Who will be the last to suffer for the mistake of austerity?

This faith-based construction of economic ‘reality’ is no less ideologically driven than the Soviet five-year plans

Minister for Social Protection Joan Burton is under instructions from the troika to cut another €440 million from the social welfare budget in the autumn. Photograph: Eric Luke

Minister for Social Protection Joan Burton is under instructions from the troika to cut another €440 million from the social welfare budget in the autumn. Photograph: Eric Luke

 

In 1971, testifying before a US Senate hearing on the Vietnam war, John Kerry famously asked: “How do you ask a man to be the last man to die for a mistake?” We must ask a version of the same question: how do you ask a child or an elderly person to be the last one to suffer for a mistake?

First, the mistake. The Europe-wide obsession with so-called austerity is based on an admitted error. Our masters got their sums wrong. They believed the negative economic effects of cutting public spending would be very limited. They had faith in a magical notion called “expansionary fiscal contraction”, which is just as absurdly self-contradictory as it sounds. This faith-based approach is a construction of economic “reality” no less ideologically-driven, and no more based on evidence, than the glorious triumphs of five-year plans in the old Soviet Union.

At the heart of this belief was a mathematical calculation. It suggested a billion euro taken out of the economy in an austerity budget would not reduce economic activity by a billion euro. The damage would amount only to €500 million. The market would somehow absorb half the hit. But these sums were simply and wildly wrong. After four years of austerity, the International Monetary Fund’s economists flatly admitted the formula was rubbish. Instead of giving a €500 million hit to the economy, the billion euro in cuts causes €1.7 billion of damage. The sums were wrong by a factor of more than three.

This admission was made last September. In January, the two IMF economists who made the admission published a detailed paper showing why and how the calculations had been so wrong. And since then? Nothing. The official response has been to carry on cutting and to carry on telling the public the corner is just about to be turned. People must continue to suffer for a mistake.

To take the most urgent example, Minister for Social Protection Joan Burton is under instructions from the troika to cut another €440 million from the social welfare budget in the autumn. The smart lads and lassies who know about these things would have calculated, when they set out the austerity programme, that this would create just €220 million of damage to the economy. But in reality, according to the IMF’s admission, it will cause something closer to €750 million of damage – an enormous hit to the local economies of every village, town and city in Ireland.


Magical thinking
It’s not hard to see why this would be so. In the magical thinking that underlies austerity, the private market will take up the slack caused by cuts in public spending. But vast numbers of people in Ireland are only marginally attached to the market economy. A paper just published by Micheál Collins of the Nevin Economic Research Institute highlights some striking findings from the most important research on living standards in Ireland, the Central Statistics Office’s Survey on Income and Living Conditions. Collins looks at the distribution of “market income”, which is the money people earn before taxes and benefits kick in. What’s startling is that half of Irish households have between them just 8 per cent of all of this market income. Without social welfare payments, the bottom 10 per cent of households would have an income of just €24 a week. (Remember, this refers to the entire household, not to individuals. Households in the top 10 per cent have a weekly market income of €2,783.)

The idea that the magical market is going to make up a substantial part of what this half of Irish households will lose in the budget is pure fantasy – the bulk of their income doesn’t come from the market, it comes from the State. And the negative economic effects of cutting that income are much deeper than those of cutting the incomes of the better off. We know what people in the bottom half do with the money they get from the State: they spend it. Unlike those at the top they don’t have the choice of saving large parts of their income. They have to buy stuff with it, helping in the process to keep local businesses going and to keep people in jobs in the battered domestic economy. More cuts to the incomes of the poorest means less spending, more unemployment, lost taxes. And more scratching of heads when it turns out that all the promises of economic growth were illusory.

Cutting the incomes of the poorest people is indecent. It is particularly stupid when children are overrepresented in poor households, meaning the long-term social and economic costs will be all the greater. But even leaving aside considerations of basic decency, it is an exercise in bone-headed futility, like generals throwing kids and the elderly on to the frontlines in a war that is already lost. It is not fiscal responsibility, but social and economic recklessness. We’ve had zombie banks and zombie politics and now we have a zombie idea, a policy based on calculations admitted to be wrong. Are we really telling people to go cold and go hungry because somebody couldn’t do the maths?

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