‘0082015 Amartya Sen: The economic consequences of austity vesrieuiga] ll tsF NewStatesman Amartya Sen: The economic consequences of austerity The judgements of our financial and political leaders are breathtakingly narrow. Nobel Prize-winning economist Amartya Sen considers the alternatives. MEDICINA BRAGANCA PAULISTA) worth £8.99 oe eee Tweet (259) wm) [Set ae . ‘On 5 June 1919, John Maynard Keynes wrote to the prime ‘minister of Britain, David Lloyd George, “I ought to let you know that on Saturday T am slipping away from this scene of nightmare. um {Lean do no more good here.” Thus ended Keynes’s role as the official representative of the British Treasury at the Paris Peace Conference. It liberated Keynes from complicity inthe Treaty of Versailles (0 be signed later that month), which he detested Why did Keynes disike a treaty that ended the state of war Detween Germany and the Allied Powers (surely a good thing)? Keynes was not, of course, complaining about the end of the word ‘war, nor about the need for a treaty to end il, Dut about the terms of the treaty ~ and in particular the suffering and the economic turmoil forced on the defeated enemy, the Germans ‘through imposed austerity. Austerity is a subject of much contemporary interest in Europe ~ I would like to add the word “unfortunately” somewhere in the sentence. Actually, the book that Keynes wrote attacking the treaty, The Heonomic Consequences of the ‘Peace, was very substantially about the economic consequences of “imposed austerity", Germany had lost the battle already, end the treaty was bout what the defeated enemy would be required to do, inehuding what it should have to pay to the victors. The terms of this Carthaginian peace, as Keynes saw it (recollecting the Roman treatment of the defeated Carthage following the Punic wars) included the imposition of an ‘unrealistically huge burden of reparation on Germany ~ a task that Germany could not eatry out without ruining its economy, As the terms also had the effect of fostering animosity between the vietors and the vanquished and, in addition, would economically do no good to the rest of Europe, Keynes had nothing but contempt for the decision of the vietorious four (Britain, France, Italy and the United States) to demand something from Germany that was hurtful for the vanquished and unhelpful for al The high-minded moral rhetoric in favour of the harsh imposition of austerity on Germany that Keynes complained about eame particularly from Lord Cunliffe and Lord Sumner, representing Britain on the Reparation Commission, whom Keynes liked to eall “the Heavenly Twins". In his parting letter to Lloyd George, Keynes added, "I Ieave the Twins to gloat over the devastation of Europe.” Grand chetoric on the necessity of imposing austerity, to remove economic and moral impropriety in Greece and elsewhere, may come more frequently these days from Berlin itself, with the changed role of Germany in today’s world, But the unfavourable consequences that Keynes feared would follow from severe ~ and in his judgement unteasoned ~ imposition of austerity remain relevant today (with an sltered geography of the morally upright disipliner and the errant to be disciplined) Aside from Keynes's fear of economic ruin of a country, in this case Germany, through the merciless scheduling of demanded payments, he ‘also analysed the bad consequences on other countries in Europe of the eeonomie collapse of one of their partners. The thesis of economic Interdependence, whieh Keynes would pursue more fully later (Including in his most famous book, The General Theory of Employment, Interest and Money, to be published in 1996), makes an early appearance in this book, in the contest of his eritique of the Versuilles Treaty “An inefficient, unemployed, disorganised Europe faces us," says Keynes, “torn by internal strife and international hate, fighting, starving, pillaging, and Tying.” If some of these problems are visible in Europe today (as I believe to some extent they are), we have to ask: why is this 80? After al, 2015 is not really anything ike 1919, and yet why do the same words, taken quite out of context, look as if there isa fitting context for at least a part of them right now? If austerity is as counterproductive as Keynes thought, how come it seems to deliver electoral victories, atleast in Britain? Indeed, what truth is there in the explanatory statement in the Financial Times, ated shortly ater the Conservative vitory in the general election, and coming nipsluwwnewstatesman comipales/201S!06lamartya-ser-econemic-consequencas-austrity 1610082015, ‘Amartya Sen: The economic consequences of austerity from a leading historian, Nill Ferguson (who, {should explain, is a close friend ~ our friendship seems to thrive on our persistent disagreement): “Labour should blame Keynes for their election defeat.” If the point of view that Ferguson airs is basically right (and that reading is shared by several other commentators as welD, the imposed austerity we are