Monthly Archives: August 2015

Austerity? What austerity?

Since at least 2010, British political discourse has been dominated by ‘austerity’. With British government finances in a mess following the banking crisis of 2007/2008 and subsequent economic collapse, the coalition acted to close the resulting deficit relying primarily on spending cuts rather than tax rises. This is the ‘austerity’ that is frequently talked about.

The trouble is that its difficult to actually see it in the figures. The chart below shows British government spending since 1900 in inflation adjusted, 2005 sterling.


Source: UK Public Spending

The post-2010 period does stand out, but not, I think, as a particularly ‘austere’ time in terms of government spending. Indeed, all of the British government’s six highest spending years since 1900 have come since 2010. British government spending has risen from £702.09 billion in 2010 to £748.12 billion in 2015. What has happened since 2010 is that the rate of increase of government spending has slowed drastically.

So do we have ‘austerity’? If austerity = a decline in the increase of government spending, then yes. If austerity = a fall in government spending, then no.

A Short History of Financial Euphoria by John Kenneth Galbraith


Galbraith‘s reputation as an economist isn’t what it once was. There are few takers these days for tomes such as American Capitalism, The New Industrial State, or Economics and the Public Purpose, although The Affluent Society retains a readership. But as a writer of popular, accesible economics, he is, in my view, up there with Bastiat. His The Great Crash of 1929 is an excellent bit of descriptive writing and this short book is another riff on its themes.

Are the causes of economic events such as assets bubbles and busts endogenous – originating within the economic system, such as central bank action or new innovations – or exogenous – originating outside it, such as natural disasters? Galbraith comes down very firmly for the latter, rooting his explanation entirely in group psychology. For the same reasons I didn’t much likeAnimal Spirits, I find the total reliance on group psychology unsatisfactory. In the most recent boom and bust, that of sub prime mortgages and their derivatives, there were plenty of endogenous factors which cannot be ignored.

But Galbraith makes some good points. His focus on the repeated presence of leverage in these events is interesting and it is a shame that space does not allow for a more systematic analysis. Also, Galbraith is entirely right to castigate the quest for ‘the’ person to blame after the bust. For all the fuss about bankers since 2008, little popular flak has been directed at central bankers.

George Osborne hasn’t created more debt than every Labour government in history

Source: Another Angry Voice

If you have been at all aware of British of British politics over the last five years you are very likely to have seen the above. Is it true?

Chart 1 shows the annual increase in the public sector net debt each year going back to the first Labour government, Ramsay MacDonald’s short lived ministry of 1924. Adding these up, the coalition (in green, a mix of yellow and blue) has ‘created’ £523 billion of debt between 2010 and 2015. Adding up all the debt increases under the two MacDonald governments (1924 and 1929), the Attlee government (1945 to 1951), the Wilson government (1964 to 1970), the Wilson/Callaghan government (1974 to 1979) and the Blair/Brown government (1997 to 2010), the total comes to £665 billion.

Chart 1


Source: UK Public Spending

If anyone crunches the numbers and comes up with different answers, drop me a line.