…we act as though we are able to predict historical events, or, even worse, as if we are able to change the course of history. We produce thirty-year projections of social security deficits and oil prices without realizing that we cannot even predict these for next summer – our cumulative prediction errors for political and economic events are so monstrous that every time I look at the empirical record I have to pinch myself to verify that I am not dreaming. What is surprising is not the magnitude of our forecast errors, but our absence of awareness of it.
Nassim Nicholas Taleb
For those on the outside, the strange and impenetrable world of economics can’t help but seem an alien environment. To the laymen – buffeted by forces he neither controls nor understands – the modern, globalised market-economy can often appear bewildering and unsettling. To us ‘ordinary folks’, stuck in the middle between politicians on the one hand, and high-financiers on the other, a sense of profound powerlessness can accompany and magnify the confusion. We gaze helplessly from the sidelines as brash young suits and old Etonians gamble with our money, and, by extension, our lives. “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood,” wrote John Maynard Keynes, “Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” Lashed to the mast of market forces, we little people have little choice but to face the wild fluctuations in the global economy with stoicism and a pitiless hope our jobs and pensions will survive the storms intact.
Despair cannot be considered unreasonable in the face of an absurdity such as this. Hysteria might even be thought rational. Especially when one considers the great unmentionable secret of politics and economics: those we charge with guardianship of our world are, in all essential and practical ways, as clueless as everybody else. When one considers the utter inability of either markets or politicians to predict the future with anything even approaching certainty, one is liable to be somewhat sceptical regarding all and any confident pronouncements regarding what history has in store. A list of cataclysmic events that went faithfully unnoticed until they happened would, after all, have to include many of the most important and far-reaching events in world history. The liberal laissez-faire world of the 1910s, for instance, was ill-prepared for the first World War. The greatest economists of the 20s failed to spot the Wall Street Crash approaching. Few foresaw the rise of Hitler. The fall of the Berlin Wall was a complete shock to most in the West. The Asian crises of the 90s was well under way before anyone really noticed. The dotcom boom bust the moment people realised it was a classic stock-market bubble. The most elaborate and expensive security apparatus in history failed to stop 9/11. Events, it seems, will always outpace our ability to understand them: hindsight bias and retrospective analysis serve only to blind us to the fact that in history, as in life, chaos and contingency reign.
Such qualifications must be borne in mind when we consider our current economic woes. It is safe to say that if the Great Crash of 2008 had been adequately anticipated, we wouldn’t be in this mess in the first place. As late as March 2007 Gordon Brown could be heard telling the House of Commons that his ‘light-touch’ financial regulation had resulted in the, “longest period of economic stability and sustained growth in our countries history,” and boasting – in a phrase that will surely haunt him to the grave – “We will never return to the old boom and bust.” Easy to knock such sentiments now (remarkably easy, as it happens, and satisfyingly so), yet it should also be remembered that Brown was far from alone in his hubris, or his faith. Since the the election of Thatcher in 1979 we have, after all, been living through a dominant economic paradigm that eschews governmental interference in the financial sector in favour of a quasi-mystical faith in the magical healing-properties of the free-market. For the children of Friedrich Von Hayek and Milton Friedman – and they are legion – the market is akin to a Godhead that must be placated, not tamed; any interference liable to kill the beast. New Labour took the lessons of the Thatcher years to heart and made a Faustian pact with the City in order to carry out its broadly social-democratic aims – by allowing an orgy of speculation and debt, they could finance the building schools and hospitals from the tax revenues created. In order to redistribute wealth, Blair and Brown not unreasonably argued, you must create wealth. In this they were helped by some of the world’s most well-qualified economic minds – the new ‘masters of the universe’ – who had complex mathematical models and power-point presentations that pointed to a rosy future of uninterrupted growth and ever-increasing prosperity. The political class in Britain, as elsewhere in the western world, were riding the wave of heady optimism emanating from an economic milieu that really believed it had learnt to carefully manage and harmlessly spread risk once and for all.
For a long period you could be fooled into thinking it was working, too: throughout the 90s and for most of the 2000s the British people had never been richer. So what if much of this wealth was based upon debt? Most of the debt was secured against the property market, which was showing astonishing year-on-year increases – the market was self-correcting. You didn’t have to gaze too far beneath the surface of this euphoria to see trouble ahead: the market-mania of the New Labour years saw not only a massive increase in the disparity between rich and poor, but a new gap opening between the middle-class and the super-rich (the so-called haves and have-yachts). At the same time large swathes in the bottom half of society were being saddled with ludicrous levels of debt they could never hope to repay, while Britain’s stubbornly persisting underclass became ever more deeply entrenched in welfare dependency. Yet what seems like an obvious time-bomb now passed as conventional economic wisdom in the years before the crash. Gordon Brown was so confident of continued growth that he broke the Golden Rule of Keynesian economics; saving nothing for a rainy day during the sunny period. When the storm came, we had no shelter.
