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A Budget based on Six Right-wing Myths

This is one of those watershed budgets where the governing party tries, not simply to make budgetary adjustments to the nation’s finances, but to change profoundly the ideological underpinnings of the State itself.   But the whole project is built on a string of fundamental myths which give an almost surrealistic atmosphere to today’s proceedings.   Here are the main myths.

  1. The financial crash and economic downturn have been caused by Big Government, not by the markets,
  2. The budget deficit is out of control, and if not brought rapidly under control it will lead to disaster like the Greek collapse,
  3. Excessive public spending is the central cause of the problem, and needs to be drastically cut back,
  4. If the public sector is cut back to a much smaller size, the suppressed private sector will emerge to fill the space as the engine of sustainable expansion,
  5. Balanced budgets are the right way to run the economy, like balanced household budgets, and the only way to produce stable prices,
  6. The precedent of other countries, like Canada, show that harsh cuts, however painful, are the quickest and most effective way to generate strong growth thereafter.

These ideas have been insidiously and relentlessly imprinted on the nation’s consciousness over the last weeks and months to lay the foundations for today’s measures.   Yet every one of these prescriptions is utterly wrong.   This is why.

  1. The financial crash was caused by the recklessness of US banks on Wall Street, and equally of UK banks in the City, in profiteering on toxic derivatives which they did not understood and turned out to be near-worthless.   The State bore no responsibility whatsoever for their greed and folly.   By bailing out the banks the State proved itself, not the problem as Cameron pretended, but the solution.
  2. The budget deficit, at 10.3% of GDP, but coming down steadily – already  £25bn less than 9 months ago.   Britain’s national debt, at 62% of GDP, is well below that of Germany, France,  and the US, and vastly below Britain’s debt at the end of the war when it reached 250% of GDP, from which it steadily decreased by economic expansion and without any spending cuts.
  3. The real cause of the economic downturn is the collapse of private investment in 2007-8, and public spending, so far from being excessive, was necessary to fill the gap left by the private sector.
  4. The idea that the private sector is crowded out by an over-large public sector is the opposite of the truth: around £150bn of private sector development is dependent on public spending.   Osborne’s cuts today will weaken growth further and squeeze private investment even more.
  5. Balanced budgets are the primitive economics in the 1920s of Montague Norman, Governor of the Bank of England and of Herbert Hoover, US President.   In both countries it led directly to the Great Depression.   Capitalism is driven by cyclical forces which need tight regulation, not balanced budgets irrespective of the cyclical momentum.
  6. Canada is in no way a precedent for the current UK situation.   Canada’s harsh measures 1994-7 were balanced by export growth due to US expansion, but there is no such option for Britain today.   And Osborne has gone overboard on austerity – today’s cuts are as tough as the IMF imposed on Greece which is on the verge of bankruptcy, twice as tough as the Canadian measures, three times as tough as Sweden’s measures 1993-5, and much tougher even than in the IMF crisis in 1976.

The 6 right-wing myths behind this Budget

June 22nd, 2010

This is one of those watershed budgets where the governing party tries, not simply to make budgetary adjustments to the nation’s finances, but to change profoundly the ideological underpinnings of the State itself.   But the whole project is built on a string of fundamental myths which give an almost surrealistic atmosphere to today’s proceedings.   Here are the main myths.

1  The financial crash and economic downturn have been caused by Big Government, not by the markets,

2  The budget deficit is out of control, and if not brought rapidly under control it will lead to disaster like the Greek collapse,

3  Excessive public spending is the central cause of the problem, and needs to be drastically cut back,

4  If the public sector is cut back to a much smaller size, the suppressed private sector will emerge to fill the space as the engine of sustainable expansion,

5  Balanced budgets are the right way to run the economy, like balanced household budgets, and the only way to produce stable prices,

6  The precedent of other countries, like Canada, show that harsh cuts, however painful, are the quickest and most effective way to generate strong growth thereafter.

These ideas have been insidiously and relentlessly imprinted on the nation’s consciousness over the last weeks and months to lay the foundations for today’s measures.   Yet every one of these prescriptions is utterly wrong.   This is why.

*  The financial crash was caused by the recklessness of US banks on Wall Street, and equally of UK banks in the City, in profiteering on toxic derivatives which they did not understood and turned out to be near-worthless.   The State bore no responsibility whatsoever for their greed and folly.   By bailing out the banks the State proved itself, not the problem as Cameron pretended, but the solution.

*  The budget deficit, at 10.3% of GDP, but coming down steadily – already  £25bn less than 9 months ago.   Britain’s national debt, at 62% of GDP, is well below that of Germany, France,  and the US, and vastly below Britain’s debt at the end of the war when it reached 250% of GDP, from which it steadily decreased by economic expansion and without any spending cuts.

*  The real cause of the economic downturn is the collapse of private investment in 2007-8, and public spending, so far from being excessive, was necessary to fill the gap left by the private sector.

*  The idea that the private sector is crowded out by an over-large public sector is the opposite of the truth: around £150bn of private sector development is dependent on public spending.   Osborne’s cuts today will weaken growth further and squeeze private investment even more.

