Myth 1: Austerity will lead to 'jobs and growth'

Economics
Work

Copyright Belle Mellor

Austerity as a cure for economic woes is a confidence trick. As a response to an off-the-rails financial system and the deep recession caused by the risky and often fraudulent behaviour of private banks, it defies belief. Not only is the buccaneering of the banks rewarded by huge sums of public money, but the suffering public must submit to their elected leaders sadistically tightening belts to gut-squishing proportions.

The con is of the steady hand on the tiller. Conservative politicians start to talk in what economist Paul Krugman calls ‘hard choices boilerplate’. Times are hard so hard choices must be made; austerity is presented as the bitter pill that must be swallowed to return the economy to health. There will be increasing business confidence in the prudence of the government and this, along with tax breaks for corporations, will provide the incentive for the business sector to invest more and create jobs.

Times are hard so hard choices must be made; austerity is presented as the bitter pill that must be swallowed

However, the desired result has yet to materialize. According to Krugman: ‘Since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity.’1

The reason is clear. In a depressed economy with increased job insecurity and worsening welfare provision, people will want to hang on to their savings and not spend, prolonging the stagnation. The super-rich also see little reason to invest productively, preferring instead to build their asset portfolios and blow up property bubbles. If the government truly wants to restore confidence (there’s that word again) then it needs to spend, not cut, creating jobs in the public sector, offering the security of a more social state. If deficits are run, that’s not the horror it has been made out to be, as interest rates are rock bottom anyway and the money being borrowed is being used productively rather than gathering dust.

However, the early adopters of austerity clearly thought this sounded too much like common sense and relied instead on off-beat economic theories of ‘expansionist austerity’ (which relied on statistical research that has been proven plain wrong since). The IMF, notorious for (along with the World Bank) imposing austerity on the Majority World during the 1980s debt crises, undertook a wide-ranging study of austerity measures after the 2007/08 financial crisis and declared that austerity has a negative impact on growth. One only has to look at Greece and Spain, undergoing harsh austerity despite the contrary desires of their people and where over 50 per cent of young people today cannot find a job, for the clearest demonstration of that negative impact.

The US establishment has since become openly critical of austerity, and was itself being urged by financial analysts Bloomberg earlier this year to increase public spending and hiring to give a boost to the economy.2

In Britain, meanwhile, the Conservatives never miss a turn to declare that their austerity policies are paying off. But Cambridge economist Ha-Joon Chang reveals another picture. The official narrative of a higher national income breaks down thus – real wages have fallen by 10 per cent since 2008, while the wealthiest increased their share of wealth. As for job creation – he finds that the proportion of underemployed workers forced to accept fewer hours due to a lack of work has shot up fourfold. Self-employment, too, has jumped – a sign of desperation rather than ‘a sudden burst of entrepreneurial energy’, he finds.3 The Institute for Fiscal Studies believes that by 2020, an additional 800,000, or one in four, British children will be living in poverty.4

No wonder Nobel-prize winning economist Joseph Stiglitz described austerity plans in 2012 as a ‘suicide pact’ that would lead countries into a ‘vicious cycle of spending cuts and slumping growth’. But here’s another smokescreen – the austerity agenda has little to do with strong governance, but is entirely ideological. As the alternative policy group Transnational Institute commented at the start of 2013: ‘Corporate and political elites, rather than learning from the crisis, are using it as a pretext to deepen neoliberalism and remove obstacles, including workers’ rights and much of the welfare state, which hinder greater corporate domination.’5 Austerity is being used as a tool for ever-increasing privatization, either with the collusion of a moneyed elite in government (as in Britain), or by the imposition of it on crisis-hit countries (as in the loan conditions attached by the ‘Troika’ of the European Commission, the European Central Bank and the IMF to European countries).

Austerity’s harvest has been of growing inequality, as governments have ditched social spending to reduce poverty and sought to incentivize the idle rich rather than small businesses. Large corporations today divert increasingly large amounts of their profits to CEOs and shareholders with the share for their workforce continually shrinking. Meanwhile, the political discourse remains of tough measures for tough times which will reward hard workers and come down hard on shirkers. It’s a confidence trick with an emotional appeal to a significant number of voters, who see it as unfair but necessary, even while there is no evidence that it actually works.

The 10 economic myths will be published over the course of December. The full list can be seen here. For early access, subscribe to our print and/or online magazine.

  1. ‘The austerity delusion’, The Guardian, 29 April 2015, nin.tl/Krugman-austerity

  2. ‘Here’s how you add 2.4 million jobs to the economy’, Bloomberg 28 May 2015, nin.tl/USj-addjobs

  3. ‘Why did Britain’s political class buy into the Tories’ economic fairytale?’, The Guardian, 19 October 2014, nin.tl/economic-fairytale

  4. Oxfam, ‘The true cost of austerity and inequality’, September 2013, nin.tl/cost-austerity

  5. Joseph Zacune, Privatising Europe, TNI working paper, March 2013, nin.tl/private-europe

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