the deficit in the short term, because this promotes economic growth. Higher tax returns in the future then allow you to pay off the debt. You might think I’m being new age or coming from a radical left background. I’m not. John Maynard Keynes, wrote about this in the 1930s:
The boom, not the slump, is the right time for austerity at the Treasury.
That’s the same Keynes who advocated a predominantly private sector economy and believed strongly in free markets.
The Right does not like this idea. They want an excuse to implement austerity measures. It’s annoying for them, because all the evidence is against them. Alan Greenspace moaned in The Wall Street Journal that all those problems he said would happen if people didn’t listen to him just weren’t happening:
Inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.
Trying to justify austerity
In 2010, Carmen Reinhart and Kenneth published an article called "Growth in a time of Debt" in a non-peer-reviewed issue of the American Economic Review. I’m sorry, that sounds judgemental. What I mean is that it was published in a magazine where academics could write whatever they wanted without the rest of their industry feeding back about whether they’d made any mistakes.
The key message of this paper was that "for levels of external debt in excess of 90 percent of GDP, growth rates are roughly cut in half". That is, it’s all very well trying a stimulus package, but if you borrow too much money your growth rate falls. Greece had very high levels of debt, and look at them. Maybe, their economic disaster wasn’t anything to do with massive amounts of corruption and fraud and instead was because of economics.
This was perfect for Government officials to justify "austerity" measures and discredit costly stimulus packages. David Cameron pretended that we’d all be like Greece if we kept on following these silly universally agreed, economically proven policies like stimulus packages:
Greece stands as a warning of what happens to countries that lose their credibility, or whose governments pretend that difficult decisions can somehow be avoided,
But very few economists agreed with Reinhart and Rogoff’s article.
many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt.
They’d fallen for one of my all-time favourite mistakes: "correlation does not imply causation". And more than that: their maths was wrong.
First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error.
The whole narrative of austerity, on cuts to public services has been justified by a typing error. But the article hadn’t persuaded the Conservatives that austerity was the right thing. They had used the article to justify austerity. And once everyone was convinced, they’d used false analogies and sensationally large figures to cement the narrative in the media and to the nation. Once a strong clear narrative is out it takes a long time to replace it.
Painting the wrong picture
We have fallen for the message that debt is a bad thing and that we should pay it off as quickly as possible. We have been tricked into thinking that austerity measures are the best way of doing that. And we think this is what the economists say we should do.
But the truth is that mainstream, textbook economics not only justified the initial round of post-crisis stimulus, but said that this stimulus should continue until economies had recovered.
The Conservatives successfully convinced us that they are implementing austerity measures. They are doing nothing of the sort. They are cutting taxes. These are not the actions of a party committed to reducing the deficit as quickly as possible. These are the actions of a party trying to justify, by any means necessary, reductions in public spending while sneaking through tax cuts for the rich.
As Cameron said in a speech at the Lord Mayors Banquet, these polices are "Not just now, but permanently." That doesn’t make sense if he’s putting them in to reduce the deficit. Once the deficit is gone, you can increase your spending again.
But what’s even sneakier is that the Conservatives haven’t even imposed very many benefits cuts over the last few years:
Given the fact that the coalition essentially stopped imposing new austerity measures after its first two years, there’s nothing at all surprising about seeing a revival of economic growth in 2013.
They did a lot at first and then stopped. That’s just as well, because it would have been damaging to the economy if they had. But this is doubly sneaky. They can then point to the evidence of the recovering economy and say it’s because of austerity measures that they’re not imposing. This clears the way for them to cut more benefits.
Look back at Chart 2, and specifically at what happened to countries that did little if any fiscal tightening. For the most part, their economies grew at between 2 and 4%. Well, Britain did almost no fiscal tightening in 2014, and grew 2.9%. In other words, it performed pretty much exactly as you should have expected. And the growth of recent years does nothing to change the fact that Britain paid a high price for the austerity of 2010-2012.
You almost have to admire the sneakiness of it. If it wasn’t for the fact that it’s literally killing people.
If this counts as a policy success, why not try repeatedly hitting yourself in the face for a few minutes? After all, it will feel great when you stop
And the Left? The Left has fallen for it and taken to opposing "austerity" that isn’t happening. They suggest their own mechanisms to pay off the debt, pandering to their own biases. Their narrative is that rich people aren’t paying tax and if we got them to pay it, we could use that to pay off the deficit. It’s a more humane version of the same fallacy.
They’ve been dragged into the same narrative. One that is too complex to play out in soundbites on the public stage.
What’s with sophisticated media outlets such as the FT seeming to endorse this crude fallacy? Well, if you actually read that 2013 leader and many similar pieces, you discover that they are very carefully worded. The FT never said outright that the economic case for austerity had been vindicated. It only declared that Osborne had won the political battle, because the general public doesn’t understand all this business about front-loaded policies, or for that matter the difference between levels and growth rates. One might have expected the press to seek to remedy such confusions, rather than amplify them. But apparently not.
When you have a strong but untrue narrative, opposing it directly makes the message stronger. Being "anti-austerity" means there are austerity measures that you opposing. And arguing with the Right lures you into a debate that is full of complexities. It’s a game of noughts and crosses and the Conservatives went first.
The only way to win is not to play.