*  Balanced budgets are the primitive economics in the 1920s of Montague Norman, Governor of the Bank of England and of Herbert Hoover, US President.   In both countries it led directly to the Great Depression.   Capitalism is driven by cyclical forces which need tight regulation, not balanced budgets irrespective of the cyclical momentum.

*  Canada is in no way a precedent for the current UK situation.   Canada’s harsh measures 1994-7 were balanced by export growth due to US expansion, but there is no such option for Britain today.   And Osborne has gone overboard on austerity – today’s cuts are as tough as the IMF imposed on Greece which is on the verge of bankruptcy, twice as tough as the Canadian measures, three times as tough as Sweden’s measures 1993-5, and much tougher even than in the IMF crisis in 1976

7 Comments

  1. HooversGhost says:

    Re 5–The primitive history is that Hoover balanced the budget. The truth is that there was a large budget surplus in place when he took office and it shifted toward a large deficit during his term in office (a la G W Bush). Don’t believe me? See Table 1.1 at the link below:

    http://www.whitehouse.gov/omb/budget/fy2008/pdf/hist.pdf

  2. Matthew Stiles says:

    Just before the Wall Street Crash (following a speculative boom), Hoover had cut public spending and cut taxes particularly for the richest. When the depression hit, Hoover’s response was very timid and in fact taxes went back up as he tried to increase revenues which had collapsed. He did very little to do anything to counter the depression and attacked the New Deal as a move to statism. The fact that the deficit increased under him was not a deliberate move to increase growth but the result of the fall in tax revenues caused by the massive fall in output.

  3. HooversGhost says:

    Hoover did not cut spending. Click the link above. You’ll see that spending went up 50% between 1929 and 1932.

    He did hike tax rates. Just one of several counterproductive moves he made to turn a recession into an economic calamity.

  4. Matthew Stiles says:

    Andrew Mellon was the Secretary of the Treasury from 1921-1932. Apologies for using Wikipedia but I am short of time to look up the likes of Galbraith:
    “Mellon became unpopular with the onset of the Great Depression. He advised Herbert Hoover to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.” Additionally, he advocated the weeding out “weak” banks as a harsh but necessary prerequisite to the recovery of the banking system. This “weeding out” was accomplished through refusing to lend cash to banks (taking loans and other investments as collateral), and by refusing to put more cash in circulation. He advocated spending cuts to keep the Federal budget balanced, and opposed fiscal stimulus measures.”

    Deficits normally rise during recessions due to decreases in tax revenues and increased spending on unemployment benefits. Trying to reduce a deficit in a recession by cutting public spending can often be counter-productive as the cuts in public spending depress growth, increase unemployment, decrease tax revenue etc and so you get into a vicious circle.

  5. Hoovers Ghost says:

    Mellon was a “liquidationist” but Hoover disagreed with him, though the harshness of the downturn may have led to many liquidations.

    There may be some Hoover quotes advocating balanced budgets but his actual record–again click the link above–is a 50% increase in spending. Maybe that was not enough but it does not demonstrate some slavish devotion to small government and balanced budgets. BTW, the shift from surplus to deficit is larger than the decline in tax revenues (which do decline during recessions) so the the deficit spending is not entirely attributable to the cyclical downturn.

  6. Hoovers Ghost says:

    Mellon was a liquidationist but Hoover disagreed and didn’t follow his advice.

    In any case, spending did increase by 50%. Again see the link above.

    Tax revenues do fall during recessions but some of the shift from surplus to deficit is because of the increased spending. Again, check the data.

  7. Matthew Stiles says:

    Well, I’ve found this from http://www.huppi.com/kangaroo/Causes.htm

    “The Roaring Twenties were an era dominated by Republican presidents: Warren Harding (1920-1923), Calvin Coolidge (1923-1929) and Herbert Hoover (1929-1933). Under their conservative economic philosophy of laissez-faire (“leave it alone”), markets were allowed to operate without government interference. Taxes and regulation were slashed dramatically, monopolies were allowed to form, and inequality of wealth and income reached record levels. The country was on the conservative’s preferred gold standard, and the Federal Reserve was not allowed to significantly change the money supply.

    The fact that the Great Depression began in 1929, then, on the Republicans’ watch, is a great embarrassment to conservative economists. Many try to blame the worsening of the Depression on Hoover, for supposedly betraying the laissez-faire ideology. As the time line in the next section will show, however, almost all of Hoover’s government action occurred during his last year in office, long after the worst of the Depression had hit. In fact, he was voted out of office for doing “too little too late.” The only notable exception to his earlier idleness was the Smoot-Hawley tariff of 1930, whose minor impact we shall explore in more detail later on.

    But much more importantly, the economy was clearly turning downward even before Hoover took office in 1929. Entire sectors of the economy were depressed throughout the decade, like agriculture, energy and mining. Even the two industries with the most spectacular growth — construction and automobile manufacturing — were contracting in the year before the stock market crash of 1929. About 600 banks a year were failing. Half the American people lived at or below the minimum subsistence level. By the time the stock market crashed, there was a major glut of goods on the market, with inventories three times their normal size.

    The fact that all this occurred even before the first act of government intervention is a major refutation of laissez-faire ideology. ”

    This is true isn’t it? Hoover waited till 1932 to boost spending and increase the deficit.

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