going through is not a useless nightmare (as Keynes’ analysis would make us believe), but more like a streauous workout for & healthier future, as the champions of austerity have always claimed. And itis i this view, a future that is beginning to unfold already in our time, at least in Britsin, appreciated by grateful voters. Is thatthe real story now? And more generally, could “the Heavenly Twins” have been ight all along? ‘There are many odd features of the experience of the world since the ersis of 2008, beginning in the United States. One of them is that what Degan as @ clear failure of the market economy (particularly fed by misbehaving financial institutions) soon looked like a problem of the overstretched role of the state, The crisis, whem it eame, was seen ~ righty, I believe ~ asa fallure of the operation of the private financial institutions, and led to & huge demand for reinstating some of the state regulations, particularly ofthe financial markets, that had been gradually eliminated in the US economy through piecemeal eradication (beginning in the Reagan presidency but continuing through Democratic administrations). However, after the massive decline in 2008 of financial markets and of business confidence had been halted and to some extent reversed through the intervention of the state, especially through stimulating the economy, often paid for by heavy public borrowing, the state bad large debts to deal with, The demand for a smaller government whieh hed begun earlier, led by those who were sceptical of extensive public services and state provision, now became a loud chorus, with politieal leaders competing with each other in frightening people with the idea that the economy could not but collapse under the burden of public debt. Similarly, al the international level, the global freefall following the 2008 crisis was largely halted by the move, under the visionary leadership of Gordon Brown, for a mecting of the governments of the newly formed G20 in April 2009 in London, each promising to do ils best not to feed the downward spiral by domestic complicity. This turned a page in the history of the crisis successfully, but soon the story changed, with the governments being asked to get out of the way before they ruined healthy business setivities. Turning to the management of debts, suddenly the idea of austerity as @ way out for the depressed and heavily indebted economies became the dominant priority ofthe financial leaders of Europe. Those with an interest in history could easily see in this a reminder of the days of the Great Depression of the 19305 when cutting public expenditure seemed like a solution, rather than a problem. This is, of course, where Keynes ‘made his éefinitive contribution in his classic book, the General Theory, in 1996. Keynes ushered in the basic understanding that demand is ‘important as a determinant of economic activity, and that expanding rather than cutting public expenditure may do a much better job of expanding employment and activity in an economy with unused eapacity and idle labour. Austerity could do litte, since a reduction of public ‘expenditure adds to the inadequaey of private incomes and market demands, thereby tending to put even more people out of work, There i, of ‘course, more to Keynes's full theory than that, but the common-sense summary just presented is gst enough, However, the financial leaders of Burope hada different reading ~ from Keynes and from a grest many mainstream economists ~ of what was ‘needed, and they were not going to budge from their understanding. As itis quite common these days to blame economists for filing to see the real world, I take this opportunity to note that very few professionally rained economists were persuaded by the dizection in which those in charge of European finances decided to take Europe. The European debacle demonstrated, in effect, that you do not need economists to generate a holy mess: the financial sector can generate its own gory calamity with the greatest of elegance and ease. Further, if the policy of austerity deepened Europe's economic problems, it did not help in the aimed objective of reducing the ratio of debt to GDP to any significant ‘extent ~ in fact, sometimes quite the contrary. If things have started changing, over the past few years, even if quite slowly, itis mainly Decause Europe has now started to pursue a hybrid policy of somewhat weakened fiscal austerity with monetary expansion, If that isa half= hearted gesture lowards Keynes, the results are hal(-hearted, too. ‘There is in fae, plenty of evidence in the history of the world that indicates that the most effective way of cutting deficits is to resist recession and to combine defiit reduction with rapid economie growth. The huge defleits ater Ube Second World War were easly tamed with fast economic growth in the postwar years (L will come back to this issue later). Something similar happened daring the eight years of Bil Clinton's presidency of the United States, when