A Tale Of Two Policies

This week has seen the release of two sets of data that illustrate the division between the kind of Keynesian policy of fiscal expansion undertaken in the US, and the policy of Austerian contraction adopted in the UK, and inflicted on the EU periphery, which I discussed some time ago. On the one hand, the US economy's growth has been revised up significantly from previous readings, showing 5% growth for the 3^rd quarter. On the other, UK growth has been significantly revised down from 3%, to just 2.6%.

The Liberal-Tories, for the last five years, have relied on telling lies about the condition of the UK economy. Ahead of the 2010 General Election, the Tories declared that the UK economy was in as bad a condition as Greece. That statement was ridiculously untrue, but it justified the Tories adoption of a policy of Austerianism, as a means of politically differentiating themselves from Labour, and of appealing to their small capitalist base. The Liberals, only after they had got the whiff of leather, from Ministerial limousines, adopted the same set of lies, to justify their collaboration with the Tories.

Having adopted this narrative, they became locked into it, in relation to the policy they were then forced to adopt. They no doubt believed that the economy would recover faster, so that many of their policies would never have to be implemented. They focussed a large part of their early cuts programme on Local Government, so as to be able to blame “profligate” Labour Councils, and avoid too much criticism themselves. The total package of cuts was back-loaded, so that, for example, the cuts in Child Tax Credits, which affect the better off voters, more likely to vote Tory, were only to be implemented to the back end of their programme. They no doubt expected never to have to introduce that part of their programme, and to thereby declare the success of their policies.

But, just the ridiculous catastrophist rhetoric that the Liberal-Tories came out with, in 2010, was enough to send the economy into a serious tailspin. When Osborne introduced his Austerian budget later in the year, it sent the economy into a recession, that was to last essentially for 3 years, reversing the sharp expansion of the economy it had been experiencing after 2009. The major lie that the Liberal-Tories have had to tell, therefore, has been that the UK economy was in a dire state in 2010, and getting worse, rather than that the economy was recovering strongly after 2009, and it was the Liberal-Tory policies which sent it into recession.

In fact, as the graph shows, UK GDP was higher in nearly every quarter between 2005, and the financial crisis of 2008, than the Liberal-Tories have managed after 2010. Moreover, far from the economy being in contraction prior to the election, as the Liberal-Tories have claimed, it was growing, at around 2%. And, given the fact that the Liberal-Tories could hardly claim any credit for what happened to the economy for most of 2010 (other than that their catastrophic pronouncements acted to depress rather than stimulate economic activity!) the continued growth of more than 2%, for the rest of the year, would reasonably have to be credited to the stimulative policies, previously introduced by Labour. It is after that period, when the economy noticeably begins to slow down under the impact of Liberal-Tory economic policy.

The line graph of the period, showing the strong “V” shaped recovery under Labour, and the decline under the Liberal-Tories, shows that even more clearly. Only in the last four quarters, has growth returned to the kind of level that it was at prior to the election, and, as set out previously, the basis of that has not been the kind of restructuring towards industrial production that the Liberal-Tories promised, but has been based on yet another, quick fix monetary stimulus to existing asset bubbles, and a reliance on freak phenomenon such as the stimulus provided from PPI compensation payments. But, as set out in that previous post, the UK economy is now turning down sharply, as that fig leaf of growth is exposed, and the chickens once more come home to roost, on Liberal-Tory short-termism and gimmickry. The revision of UK growth figures from 3% to just 2.6% represent a huge reduction, of around 12% of the original figure, and the trajectory is sharply downwards from here.

The other lie that the Liberal-Tories have relied on, is that the 2008 financial crisis was somehow the result of Labour profligacy in public spending. Yet, on average, the UK deficit to GDP ratio was lower between 1997-2008, under Blair and Brown, than it was under the arch Austerians Thatcher and Major, and significantly so. This is shown in the next chart. In 1995, under Major's government, the budget deficit was more than 5% of GDP. Under Blair's government, not only did the deficit to GDP figure shrink, but in 2000, it went into surplus. In 2001, Blair's government ran a budget surplus of around 3% of GDP, and there was a surplus in the following year too. Even in the following years, from 2002 up to 2008, the deficit to GDP ratio was only around 2-3% of GDP, and significantly lower than the deficit to GDP ratio that has been run throughout the period of the Liberal-Tory government. The main reason for that is that under Labour, there was economic growth, and under the Liberal-Tories there has been economic contraction.

