The Art of the Comprehensible

UK Budget
By Christian Nicholson

The economic policy of any government is one of the most politically charged elements of its portfolio. This should be an obvious point, but is not always fully appreciated by economists who deal primarily with data and, in the modern form of the discipline, through abstracted models. This point was also obscured for us all during the 2000s boom years when the rising tide seemed to lift all boats, and the great battles over economic policy appeared to be a thing of the past. Tweaks here and there to policy could be left to the technocrats and need not concern the electorate too much.

But economic policy always has been, and always will be, more than a purely technocratic exercise. The main point of this article is to comment upon the current reality of the relationship between the electorate, economics and the government in between. We are not interested here about effectiveness or merits of the current UK coalition government’s economic policy – or that of any other government. We are looking at how public perception factors into the choices politicians have to make when determining the overall bent of economic policy.

Our central case study is the recent adjustment in the Labour Party’s economic policy. In opposition the party has had to offer an alternative economic policy to the coalition’s focus on austerity as a means of reducing the deficit.

It is clear why many groups, such as the public sector unions, whose members will suffer under public spending cuts, oppose them. Politically Labour cannot simply support these groups as it will tie them to a special interest and thus discredit their overall position. Labour must therefore provide an economic argument against the cuts, and an alternative plan.

Contrary to much opinion, this is what the party’s Shadow Chancellor, Ed Balls, has done. Since losing the 2010 election the Labour Party has offered a reasonably clear alternative to the coalition government’s austerity policy, advocating a slower and less severe programme of public spending cuts coupled to a sustained level of public investment, particularly into infrastructure projects.

Not only is there an alternative, it has a great deal of academic underpinning in the form of Keynesian economics, which prescribes precisely this approach. Yet as a growing body of poll data shows, the message has not won over the electorate.

Polling in late 2011 and early 2012 indicated that in handling the UK economy, 30 per cent thought the Conservatives would handle it best, while just 26 per cent thought Labour would. This is despite the fact that 58 per cent of the public thought the coalition was managing the economy badly. Fully 46 per cent of respondents to a November 2011 Guardian/ICM poll believed the coalition’s cuts were too severe. Yet this same poll found that only 34 per cent of voters thought Labour had the right policies to rescue the economy.

This data are confusing to say the least. Some of Labour’s lack of credibility with the electorate can probably be put down to the public attributing the party with responsibility for the 2008 crisis. The Guardian/ICM poll found 30 per cent of people held this view. However the sheer lack of enthusiasm for a genuine alternative, allied with clear dissatisfaction with the status quo, suggests that we must move beyond this to understand the full picture.

An alternative explanation is that the electorate is simply not receptive to the Keynesian case. This leaves the Labour opposition in something of a quandary. Though the public claim to want an alternative, the genuine alternative it has offered is seen as not credible. The numbers additionally seem to put public expectations of improved economic performance low, and hence patience with poor economic performance (and thus austerity) higher than one may expect.

Proponents of a stimulus, such as Nobel Laureate Paul Krugman, argue that Labour’s position is too timid. Yet politically Labour have reached the point where many argue that they should ditch the Keynesian bent of their economic policy and move closer to the government’s line on the deficit.

In a speech to the left-wing Fabian Society, Ed Balls eloquently outlined the simplistic distortions of Labour’s Keynesian policy made by Conservative attacks. Identifying these distortions could not however surmount the fact that the public has so far not been responsive to the Keynesian case, even with the UK’s continued poor economic performance. Balls was unable to find a convincing path out of the problem, and arguably betrayed an acceptance that the message was not getting across.

A subtle repositioning has instead been undertaken: the Labour Party will not commit to reversing cuts at the next election, though it continues to oppose the cuts while they are being made. This does not represent an abandonment of the stance that the coalition’s austerity programme is economically destructive. It does however indicate a movement away from the openly Keynesian stance previously held.

A look beyond the UK begins to corroborate the view that the Keynesian message itself has simply failed to register with electorates. Austerity programmes have become the order of the day across the Western world. The extent to which they have taken the public with them varies. Some governments such as in Spain and Ireland have won a mandate for austerity as an apparently necessary evil, whereas in the US pressure has come from a strong constituency of voters (the so-called “Tea Party” movement). Germany has preached austerity throughout the Eurozone crisis, building upon long standing cultural aversions toward debt. In Greece, the government has reluctantly stuck to a harsh deficit cutting programme in the face of enormous public opposition.       

The new politics of austerity, irrespective of its merits as an economic strategy, lends itself to straight forward explanation: deficits are too high because spending is too high, thus spending must be cut. This message is eminently straightforward and relatable.

In his 2011 Conservative Party conference speech David Cameron made the case that “the only way out of a debt crisis is to deal with your debts. That means households - all of us - paying off the credit card and store card bills”. Cameron here is linking the household and the state, not in a way that an economist would recognise – though part of recovery will be a slow deleveraging by UK households – but rather he is exploiting the intuitive link between one collective the electorate can understand (the family) and one which it struggles with (the state) to make the case for the government’s austerity programme.

