Saturday, May 30, 2015

The spending cuts vs tax increases false dichotomy

One of the most commonly occurring defences of George Osborne's ideological austerity con is the spending cuts vs tax increases false dichotomy. I'm not sure where people are rote learning this vastly over-simplified and economically illiterate argument from. All I know is that they're learning it from somewhere and repeating it in lieu of making any actual effort to understand the economic issues for themselves.

Here is an example from the Another Angry Voice Facebook page:

"What would you have the government do, raise taxes or cut spending? They're the only options."
The fetishisation of public sector borrowing

There are numerous problems with this kind of over-simplified question, not least the fact that the unhealthy fetishisation of the public sector borrowing figures (above other vitally important economic indicators such as the balance of trade, GDP per capita, private debt levels, workforce productivity ...) is so extreme that it's completely warped political debate in the UK.

After five years of ideological austerity the UK's GDP per capita is still way below the pre-crisis level, the UK balance of trade is woeful, we're languishing behind the other developed economies in terms of workforce productivity, disposable income (and therefore economic demand) has been eroded away by the longest sustained decline in wages since records began and levels of household debt have rocketed back above pre-crisis levels - yet all people tend to worry about is a level of public sector debt that is only a third of what it was in the 1940s, and still lower than the average for the entire 20th Century!

If this illogical public debt fixation weren't such a serious problem, it would be laughable that the level of government borrowing is being given such complete priority over other incredibly significant problems like the fact that the UK is trapped in an ever widening trade deficit, that the so-called recovery has been funded with another unsustainable bubble of private debt, that the recklessly deregulated and corruption riddled private banks haven't been reformed, and that the British workforce is falling further and further behind the other developed economies in terms of productivity.

false dichotomies

Once we get beyond the bizarrely over-simplified idea that levels of public sector borrowing are the be-all and end-all of any nations' economic performance, it's important to note that the spending cuts vs tax increases question is a false dichotomy that makes absolutely no sense whatever to anyone with a basic understanding of macroeconomics.

False dichotomies are very useful propaganda tools because they can be used to trick people into supporting all manner of things under the mistaken impression that there is only one other alternative that is much worse.

The presentation of false dichotomies is such an effective propaganda technique that the tactic of programming people to believe in simplistic binary choices is not going to go away. What we can do is try to remain ever vigilant when we are presented with binary choices by politicians and the media. If we can think of any other possibility that lies outside the two given choices, it becomes obvious that the choice we're being presented with is more of a propaganda device than an actual choice.

Returns on investment

The reason that the spending cuts vs tax increases choice is so misleading is a fundamental part of macroeconomics theory called fiscal multiplication. I've already written an article explaining the term here, so I won't go into excessive detail about what the term means other than to give a very brief description and to demolish one of the commonly cited criticisms of the concept.

The basic idea of fiscal multiplication is that some forms of government spending produce more economic activity than others.

A hypothetical example could be government funding for a new bypass to ease congestion that might return £3.70 for every pound spent by virtue of the fact that construction companies, their workers and their suppliers will benefit from the construction project, then millions of gallons of fuel and millions of hours will no longer be wasted sitting in traffic jams.

Another hypothetical example could be a government scheme to increase employment by bringing in a load of corporate outsourcing giants to get people into work that only returns 20p for every pound invested because the companies end up raking in hundreds of millions of pounds despite producing results that are statistically worse than had nothing been done at all*

The new bypass would have a fiscal multiplication value of 3.7 and the corporate work scheme would only have a value of 0.2. 

The concept is pretty easy to understand, but I think it would be better named "returns on investment ratio" (or something similar) so that people could easily grasp its meaning when they hear the name of it.

People of the extreme-right libertarian persuasion often try to dismiss the concept of fiscal multiplication by making misleading claims that the concept is "highly contested", a claim that is often used in conjunction with attacks on the character and competence of John Maynard Keynes, who was the Godfather of macroeconomics.

The idea that fiscal multiplication is "highly contested" is completely wrong. Fiscal Multipliers are used by the IMF and World Bank (hardly radical "leftie" organisations by any stretch of the imagination) and by every government that is interested in generating anything resembling accurate economic projections.