The coalition has gotten a great deal of mileage out of its repeated refrain about “the mess left behind by Labour”. This is good politics, not least because there’s a great deal of truth in it. Yet it doesn’t tell the whole story. With its constant focus on ‘reckless’ spending the Tories and the Lib Dems have somehow managed to convince many people that the deficit is largely or wholly the fault of New Labour’s prolifigacy. These criticisms would have more resonance, however, if the Conservatives weren’t pledging to match Labour’s ‘reckless’ spending plans until sometime after the crash. Besides which, it is disingenuous to suggest that the bulk of the hole in our finances was caused by excessive spending in the public sector. The real reason the deficit grew so enormous was because vast amounts of taxpayer’s money went into liquidating a banking system that had dried up following the housing crisis. After the meltdown our deficit grew from £31 billion to around £150 billion. Even if the coalition’s fiscal gamble works – big if – we’ll still be some £37 billion in the red come the next parliament. Gordon Brown did overspend, in other words, but we are not entering an age of austerity because he gave too much away to single mums – we are entering an age of austerity because he took his eye off a financial sector getting drunk on obscure derivatives and cheap credit. Gordon Brown may be guilty of many things, some of which have undoubtedly contributed to our current dilemma, but causing a global economic meltdown is beyond even his legendary powers of ineptitude.
Clearly, a deficit running above 10% of GDP is unsustainable, particularly with the US and much of Europe experiencing their own sovereign debt crises. Without a credible plan for deficit reduction and long-term fiscal responsibility, the bond markets might have started viewing Britain as a Greece-style risk, resulting in higher interest rates at a time of slow growth. Whoever was in power would be seeking to avoid the classic triumvirate of stagflation – high interest rates, low growth, and rising unemployment – that made Britain such an economic basket-case during the 1970s. (Which is why Ed Balls’ ‘keep calm and carry on for two years’ plan strikes me as a form of ostrich-like economic suicide.) Seeing as there are only two ways to balance the books – cuts and tax increases – the real question is whether the right plan has now been adopted. That, when all is said and done, is a question only history can answer. Not to put too fine a point on it, the coalition government’s long-awaited ‘Spending Review‘ – detailing £85 billion of cuts – is the most important fiscal document for a generation: it will – depending on many unknowable factors – see us sink or swim.
Labour can bang on about its plan to half the deficit over four years all it wants – we will never know whether Alastair Darling’s more cautionary approach represents the right course of action. We do know the differences between Osborne’s and Darling’s cuts are differences of degree, not kind: a Labour government would have still delivered us of cuts “worse” than those under Thatcher. This would have also have entailed tens of thousands of job losses in the public sector and disruption to front-line services, with the inevitable consequence of a shrunken state. We also know that Labour’s criticisms of the coalition’s cuts agenda will lose its force if they continue to remain vague about exactly how their smaller, kinder axe would have spilt its blood less painfully. If the government’s cuts are indeed, as Labour charge, ‘dangerous’, then they are at least obliged to posit a coherent response to the spending review by publishing its own ‘safe’ alternative.
One thing that I imagine would be different had Labour won the election is the tone: it is hard to imagine Labour MPs cheering such drastic cuts to welfare in quite the same way as Conservative MPs cheered those in the spending review. Having read Dylan Jones’ tedious 2008 collection of interviews with the prime minister, it was clear to me before the election that Cameron was gunning for the welfare state, and that now he had the perfect excuse to polish his pistols. “There are nearly five million people on out-of-work benefits,” he states at one point in the book, “many of whom could work, many of whom would work, but we leave them sitting on the sofa watching TV, not just week after week but generation after generation.” Similarly, the “problem” with the welfare state is, “people out of work and on incapacity benefit.” If there is truth to the cliché that Labour governments overtax and overspend (and there is), then there is also truth to the charge that Tory governments are prone to attacking those who are, by definition, among the poorest and most vulnerable in our society – those on welfare. Hearing George Osborne lambaste what I can only presume to be the same 5 million (who, according to him, have made “a deliberate lifestyle choice” to remain on benefits) is to hear distinct echoes of the old ‘nasty party’. Such words could only have tumbled from the mind of a man who has as little experience of living on welfare as I do of a life of unmitigated privilege (what a shame, as Suzanne Moore noted, those 5 million hadn’t made a deliberate lifestyle choice to have millionaire parents and large trust funds like him).