Butting up against the economic implications of Keynes’ paradox of thrift the speech had to be revised, but the message is one Cameron expected to score with the electorate, and the aforementioned poll data seems to back him up.

Angela Merkel has deployed the household analogy with abandon. The “Swabian housewife” balancing the books has been used repeatedly, with Merkel keen to articulate a vision of a balanced state budget, whilst in actuality since 2008 Germany has indulged in two bouts of stimulus spending.

Even President Obama, who placed great stock in stimulus in 2009, has begun to deploy the analogy. Obama stated in a February 2011 radio broadcast that “families across this country understand what it takes to manage a budget”, and that it was therefore “time Washington acted as responsibly as our families do”. Clearly the analogy is perceived as making good politics, even if one rejects its economic rationale.

If austerity currently makes good politics, it is important to note that it is not altogether without intellectual foundation. The impact and efficacy of fiscal stimulus remains highly contested, with economists still divided. An increase in the number of deployable case-studies seems to be the only sure result of the global crisis.

Chancellor George Osborne argued in 2010 that present British economic policy would be guided by the concept of “expansionary fiscal contraction” which has its acolytes in academe. Put simply it is the idea that rising public debt and declining private consumption are correlated, with the latter compensating for the former in equal measure. If this theory is right then stimulus, the Keynesian alternative the Labour Party has been pushed to abandon, is literally worse than useless.

Importantly, however, this is not how austerity is sold the public. How could it be? The voting public have neither the time nor inclination to engage with academic economics. Even if they were to do so the economics discipline can only provide conflicting voices that firmly agree on very little.

As we see with Merkel, Osborne, Obama and others, what is important, as ever in politics, is to provide policy the public understands, or feels it can understand, and that it can therefore support. Though explaining national economic policy through household and credit card analogies would make any macroeconomist wince, such analogies are easy to understand.

Taking this view expansionary fiscal contraction has the advantage, not of being any more understandable to the public than Keynesian policy recommendations – here it suffers just as much from the fact that it seems counterintuitive, in name especially – but because it accords with a message that can be understood. When in deficit, cut spending. If the sequential relationship between the two in George Osborne’s mind is unclear, it is at the very least very convenient. Keynesian deficit financing in the face of a prolonged slump is simply too counter-intuitive, and frankly seems like too much of a gamble for the electorate.

Austerity became the economic watchword for 2011. The results have been, to say the least, unimpressive. The economic performance of those countries undergoing austerity has been consistently dire. We see Ireland, serially sold as an exemplar of “doing what must be done”, suffering multiple slumps back into recession. The UK economy continues to flat line, and entered a “double-dip” recession in 2012.  Electorates should be grasping for alternatives, yet as our initial look at the Labour Party’s repositioning shows, the alternative, with all its intellectual underpinning is still shunned.

To complete our argument we must contrast the current situation with the economics-government-electorate nexus during the 2000s.

Economics is a subject that took something of a vacation from the public consciousness through the boom years. The (apparently) key measures of GDP growth and overall employment all headed up. Economic policy was underpinned by a mainstream consensus – generally referred to as “neo-liberal” – politically and economically, and challenged only from the margins, to little evident effect, ensuring that the public was not actually required to engage in any real way with the nature of the economy of which we are all a part.

The academic underpinnings of the consensus were debated in academe, and there was considerable ferment over an almost thirty year period in which the Democratic Party in the US and the centre-left parties of Europe, most obviously the UK Labour Party, reached these points of consensus.

Importantly the complex nuts and bolts had not needed to be articulated to the electorate as economic prosperity afforded everyone’s typical hopes and aspirations: that inflation would be kept low, that deregulation would “unleash” private enterprise to new levels of productivity, and that jobs would follow… Who in truth wished to engage with the “neoclassical endogenousgrowth theory” which underpinned UK government policy in the 2000s? Real scrutiny of the assumptions and underpinning ideas in the public discourse came only once the system buckled in 2008.

To return to the overall point, economic policy in a democracy remains tied in a rather more curious manner to the electorate’s preferences than one may expect. Putting an economic case rests on two key points. First, does the electorate care hugely about economic issues at the time? If they don’t, as in the boom years of the mid-2000s, whether your economic policy is easy to understand or not is not a major issue. Second, if economic issues are important, arguably the key factor determining the democratic viability of a policy is dictated by its accordance with a comprehensible economic message, whether it accurately represents the underlying economics or not.

If the public do not like your economics, but you believe you are right, do you stick or twist?

 

Christian Nicholson is reading for an MA in International Relations at King's College London, having graduated with first class honours in War Studies, also at King's, in 2009. His research interests include state building and the impact of ideas in social sciences.

 

17 October 2012