OXFORD, England – One thing we’ve learned in the years since the financial crisis is that seriously bad ideas – by which I mean bad ideas that appeal to the prejudices of Very Serious People – have remarkable staying power. No matter how much contrary evidence comes in, no matter how often and how badly predictions based on those ideas are proved wrong, the bad ideas just keep coming back. And they retain the power to warp policy.
What makes something qualify as a seriously bad idea? In general, to sound serious it must invoke big causes to explain big events – technical matters, like the troubles caused by sharing a currency without a common budget, don’t make the cut. It must also absolve corporate interests and the wealthy from responsibility for what went wrong and call for hard choices and sacrifice on the part of the little people.
So the true story of economic disaster, which is that it was caused by an inadequately regulated financial industry run wild and perpetuated by wrongheaded austerity policies, won’t do. Instead, the story must involve things like a skills gap – it’s not lack of jobs; we have the wrong workers for this high-technology globalized era, etc., etc. – even if there’s no evidence at all that such a gap is impeding recovery.
And the ultimate example of a seriously bad idea is the determination, in the teeth of all the evidence, to declare government spending that helps the less fortunate a crucial cause of our economic problems. In the United States, I’m happy to say, this idea seems to be on the ropes, at least for now. Here in Britain, however, it still reigns supreme. In particular, one important factor in the recent Conservative election triumph was the way Britain’s news media told voters, again and again, that excessive government spending under Labour caused the financial crisis.
It takes almost no homework to show that this claim is absurd on multiple levels. For one thing, the financial crisis was global; did Gordon Brown’s alleged overspending cause the housing busts in Florida and Spain? For another, all these claims of irresponsibility involve rewriting history, because on the eve of the crisis nobody thought Britain was being profligate: Debt was low by historical standards and the deficit fairly small. Finally, Britain’s supposedly disastrous fiscal position has never worried the markets, which have remained happy to buy British bonds despite historically low yields.
Nonetheless, that’s the story, generally reported not as opinion but as fact. And the really bad news is that Britain’s leaders seem to believe their own propaganda. On Wednesday, George Osborne, the chancellor of the Exchequer and the architect of the government’s austerity policies, announced his intention to make these policies permanent. Britain, he said, should have a law requiring that the government run a budget surplus - with current revenue paying for all spending, including investment outlays - when the economy is growing.
It’s a remarkable proposal, and I mean that in the worst way. Osborne isn’t offering the wrong answer to Britain’s problems; he’s offering an answer to problems Britain doesn’t have, while ignoring and exacerbating the problems it does.
For Britain does not have a public debt problem. Yes, debt rose in the wake of the economic crisis, but it’s still not high by historical standards, and borrowing costs have rarely been lower. In fact, interest rates adjusted for inflation are negative, even on very long-term borrowing. Investors, in other words, are willing to pay the British government to make use of part of their wealth.
Meanwhile, Britain’s real economy is still ailing. It’s true that employment has held up surprisingly well, but that’s only because of a spectacular, unprecedented productivity bust: adjusting for labor quality, output per person-hour has declined around 7 percent since early 2008.
Nobody fully understands either why this slump has happened or how to reverse it, but surely the combination of a still-weak economy, terrible productivity performance and negative borrowing costs says that this is a time to increase investment in things like infrastructure. (Passenger trains here make rail service in the United States look good, and traffic congestion is getting ever worse.) Yet the Osborne proposal would kill any such initiative.
But Osborne sounds very serious, and, if history is any guide, the Labour Party won’t make any effective counterarguments.
Now, some readers are probably thinking that I’m giving the likes of Osborne too much credit for sincerity. Isn’t all this deficit obsession just an excuse to slash social programs? And I’m sure that’s part of it. But I don’t think that’s the whole story. Seriously bad ideas, I’d argue, have a life of their own. And they rule our world.