The changes to housing benefit, to my mind, display a similar class element, and are being justified by recourse to a bogeyman beloved of the right-wing tabloid press – that of the scrounging work-shy family living in some giant mansion with a large herd of fat, lazy kids, all whooping it up at the expense of their hard-working, taxpaying readership. For that section of society whose perception of working-class life is informed by Shameless, Little Britain, and reality TV where thick people shout at each other, a media narrative like this is attractive, and easily taken as representative of a general trend. Undoubtedly such people exist – in a welfare system as anomalous as ours how could they not – and clearly something needs to done about them, but the government knows its sweeping cuts will hit more than those tabloid sensations taking advantage of the system. They are fully aware many honest citizens already struggling in a recession-battered Britain will, through no fault of their own, find life getting a good deal tougher from now on. I even empathise with Ian Duncan Smith’s project for root-and-branch reform of the welfare system: the underclass sneered at by the tabloids and TV does exist, and he is right to seek an end to generational dependency of the kind that afflicts the worst of our sink estates, yet even he has succumbed to the rhetoric of his ideological progenitors. In the 80s they told the unemployed to get on their bikes. IDS has updated the sentiment for the modern day by generously upgrading the means of transport to a bus.
An underclass is a useful thing: it can be safely demonised when the need arises; their plight drawing little sympathy from a middle-class populous feeling the pinch; its perceived idleness despised by the working-class. When the Conservatives unveiled changes to child benefit last month, it all but derailed their conference, as those higher-rate taxpayers making up the Tory ranks and sympathetic media calculated exactly how much they were due to lose. They were especially alarmed when they worked out that their neighbours, with a joint income each just under the threshold, would still qualify, despite earning more overall. Interestingly, it is rumoured Cameron wobbled on the policy due to the fierce reaction, but Osborne stood firm. True or not, it isn’t hard to see how the negative response to this seemingly ill-thought-out policy announcement helped calibrate and shape the spending review. For despite the calamitous nature of its unveiling, removing benefits from higher-rate taxpayers remains a broadly progressive policy. They might yet have carried on in this vein, by removing other universal benefits from the wealthy, such as the winter fuel allowance and free bus pass. Once bitten, though, twice shy. For all the coalition’s repeated claims that “we’re all in this together” and their mantra about “those with the broadest shoulders bearing the biggest burden”, the spending review, when it came, painted rather a strange picture of fairness.
It didn’t take long for the coalition’s high-minded rhetoric to begin to sound hollow. The Institute for Fiscal Studies (the think-tank that George Osborne once called a “credible independent [voice] on the public finances, taxation and public spending”) responded to the review by calling it “more regressive than progressive”. They had calculated that poorer families with children would be “the biggest losers” of the cuts regime. This led a haughty Nick Clegg to declare the IFS’s definition of fairness “complete nonsense”. Problem is, the figures that led the IFS to this conclusion are right there in the coalition document: while the effects of the cuts are quite evenly spread across the middle tiers of society, if one excludes the top 2% of earners, the bottom 10% are disproportionally harder hit, losing 5.5% of their net income, as opposed to 4.5% for the richest 10%. Five and a half percent might not sound like a lot to Nick Clegg, but for those struggling to get by on a few thousand pounds a year, it may well mean the difference between treading water, and sinking.
Those who got themselves in a tizz over the changes to child benefit got what they wanted, in other words, by influencing the government to heap more of the burden onto the poor. The poor – the point bears repeating – are not responsible for the hole in our finances, yet they are being asked – sorry, told – to carry the can for middle England, because of the mistakes of the ultra-rich. And what of the banks? At a time when the welfare budget is being hit for £20 billion, Osborne’s much-trumpeted bank levy is due to bring in a measly £2.5 billion. At the very least, the taxpayer deserves some kind of guarantee that it will not be asked foot the bill should the financial sector collapse again. Such a guarantee, though, seems far from secure. There are many words to describe this situation, though fair isn’t one of them. Consider, too, the taxation side of deficit reduction. If it is wrong for those at the bottom of society to fiddle the benefit system (and it is), then it cannot be right for those at the top to manipulate the tax system to similar ends. Tax avoidance is estimated to cost the treasury somewhere in the region of £25 billion a year – a figure that would come in rather handy at the moment. Danny Alexander and Nick Clegg vowed to tackle the issue during the Lib Dem conference. Come the Conservative conference, though, and Osborne had slyly shifted the rhetoric away from ‘tax avoidance’ (not illegal but immoral) to ‘tax evasion’ (already illegal). As well he might: just look at those who surround our chancellor and chums. The government’s so-called “efficiency advisor” – the vulgar and bombastic Philip Green – is so efficient at avoiding tax that in 2005 he managed not to pay the UK any on the largest corporate dividend in history – £1.5 billion – by giving it to his wife, who lives in the tax haven of Monaco. A similar picture emerges when one looks at those sitting on David Cameron’s ‘business council’. Martin Sorrel, for instance, moved his advertising company WPP off-shore in order to dodge paying tax. Paul Walsh, of drinks giant Diageo, has threatened to do the same. The chief executive of notoriously tax-shy Glaxosmithkline – Andrew Witty – has likewise been welcomed aboard. Even more damningly, a recent Channel 4 Dispatches program has alleged that among Cameron’s cabinet – the most privileged since that of Alec Douglas Home, containing, as it does, some 20 millionaires – several prominent members – such as Andrew Mitchell and Philip Hammond – are themselves no strangers to such ruses. Neither, the program reports, are some of the Conservative’s more generous – read wealthy – financial backers, who are more than aware of the loophole happy offshore benefits of tax havens like the British Virgin and Cayman islands.
