« America versus China in the 21st century – bet on the eagle, not the dragon | Main | Drone warfare isn’t very nice, but that’s mainly because of the warfare not the drones »

Work and prosperity
15 May 2013

Stimulus versus austerity: What if both sides are wrong?

Larry Elliot is the economics editor of the Guardian, but don’t let that put you off. Unlike the Labour frontbench, there are some parts of the British centre-left still capable of original thought on the economy.

It is, for instance, refreshing to see someone look beyond the frustratingly restricted debate between ‘Keynesian’ supporters of stimulus and ‘monetarist’ supporters of austerity: 

  • “Whatever ideological differences they might have, Keynesians and monetarists share a faith that all it takes is time and the right policies to bring back the good times. What unites them is the belief that the tough time the world has been going through since the summer of 2007 is an aberration.
  • “But what if it isn't? What if – in the memorable phrase of Tony Crosland when the wheels came off the economy in the mid-1970s – the party's over? What if the 25% share of the vote taken by Ukip at last week's local elections is not just a here today, gone tomorrow protest, but a sign of the political disaffection to come?”

Some good questions, there – but it would be career suicide for any mainstream politician to even hint at the possibility that low growth may be here to stay. The pretense must be maintained at all times that growth is like a tiger in a cage, ready to spring forth the moment someone finds the right key.

But perhaps the reason why the beast seems so still is because it’s dead – or, at least, not at all well. 

Larry Elliot considers three arguments to the contrary. First up is the observation that recovery is already underway:

  • “It is certainly true that western economies – the eurozone apart – are enjoying some growth. It is also true that the emergency policy actions of late 2008 and early 2009 prevented a severe recession from turning into a rerun of the 1930s. But five years on these emergency measures are still in place… We have become hooked on stimulus and this is not a healthy sign.”

Elliot goes on to deal with comparison to the 1970s, when what appeared to be terminal economic decline was dispelled by the optimism of the 80s:

  • “An alternative history of the past 40 years goes as follows. The growth pessimists were broadly right, but what they did not anticipate is that the west would find new, ingenious and often dangerous ways of keeping the show on the road: financial de-regulation, personal debt, globalisation, exploiting the environment. There are still a few tricks policymakers can turn, such as shale gas and quantitative easing, but essentially these are just new versions of the old tricks. The game is up.”

The final counter-argument is that a new wave of technological innovation will rescue us, which, of course, it might. Then again, it might not – it’s very difficult to predict an economic future based on things that haven’t been invented yet.

For all of these reasons, we need to question the lazy assumption, shared by left and right alike, that economic growth is just waiting to be ‘unlocked’. If this shared assumption is indeed wrong, then neither side in the current economic debate is right.

But might one of them be less wrong than the other?

The policy of ‘expansionary austerity’ – as pursued by George Osborne – may not produce much in the way of expansion, but the austerity part might at least better prepare us for a future in which we have no choice but to live within our means.


You must be logged in using Intense Debate, Wordpress, Twitter or Facebook to comment.

Register to get The Deep End delivered to your inbox.