Alarm Bells Ring for Economic Technocrats

Recent events in Greece and in Italy demonstrate, once again, the deadly seriousness of the global economic crisis, now in its third year. Indeed, it is difficult to over-state the risks which are now faced by us all. Yet, in the most fragile of circumstances, the UK coalition government remains a cheerleader for exactly the combination of policies which are guaranteed to make those risks greater rather than reduced.

Mark Drakeford AM

Mark Drakeford AM identifies some of the ways in which national and international aspects of the Cameron administration’s approach combine to propel the domestic and wider economy over the brink of a deep and chilling recession.

At home, the one-club approach in which George Osborne specialises means that demand has been sucked out of the economy in a series of different ways.

For those at the very bottom of the income distribution, the £14 billion cuts in benefits will be a bitter blow from which many individuals, families and whole communities will struggle to survive. Latest research from Sheffield Hallam University, for example, demonstrates the way in which the assault on Incapacity Benefit will have its most concentrated impact in those places where need is already greatest. The older industrial areas of Wales, Scotland and Northern England will be the hardest hit, while, the report concludes, ‘the reforms will impact barely at all on the most prosperous parts of southern England’. Kirrin Davidson and I have recently published a pamphlet for the Bevan Foundation which rehearses the impact that tearing up that final safety net of the welfare state, the Social Fund, will have on the very poorest claimants in Wales. Least well off households spend their incomes in local economies. If those incomes fall, those fragile economies go under.

For those in low and middle incomes, purchasing power has been declining for a decade. Something unexpected happened in the British economy around ten years ago. The link between economic growth and shared prosperity was broken. While the benefits of growth had been increasingly unequally distributed from the mid 1970s onwards, it remained the case that some small and diminishing share of the proceeds of growth continued to be felt, even at the lower ends of income distribution. Then all that came to an end. For a decade now middle and lower incomes have had no share whatsoever in any growth – and, as a result, the effective demand they are able to make for goods and services has diminished well in advance of the wage freezes and raids on pensions which have been pursued in such blinkered fashion by the Westminster coalition.

Of course, whenever pressed, coalition Ministers point to their policy of taking anyone earning less than £10,000 out of income tax. Yet, as Malcolm Dean has recently pointed out, some three million households in the poorest quarter of the UK population gain nothing from this policy, because their incomes are already below the existing tax threshold. But, worse still, of the £17 billion which that tax cut costs, only £1.5 billion goes to poorest families. The vast bulk goes in lifting the tax liabilities of those who are already better off. ‘Unlike Labour’s progressive tax cuts’ Dean concludes, these tax cuts are regressive, ‘giving most to the richer half’ (2011: 364).

Now, that position has worsened even further. At the time of the Osborne budget, of June 2010, and the autumn statement of the following November, the Office of Budget Responsibility advised that inflation for 2011 would run at 2.4% (CPI, Q4) and at 1.9% in 2012 (CPI, Q4). In fact, it has been more than double that rate. Of course, the decision to use the CPI, rather than RPI, in itself represented a deliberate reduction in the living standards of benefit claimants. Now, in September this year when CPI inflation stood at 5.6%, Prime Minister Cameron speculated over a further fiddling of the figure to bring them below even this level. When the famous American economist, J.K. Galbraith, concluded that the only function of economic forecasting was to make astrology look respectable, it was organisations making spurious claims to ‘science’, and ‘objectivity’ (such as the OBR) that he had in his sights. The result of the inflation error is that by itself it has removed an extra £17 billion in effective purchasing power from the UK economy. It does for the domestic economy just what the neo-cons are so determined to do for the economy across Europe.

It has become intensely fashionable to have not a single good word to say for the premiership of Gordon Brown and he was, no doubt, a difficult man who struggled to make the most of the job which he had sought for so long. Yet, it is hard to think of a more striking contrast than that between the lead which he provided to the global economy in 2008 and the way in which Cameron and Osborne have been so utterly impotent in the crisis of 2011.

Britain watches from the side-lines as the Greek and Italian economies teeter on the brink, threatening to drag the rest of the globe behind them. Further doses of ‘austerity’ simply make it ever more impossible that economies can recover through renewed growth. The medicine only makes the sick patient sicker still. And, in the process, not only are workers across Europe forced into picking up the pieces for a system which they did not break, but democracy itself is sacrificed in order to placate the markets. When Greek Prime Minister Papandreou proposed asking Greek voters if they were prepared to endorse the sacrifices they were being asked to make, the reaction of establishments across Europe was to throw up their hands in horror. His replacement by someone who has never been elected, and whose main credentials are that he has been the Governor of the Bank of Greece and Vice President of the European Central Bank suggests that those responsible for the crisis really have taken charge of the asylum. No-one with a basic sense of decency will want to weep tears over the disappearance of Prime Minister Berlusconi, but the notion that a ‘technocratic’ administration should be preferred to a democratic one ought to ring alarm bells, not church bells, for anyone with an interest in modern Italian history.

The fundamental challenge we face is, therefore, not to find ways of placating the markets, but of asserting that the public interest has to take primacy over them. The old saying that markets can be good servants, but are always bad masters remains as true today as it ever was in the past. Our problem is that we live in an era in which those in charge of our economy believe the exact opposite.

Reference: Dean, M. (2011) Democracy under Attack: How the Media Distort Policy and Politics, Bristol, The Policy Press

Mark Drakeford, Labour, is Assembly Member for Cardiff West