Anyone who tries to talk down the concept of fiscal multiplication is essentially saying that it's better not to have a measure of how strong the economic returns are on any given tranche of government spending. This stance makes no economic sense, and surely doesn't even make sense to people of the right-wing persuasion because it would mean that government spending on stuff like policing, roads, infrastructure, etc would be precisely as useful as the so-called government "non-jobs" the tabloid press are always harping on and on about.

Fiscal Multiplication errors

A lot of people seem to have forgotten the Tory double-dip recession that happened as a result of George Osborne's ideological austerity agenda. The reason that the UK economy took such a huge hit between late 2010 and early 2013 was that instead of working out the economic returns on investment on the various bits of government spending they were slashing, the Tories simply assumed that every bit of government spending had a fiscal multiplication value of 0.5.

Of course it makes sense to go on an indiscriminate cutting spree if you assume that every aspect of government spending results in 50% waste, but the problem is that in reality it doesn't. In 2012 the IMF released research that showed that since the global financial sector insolvency crisis, fiscal multiplication values tend to range between 0.9 and 1.7, meaning that most of the stuff George Osborne had cut had actually been creating more economic benefits than it had cost.

It turns out that if you look at reality rather than assuming that all government spending is essentially 50% waste, arbitrary across the board spending cuts are a really really bad idea.

Intelligent investment

The idea that the only options are spending cuts vs tax increases is economically naive because it's absolutely clear that public debt can be reduced as a result of focusing government spending on things that produce more economic benefits than they cost.

This doesn't just make sense in theoretical macroeconomics, there are plenty of real world examples of governments spending their way out of debt.

The most relevant example is that of the post-war Attlee government of the 1940s that inherited a shattered war-torn economy and a debt to GDP ratio of 238% (way more than four times the size of the debt inherited by the Tories in 2010). Despite all of that debt Attlee's government founded the NHS, introduced legal aid, built hundreds of thousands of new homes per year, improved pensions, unemployment benefits and disability benefits and set about rebuilding Britain's war damaged infrastructure. By the time they left office in 1951 the debt was down to 175% of GDP, and by the time Margaret Thatcher tore up the post war consensus in 1979 the debt was down to just 43% of GDP.

Anyone who thinks that it's impossible that a government could spend its way out of trouble is not only guilty of ignoring countless historical precedents, they've also clearly never run a successful business of their own.

If we take a highly simplified example of a loss making business group with ten factories. It would make good business sense to see how much each factory is making it relation to the running costs. If it turns out that five of the factories are making losses, two are breaking even and three are making profits - it makes no sense whatever to make arbitrary across the board spending cuts in all of the factories, neither does it make sense to arbitrarily increase the product prices. Any responsible business owner would surely consider investing some money to convert the loss making factories to doing what the profitable ones are. In other words intelligent investment makes more sense than arbitrary spending cuts or increasing prices/taxes.


Of course it suits George Osborne and the right wing press to have people believe that government spending is essentially waste that is incapable of producing strong economic benefits. If people believe this, then the public can be hoodwinked into believing that the only alternative to the Tory austerity con is that we'd all have to pay a load more tax, but that's simply not the way things work.

Next time you hear anyone using the
 spending cuts vs tax increases false dichotomy, you should ask yourself whether they are saying that because they are trying to trick you into thinking that ideological austerity is a good idea, or whether they themselves have been tricked, and they're just saying it because they've rote learned it from the right-wing press.

 Another Angry Voice  is a "Pay As You Feel" website. You can have access to all of my work for free, or you can choose to make a small donation to help me keep writing. The choice is entirely yours.

* = this isn't such a ridiculous example as it sounds. I've actually given a basic description of Iain Duncan Smith's Work Programme. The only thing I made up was the fiscal multiplication value of 0.2. I've got no evidence to suggest that it's anything like as good as that.

Austerity is a con
What is ... Fiscal Multiplication?
The myth of right-wing patriotism
How George Osborne has created more debt than every Labour government in history combined
An entirely Osbornomic double-dip recession
The Tory ideological mission
Austerity and economic illiteracy
David Cameron's "austerity to infinity" speech

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