We may well be, as David Cameron and George Osborne insist, “all in this together,” but it is plain for all to see that some of us are “in it” (so to speak) deeper than others. One doesn’t have to be a Tory to admire the bold way the coalition has set about tackling Britain’s deficit; one does, however, need to be a Tory to be complacent about the way the pain has been distributed across the class spectrum. (The fact that Liberal Democrats played a full and active part in this process only goes to underscore the strangeness of the times.) A Daily Politics poll conducted the day after the spending review was unveiled found a broad majority in favour of the coalition’s cuts. This didn’t surprise me: despite the small number of protests and talk of union insurrection, it isn’t hard to sense an atmosphere of resignation in the country at large – most understand that cuts are needed and have absorbed the precariousness of current economic reality. We live in a time of deep uncertainty: it underscores debates like these, causing polarisation. On the one hand the markets responded with cautious optimism to the spending review, on the other economists like Joseph Stiglitz and Paul Krugman have warned that austerity measures risk ‘choking off the recovery’. While many in the right-wing press welcomed the cuts, commentators from the left, like Will Hutton and Johann Hari, have predicted all manner of catastrophe. While George Osborne claims the spending review means Britain has “stepped back from the brink,” Labour talk darkly of a, ‘double-dip recession’. “For every expert,” as Arthur C. Clarke reminds us in his essay Hazards of Prophecy, “there is an equal and opposite expert”.
The truth, to return to my opening theme, is that we just don’t know what will happen to the economy. Cuts of £85 billion are unprecedented. Deleveraging on this scale has never been witnessed, not least because the scale of debt in the UK – both private and public – has never been witnessed. What analogies we do possess are inexact: Canada carried out its austerity experiment during the booming 90s. More worryingly, Ireland has fallen back into recession after its recent bout of cuts. The coalition has taken a huge gamble, in other words, and is banking on growth to see them through. They have claimed the million or so job losses caused by the cuts will be offset by job creation in the public sector – though its figure of 2.5 million new jobs strikes me as pure pie in the sky. Projections of long-term future growth, as we have seen, are not always accurate. The coalition would do well, I might add, not to make too much of the growth seen during the last quarter: we are not out of the woods yet; the age of austerity has only just begun. Demand is what speeds growth, and in an economy struggling to shift from leverage-based consumption to fiscal solvency, demand might be hard to stimulate. Future UK growth is also dependant upon growth being seen in the European and American economies; and that – at a time when the most optimistic description you can give the world economy is ‘sluggish’ – is far from assured.
At the same time, and for similar reasons, I find much of the more alarmist rhetoric a tad absurd (I had a leftie friend rather wonderfully warn of “tanks in the street”, though, in his defence, he was reading about 30s Germany at the time). There even seems to be a part of the Left that is hoping for economic turmoil in order discredit the coalition and bring the populace back on side. That can’t be right, can it? I, for one, sincerely hope the spending review helps speed economic recovery – even if I am critical of the shape and shading of the package – if for no other reason than the biggest potential losers in any economic downturn will be the poor. There is sure to be a huge social cost to austerity; the amount of suffering largely dependent upon the market’s ability to ameliorate the pain. If I was to make a guess, I would say that the government is expecting things to go the way of the 1980s, by getting a lot worse before getting a lot better. In the meantime I shall be searching the faces of Cameron, Clegg, Osborne, and Alexander for some recognition that they understand the level of trauma they have unleashed upon Britain. As with the 80s, I fear I shall be doing so in vain.