Clinton began with a huge deficit and ended with none, thanks largely to rapid economic srowth. Again, the much-prasod reduction of the Swedish budget deficit during 1994-98 occurred in s period of faily fast growth of GDP. Despite politcal deadlocks and ¢ largely non-functional Congress, the United States has been much smarter than Europe, on this oceasion, in ‘making use of this central understanding, The rato of deficit to GDP has fallen in the US thanks to evonomic growth, which — rather than austerity — is of course the well-tried way of achieving the desired result, Had the poliey leaders of Europe (adherents of a peculiarly narrow view of financial priority) allowed more public discussion, rather tham taking ‘unilateral decisions in secluded financial corridors ~ encouraging no public discussion ~ itis possible that the policy errors could have been prevented, through the standard procedures of deliberation, serutiny and ertique, It is remarkable that this has not happened in the continent ‘that gave the world the basi ideas of institutional democracy. The big epistemic failure in missing the lessons of the past om revival, deficit reduction and economic growth is aot only a matter of wrong turns taken by the financial leaders, including the European Central Bank, but also of the democratic deficit in Europe today. It is no consolation that most of the governments in the eurozone that deployed the strategy of austerity lot office in public elections that followed, Democracy should be sbout preventing mistakes through participatory deliberations, rather ‘than about making heads roll after mistakes have been made. This is one of the reasons why John Stuart Mil saw democracy as “government by discussion” (a phrase coined, along Millian lines, by Walter Bagehot), and this demands discussion preceding public decisions, rather than following them, nips nwstatesman com/pales/2018/0/amartya-sen-econamic-consequences- austerity 2610082015, ‘Amartya Sen: The economic consequences of austerity How was it possible, it has to be asked, forthe basic Keynesian insights and analyses to be so badly lost in Ue making of European ceonomic polices that imposed austerity? Some of the dominant figures in the financial world heve had a long-standing scepticism of the economic relations on which Keynes focused which is being emended only now, with reality checks being made in observations of the penalty of the neglect of Keynesian relations. The bold plan by' the new president of the Buropean Central Bank, Mario Draghi, which we have every reason to weleome, to deliver a trillion euros of “quantitative easing” (not unlike expanding the money supply) ~ with decisive expansionary effet ~ is a result of that belated recognition which is slowly changing the European Central Bank: that expansion rather than contraction is what the ‘economy needs. 1 filing to understand some basic Keynesian relations is a part of the explanation of what happened, there was also another, and more subtle, story behind the confounded economies of austerity. There was an odd confusion in policy Uhinking between the real need for institutional reform in Europe and the imagined need for austerity ~ two quite different things. There can be little doubt that Europe has needed, for quite some time, many serious institutional reforms ~ from the avoidance of tax evasion and the fixing of more reasonable retiring ages to sensible ‘working hours and the elimination of institutional rigidities, including those in the labour markets. But the real (and strong) case for institutional reform has to be distinguished from an imagined ease for indiscriminate austerity, which does not do anything to change a system ‘while hugely inflicting pain, Through the bundling ofthe two together as a kind of chemical compound, it became very difiult to advocate reform without simultaneously cutting public expenditure all around. And this did not serve the cause of reform at al. ‘This is simple enough point, and itis surprising hove difficult t has proved to be to get this across, I have to confess to humbling failure in ‘making an impact on the policymakers through my efforts on this by addressing the European Commission, the TMF, the Bank for International Setlements, and joint meetings of the World Bank and the OECD, starting in the summer of 2009. ‘An analogy can help to make the point clearer: itis as if a person had asked for an antibiotic for his fever, and been given a mixed tablet with antibiotic and rat poison. You cannot have the antibiotic without also having the ret poison. We were in effect being told that if you want economic reform then you must also have, along with i, economic austerity, although there is absolutely no reason whatsoover why the two ‘must be put together as « chemical compound, For example, having sensible retiring ages, which many European countries do not (a much= ‘needed institutional reform), is not similar to cutting severely the pensions on which the lives of the working poor