The other lie told by the Liberal-Tories is that this profligate spending by Labour had caused interest rates to rise, and it was only the sound money policies pursued by the Liberal-Tories that were saving the situation. But, the next chart shows that this is a lie too. The yield on the UK 10 Year Gilt was 5.5% in 2007, and was falling under Labour. At the low point of 2009, even as the government was forced to borrow on a large scale to deal with the financial crisis caused by the Tories friends in the banks and finance houses, it had fallen to 3%. Although, as the financial crisis unfolded, and that borrowing to deal with it rose, yields rose to 4%, by the start of 2010, under Labour, they were falling again, back down to 3%. In fact, it was after the Liberal-Tories were elected, that yields started to rise again, back up to 4%.

Its only when, the Bank of England came to the rescue of the Liberal-Tories, with a massive programme of QE, to buy UK gilts, that their price was pushed up, and the yield down, once more. The consequence of that policy, which was one of the causes of the financial crisis in the first place, was to once again inflate asset price bubbles in property, and shares, thereby preparing the ground for an even bigger crash than in 2008, when those bubbles burst.

Moreover, it has been under the Liberal-Tories, not under Labour, that the UK lost its Triple A credit rating; a direct consequence of economic contraction, resulting from a conscious political decision by the Liberal-Tory government. The role of QE by the Bank of England, was seen after it was ended, with Gilt yields rising back to 3% once more. It is only the influx of hot money from emerging markets, seeking relative safety, that has once more pushed yields down temporarily, before they once more shoot up, crashing asset prices, as that hot money rushes out again in search of higher yields, and currency gains.

Labour has said that the Liberal-Tory policies would cause “a lost decade”, and they are right. The difference between the policies adopted by the Liberal-Tories, and forced on Greece and other countries in the EU periphery, as against the policies adopted in the US, and that were being pursued previously by Labour, is stark. The US, and Labour in the UK, adopted a policy of Keynesian fiscal expansion after the financial crash of 2008. The sharp “V” shaped recovery they experienced is clear. But, after 2010, when the Liberal-Tories came to office, they announced that they would inflict austerity on the economy. A similar policy was adopted in the EU periphery. The consequence of that is shown in the divergent course of the US economy after that date with the situation in the UK and EU.

The US, took advantage of record low interest rates – as indeed did many large corporations – to borrow almost for free, to finance expansion, or to cancel more expensive, older debt. Large corporations, for example, borrowed large amounts at these low rates, in order to buy back shares. The US continued to grow strongly, whilst the UK and EU periphery went into contraction, which made their problems of repaying debt even worse. As a result, the UK failed by 50%, in the Liberal-Tories promise to eradicate the deficit by 2015, and ever harsher austerity was imposed on Greece, and other EU countries, sending their unemployment rates ever higher, and decimating the infrastructure of the country.

Its ironic that the Liberal-Tories talk about “repairing the roof when the sun is shining”, because they have done the exact opposite. When I was first elected as a County Councillor, back in 1997, one of the first speeches I made at the Full Council meeting was on precisely that point. After 18 years of Tory misrule, the fabric of society had not just been left to rot, but had been sold off to the highest bidder, asset stripped and vandalised. It would take several years, I said for Labour to repair all the damage that the Tories had inflicted on the fabric of society. Instead of repairing the roof of the fabric of society, the Liberal-Tories have simply resorted to their normal pattern of asset stripping whatever they can get their hands on, of allowing everything to fall into disrepair for the sake of short term, penny-pinching savings.

The US, despite the fact that it has faced sniping and attempts to undermine growth by the Liberal-Tories co-thinkers in the Republican Party, and Tea Party, was able by the use of Keynesian fiscal stimulus to create a solid enough base, that the economy has entered what seems to be a path of self-sustaining growth – at least until the next cyclical downturn arises. By contrast, the UK economy looks to be entering a further period of weakness that the Liberal-Tories policies of austerianism have made it ill-prepared to weather.

The UK economy has gone nowhere in the last 5 years as a result of those policies. It has sent millions of workers into zero hours, and other temporary and low paid jobs. Not only has it led to rising government debt, despite its promise to do the opposite, but it has sent millions of workers into much greater debt, in the hope of keep the ridiculous property bubble inflated, in the hope of saving the banks. Millions now rely on credit just to get to the end of the month, millions more are permanently dependent on the tender mercies of the Pay Day Loan sharks. It will take at least another 5 years, for Labour to once again remedy the mess that the Liberal-Tories have created. A lost decade that could have turned out much better without the pain the Liberal-Tories inflicted on the economy, and on the majority of the population.