The evidence base for Austerity was dealt a hammer blow this week by the discovery that the definitive economic paper underpinning it was based on a single Excel spreadsheet with a faulty column. The IMF has called for a rethink on Austerity, the UK’s credit rating has been downgraded, the economy has stalled and unemployment is rising. Only an Austerity fanatic would continue with such a clearly bogus policy.
Another Dodgy Dossier
The 2010 ‘Growth in a Time of Debt’ paper was prepared by celebrated Harvard economists Carmen Reinhart and Ken Rogoff. It stipulated that states with a debt to GDP ratio of 90% or above grow significantly slower than states with lower debt. They claimed this demonstrated a correlation between debt and growth and that to grow our economies quickly, we needed prioritise debt reduction. It became the evidence base by which political leaders across Europe and North America could argue a dramatic programme of public spending cuts. ‘It was not ideological,’ they told us,’ it was evidence based’.
UK Chancellor George Osborne, speaking in 2010 shortly before he became Chancellor said:
“Perhaps the most significant contribution to our understanding of the origins of the crisis has been made by professor Ken Rogoff, former chief economist at the IMF, and his co-author, Carmen Reinhart.” The chancellor then quoted the finding from their paper: “The latest research suggests that once debt reaches more than about 90% of GDP, the risks of a large negative impact on long-term growth become highly significant.”
The Political Economy Institute of Massachusetts requested the calculations for the study from Reinhart and Rogoff after they found they were unable to reproduce the results themselves.
They were stunned to find the whole argument was based around a basic excel spreadsheet, given that such basic economic modelling has been responsible for the Collateralised Debt Obligations that caused the Financial Crisis.
They found not only glitches in the spreadsheet that created wrong totals, but that the spreadsheet omitted data from five of the 19 countries in the study and the wrong data for another. This meant that while the paper claimed countries with a debt to GDP ratio on or above 90% would see their economy shrink by 0.1%, they would actually grow by 2.2%. This is slower than a lower debt country, but not the doom laden forecast that triggered the extremities of the Austerity programmes.
The IMF Becomes a Critic of Austerity
This week has also seen the International Monetary Fund (IMF) recommend Chancellor George Osborne rethink his Austerity based approach to recovery, based on poor growth figures. In short, the IMF said that Austerity is not working. The fact that this call came from the head of the IMF is as bizarre as it is damning.
The IMF invented Austerity. They created a mechanism called the Structural Adjustment Programme (SAP) which meant that loans were granted to developing nations on the condition the nation followed the rules of the SAP. This was a means of the IMF effectively imposing neoliberal economic policies on the populations and sidestepping the democratic process to do so.
The SAPs are very elaborate instruments. They enforced the selling off of national industries and resources, removed all capital controls on money flowing in and out of the country, dictated level of public spending which prioritised debt repayments and corporate welfare over infrastructure investment and human welfare; they even covered suppression of wages and unionisation rules for labour.
The results of the Structural Adjustment Programmes speak for themselves. They have allowed external corporations to make enormous profits by buying up state owned industries at a low price, whilst keeping living standards, wages, civil liberties and employment rights so low as to maintain a cheap domestic labour force. The human cost has been felt most painfully in public health. The stipulations to cut spending on health, sanitation, and the development of water systems created a public health catastrophe in these nations. According to the World Health Organisation:
“In health, SAPs affect both the supply of health services (by insisting on cuts in health spending) and the demand for health services (by reducing household income, thus leaving people with less money for health). Studies have shown that SAPs policies have slowed down improvements in, or worsened, the health status of people in countries implementing them. The results reported include worse nutritional status of children, increased incidence of infectious diseases, and higher infant and maternal mortality rates.”
The Structural Adjustment Programmes are now being rolled out across Europe, as Austerity Programmes. Central banks are lending to stabilise national economies which have been broken by the cost of bailing out other banks. The Central Banks make these funds contingent upon the national government imposing an Austerity Programme. This is SAP by another name.
So far we have seen democratic governments in Greece and Italy who refused to comply replaced with technocratic governments who will. Most recently in Cyprus the government was coerced into agreeing a direct confiscation of the personal wealth of its citizens to pay off debts run up by Banks.
The Results of Austerity
The countries which have adopted Austerity Programmes have seen their economies eviscerated. Any rational person assessing the performance of a model whose academic basis just got blown open, would surely reflect on the results so far.
The economy of Greece has shrunk every year for five years and the Austerity Programme has turned a financial crisis into a humanitarian crisis.
11% of the population now live in ‘Extreme Material Deprivation’ without enough food, heating, electricity or a telephone
The Church of Greece distributes 250,000 food rations daily and there has been an explosion in food rations
This level of poverty has enabled a resurgent fascism. The Far Right Golden Dawn party now has 18 of the 300 seats in the Greek Parliament. Immigrants are being routinely assaulted and killed in racially motivated attacks. Just days ago, a group of 200 immigrant workers protesting six months of unpaid wages were fired upon by their bosses. The assault left twenty eight with gunshot wounds and it was a miracle that no one lost their life.
The Spanish economy will shrink again this year and has been shrinking throughout the Austerity programme.
Average household income has dropped by more than 10% in the last five years as wages have been depressed.
A recent Oxfam report warned that by “By 2022, some 18 million Spaniards, or 38% of the population, could be in poverty.“
The UK Economy has been through a double dip recession since the bailout of 2008 and continues to undershoot growth forecasts by the OBR and the IMF.
Wages have fallen to their lowest in a decade.
A string of assaults on the welfare state are estimated to push 600,000 children into poverty by the next general election in 2015.
The Austerity programme has been an unmitigated disaster by all of its published metrics. It has failed to create growth and it has failed to reduce national debt. It has swapped the burden of consequence of the Financial Crisis from the Industry that caused it to ordinary people. The Red Cross has announced that the Austerity induced poverty across Europe has required it to launch its largest food aid programme since the Second World War. So when critics of Austerity suggest a class war might be afoot, it is worth reflecting on that point before dismissing their arguments out of hand.
Facts Don’t Bother Fanatics
The key issue here is how the governments and individuals who have supported Austerity respond when the intellectual basis has been found bogus, the leading financial institutions argue against it and the results on the ground are so woeful.
In this case there is no sign of pause or reflection from the political leadership. Far from it, they are ordering full steam ahead as the ship meets the iceberg.
Mark Carney, the new Governor of the Bank of England has declared Britain a ‘crisis country’ alongside the Eurozone and Japan, and argued against the IMFs plea for a U Turn on Austerity.
Chancellor George Osborne has insisted he will ‘stay the course’ on Austerity – apparently regardless of the fact that puts the majority of the UK population on course for poverty and suffering.
UK Prime Minister David Cameron seems positively gleeful at the advancement of his austerity agenda, declaring there is ‘no end in sight’ for the programme of public sector cuts.
The political leadership have rejected the fact the evidence for Austerity has been undermined, they have rejected the criticism of the architects of Austerity itself and they have rejected the reality of its devastating results on the ground. These people are not rational, they are ideologues.
Without the intervention of the electorate, Austerity is here to stay. Anyone crossing their fingers that the logic of this argument will do anything to deter these Austerity fanatics needs to get real and fast. Austerity is a war on the welfare state and these bogus economic arguments are merely the sheep’s clothing adorning the wolf. If we don’t want to end up like Greece, Cyprus and Spain, then we should not follow our government over the same Austerity cliff that drove them into the dust.