may depend (@ favourite of| austertarians), The compounding of the two ~ not least in the demands made on Greoce ~ has made it much harder to pursue institutional reforms. And the shrinking of the Greck economy under the influence mainly of austerity has created the most unfavourable circumstances possible for bold institutional reforms. Another counterproductive consequence of the policy of imposed austerity and the resulting joblessness, for Keynesian reasons, has been the los of prodhetive posser — and over time the loss of skill as well ~ resulting from continued unemployment of the young. The rate of youth ‘unemployment is astonishingly high in many European countries today; more than half the young people in Greece have never experienced hnaving a job. The very process of the formation of human capability, on which Adam Smith put emphasis as the real engine of economic success and human progress, has been quite badly mishandled through the tying together of uncalledor austerity (which no country really needed) with necessary reform (which many European countries did need). More than 200 years ago, Adam Smith specified with much clarity in The Wealth of Nations how to judge the good functioning of & wellrun ‘economy. Good politcal economy, Smith argued, has to have “two distinet objets”: “First, to provide a plentiful revenue or subsistence for the people, ot more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or ‘commonwealth with a revenue suffieient for the publick services”. ‘The father of modern economies, and the pioneering champion of the market system, did not have any doubt why the role of the state fits Iegrally into the demands of a good society. Public reasoning over generations has increasingly vindicated and supported Adam Smiths broad vision, There are good reasons to think that it would have done the saume today had open and informed public dialogue been given a proper chance, rather than being ruled out by the alleged superiority of the judgements of financial leaders, with theit breathtakingly narrow view of Jhuman society and a basic lack of interest in the demands of a deliberative democracy. It is certainly true that the policy of austerity has been advertised as the reason behind the comparative success of the British economy. This ‘comparison is, however, with Europe, which has been in a bigger hole than Britain, with @ more vigorous imposition of austerity, particularly in some countries (Grevee is of course the extreme example of that ~ with the big shrinking of its economy, rather than having economic growth). The relatively positive growth in recent years daes not make Britain's overall experience of growth over the periad of austerity particularly impressive, if we look beyond Europe. Not only is the priee-adjusted GDP per eapita in Britain today stil lower than what it was before the crisis in 2008, but also, in the period of recovery from the low of 2009, GDP per capita has risen far more slowly in the UK than in the US and Japan (not to mention some of the fastergrowing Asian economics). Could the British voters, then, have missed the real story? That is possible, and I shall come to that possibility presently, but the voting figures do not quite bring out « groundswell of approval in favour of austerity. There is no question that Labour had a severely bad election, and has lost ground, not justin Scotland, and must rethink its priorities as well as strategies quite radially. But the parties forming the coalition government ~ the Conservatives and Liberal Democrats ~ had support from more than 59 per eent of the total vote in the election before last in 2010 (that is, before they sprang the surprise of austerity on the British publi; yet the coalition parties together have managed to get only around 45 per cent in this election ~ after the experience of austerity. Not gute a heady success for the vote-gelting ability of austerity. The nips nwstatesman com/pales/2018/0/amartya-sen-econamic-consequences- austerity 3610082015, ‘Amartya Sen: The economic consequences of austerity ‘Tories did get a clear majority of seats on their own (and have good reason to celebrate that outcome), but this achievement came with only 37 per cent of the votes. The success here is just like that ofthe Hindutva-oriented BJP in India in the elections last year, when it got 91 per cent of the ballots cast but a substantial majority of parliamentary seats. Before we start getting our economic theories from the reading of election results, we have to scrutinise a bit more the message that comes through from the votes and the seats in the constituency-based electoral ‘stems that the UK ang, following it, India happen to have, ‘What is not in doubt, however, s thatthe general public in the UK, following the crisis of 2008, has become increasingly nervous about the size of the public debt and also about the ratio of publi debt to GDP. What is overlooked here is that while a national debt may have many costs (and it is not paranoise to keep tracking it) it s not quite like an individual person's debt, which is oted to someone else (someone quite different). An internal national debt is mainly owed to another person in the same economy. Figures of seemingly large public debt may be Inandy enough to frighten a population with imagined stories of ruining the future generations, but the analysis of public debt demands more critical thinking than that, rather than drawing on misleading analogy with private indebtedness ‘There are two distinct issues here. First, even if we want to reduce public debt quickly, austerity is not a particulary effective way of achieving this (which the European and British experiences confirm). For that, we need economic growth; and austerity, as Keynes noted, is essentially anti-growth. Second, what is also important to note is that while panie may be easy to generate, the existence of panie does not show that there is reason for panic. No less importantly, the public has not always been scared slilf by the size of the public debt. The public debtto- GDP ratio was very considerably larger in Britain in every year for two decades, from the mid-1940s to the mid-1960s, than it has been at any time since the crisis of 2008. And yet there was no panic then (shen Britain was confidently establishing the welfare state) in contrast to the confused anxiety, not to mention the orchestrated fear, that seems to run down the spine of the terrorised British today, making austerity look like a ting response, ‘When Britain went for pioneering the welfare state and established the National Health Service, among other ways of expanding the public services, with Aneurin Bevan inaugurating the Park Hospital in Manchester on § July 1948, the ratio of debt to GDP was larger than 200 per cent, much mote than twice what it has been at any point in recent yeats. Had the British public been as successfully frightened about the debt ratio in those days, the NHS would never have been born, and the great experiment of having a welfare slate in Europe (Irom which the ‘whole world from China, Korea and Singapore to Brazil and Mexico would learn) would not have found a foothold. A decade later, when Harold Macmillan, as a buoyant new prime minister, told the British people in July 1957 that they had “never had it so good’, the size of government debt was more than 120 per cent of GDP ~ immensely higher than the ratio of roughly 70 per cent in 2010 when Gordon Brown was accused of mortgaging Britain's future by profigy. ‘The seare was not there from the late 1940s through the 1960s, with Labour as well as Conservative governments in office, perhaps beeause the searers were more searce then. And armed with good publ services and a flourishing market economy, Britain steadily reduced its debi-to- ‘GDP ratio through economic growth, while establishing the welfare state and a huge array of new public services. Publi knowledge and understanding are indeed central to the ability of a democratic government to make good polices. The Beonomie Consequences of the Peace ends by pointing to the connection between epistemology and polities, and arguing Uhat we can make a difference to the world oaly by (in Keynes's words) “setting in motion those forces of instruction and imagination which change opinion”. The last sentence in the book affirmed his hope: “To the formation of the general opinion of the future T dedicate this book.” In thst dedation, there is enlightenment as well as optimism, both of which we strongly need today. This is an edited version of a lecture delivered by Amartya Sen at the Charleston Festival in Firle, East Sussex, on 23 May Amartya Sen is professor of economies and philosophy at Harvard and won the 1998 Nobel Prize for economies. He isthe inaugural winner of the Charleston-EFG John Maynard Keynes Prize and the author of many books, ineluding "The Idea of Justice” (Penguin) Tweet (259) Loe (Ge) | Sot) 48 . nips newstatesman.com/pales/2018/08amartya-sen-econamic-consequences-austrty 4610082015, ‘Amartya Sen: The economic consequences of austerity More from the New Statesman New Statesman team: Online writers: Columnist: cries: services: ‘Tomcat Hunter Dasies achel Cooke John Gru Myriam Prancois.Cerrah Ed Smith Antonia Quirke (Cittps//wwwmewstatesman nips newstatesman.com/pales/2018/08amartya-sen-econamic-consequences-austrty‘Amartya Sen: The economic consequences of austerity Cintps//wwnewstatesman ‘Samira Shackle livia Laine ‘thtps//erww nevestatesman lzaheth Mined ranees Wilson stateaman-pdtedition) Sophie MsBsin Margaret Corvid ‘Andrew Willen (Cattp://wwnewetatesman lly Manchan, ‘blannon and Holly ‘dam Kirsch ‘Sossial upplements Ian Steadman ‘ichard Morris Tom Watson ‘tntips//erwwe nevestatesman ‘Anoosh Chakelian Phil tart Stephen Brasher ‘Andrew Harrison (Chttp://wew.mewstatesman nipsluwwnewstatesman comipales/201S!06lamartya-ser-econemic-consequencas-austrity tb //ointerest.com /news ‘Gatps//itunes.appe.com/us statesman/idaoo878015? misB&ls1 ntp://ww.newstatesman