The strictest and most severe voices are the ones making the vaguest points.
BlindSpots’ mission is to describe preposterous clashes between experienceable realities and dominant narratives, and seeks to add pieces that are sorely missing from stories.
Even now, in the midst of the biggest emergency since World War II and the most extreme economic contraction since records began, there are still dour voices (such as Irish Taoiseach Leo Varadkar or the EU’s ‘Frugal Four’) making the point that the tools we use to revive the economy after the pandemic will necessarily have to be added to the debt pile. Why they’re saying this though, they’re not so sure. A debate about ‘Strict Father Morality’ is in progress in the US. Applying this form of morality to economics results in what I call ‘Scrooge Economics’
The Scroogenomics story rears it’s ugly head every once in a while, usually only during times of crisis (which is a clue), but how much substance is there to this story? I’ve identified five intertwining strands to the story. Unravelling these five yarns and looking at them one by one will help answer that question.
1. Misery is a State of Mind
*Oxford English Dictionary
Some good synonyms for austere include stern, severe, strict, harsh, dour, cold, and grim – you get the picture. I think the best synonym for austerity is frugality. No one in their right mind would make the case that frugality doesn’t have its place. But what should be seen as an equally insane point to make is that frugality’s place is every time, everywhere.
Frugality was supposed to be a tool for use on certain jobs. But it seems to also be a state of mind that people can subscribe to and use even when it’s not the tool for the job. When austerity for austerity’s sake is deployed, it becomes a form of compound false economy that can be, ironically, the most expensive option imaginable.
After the 2008 financial crisis, the troika was on a mission to improve the Debt/GDP ratio of the bailed-out PIGS (Portugal, Ireland, Greece, Spain) countries. As Murray Milgate points out; a child should know by primary school that the value of a fraction can be reduced more quickly and dramatically by increasing the bottom number than by decreasing the top number. You could argue that some kids escape secondary school without an appreciation of this. But surely it’s safe to assume that the executives of the IMF, the ECB, and the European Commission have attained a level of education to allow an understanding of this fact?
But the troika could only see the top number in the Debt/GDP fraction. This caused them in many cases to cut spending on things that were actually generating GDP. If you’re cutting the denominator at a similar pace to how you’re cutting the numerator then a fraction can actually get bigger. In Greece’s situation, the Debt/GDP ratio worsened. Being so frugal you cut spending on things that generate income for you is not frugal at all but so blindly miserly that it even costs the very person who makes the decision.
This is where frugality goes beyond being a tool for use on jobs where it’s useful, and evolves into a state of mind that uses us as a tool for its own ends, namely: spreading itself as an idea.
Nowhere is this White Anglo-Saxon Protestant mentality clearer to see than in how Western society values someone who does work that is significantly socially or environmentally detrimental (and so creates a large minus benefit for society) over someone who doesn’t contribute to the economy.
What’s worse? Being paid to do nothing ,or being paid to do something better left undone?
2. Company/Household Economics Vs. Vascular Economics
The Economy as a whole, or Macro Economy, is often described as an entity like any other that ultimately needs to spend less than it takes in. But an economy works nothing like a household or a company.
One person’s spending is necessarily another person’s income. There cannot be plugs without sockets. Kate Raworth describes Doughnut Economics. I would go one further and say that an economy works like a cardio-vascular system. Income and wealth should be able to circulate around an economy as efficiently as possible so that it finds its way to the people who are delivering value to others.
The upshot of this is that, at a time of economic difficulty, ‘reigning in spending’ or ‘tightening your belt’ has the effect of reigning in incomes at a time when we most need that to not happen.
3. Inflation has two moving parts, not one.
One of the biggest arguments against injecting cash into a struggling economy is that too much cash chasing too few resources will drive up the prices of those resources and cause massive inflation.
Notice that there are two variables in that equation: cash and resources. For some reason, practically all commentary on this issue has ignored one of these variables, in the process suggesting that the volume of cash in the economy is the only variable affecting inflation.
If inflation is what happens when there is too much cash for too few resources, deflation happens when there is too little cash for too many resources.
Listening to Dave McWilliams and Stephanie Kelton, I started to place why, even after 12 years of stubborn and consistent deflation, frugalist policymakers are still worried about inflation. I’ve milked dry the analogy with a doctor giving a patient with dangerously low blood pressure medication for hypertension. It is worth milking this analogy again. But why is this happening?
The inflation/deflation spectrum can be referred to as price stability. It’s high time to realise that price stability is a function of the relative match between the volume of cash and the resources in an economy, and not just the level of cash alone.
Here is why price stability is important. Since the 1980s, the average low and middle-income earner has needed to use debt to finance even a modest middle-class lifestyle. A healthy dose of inflation means that this debt is being shrunk all the time as earnings rise, but the debt is a snapshot of what was borrowed at the time. It means that debts become gradually less and less relevant in an individual’s financial piechart. With little or no inflation, those debts weigh as heavily as they did on day one. The more disposable income is depressed in an economy, the more sluggish that economy is – and all of this was the state of play before the Covid19 crisis hit!
The frugalists talk about inflation as if it were a bad thing at a time when we are desperate for some. What’s more; they’re acting as if we’re in danger of dangerously high levels of inflation when we are literally experiencing dangerously low levels as we speak. Pretending that inflation has only one moving part when it actually has two is the main way that this illusion is sustained.
4. Make Hay While the Ground’s Frozen
Let’s allow the frugalists the point that the state (not the economy as a whole, but the civil service) is an entity that needs to balance its books and retain a good credit rating with the private investors who profit from public-sector debt etc. etc.
As per Maestro Taleb’s teaching that “Anything that is damaged by volatility is fragile”: Debt is fragility-inducing. When the unforeseen happens to the highly indebted, it does much more damage than it would do to the not-so-indebted.
Fiscal Conservatives and Frugalsists thus have a point when it comes to debt. Time and place is the reason I struggle to take their arguments in good faith, though.
Keynesian economics is known as ‘AntiCyclical’. The core idea is that when an economy is depressed, budget deficits are tolerable in order to plough cash into areas that are likely to jumpstart the economy again. This one side of the Keynesian coin is discussed to the complete exclusion of the other side, though. Keynes also thought that debts should be paid off during boom times. Applying this principle to printed money injection (quantitative easing), you should also syringe that liquidity back out of the economy again once it starts to boom and approaches an overheating (inflationary) point where too much money is chasing too few resources. That is the time to take the punchbowl away.
Where are all the severe, frugal voices calling for fiscal discipline whenever the economy has regained momentum? The last time, they all mysteriously shut up in 2014 once economies started to recover. The time to pay off debts and balance the books is when hay is being made, not in the depths of cold, hungry economic winters. The time for Austerity is during economic booms.
Frugalism would deserve more respect if its severe voices called for austerity at any time other than when it was at its most painful and most unnecessary.
To wrap up this fourth yarn, there is a glaring contradiction that frugalists seem to both finger-wag about the dangers of debt and resist the route of simply printing money and granting it directly to small firms and citizens. Surely if they’re that concerned about having more debt on the balance sheet they’d prefer the option of printing money and granting it directly to citizens and small businesses? Frugalism is so vague and concentrated on miserableness for its own sake that it’s starting to confuse itself.
Or, taking it from a less naive standpoint, they could be acting as the mouthpieces for the very people bond credit will be borrowed from under the debt route. How would the investor caste profit from all this if we just printed our way out of the crisis?
For those to whom this idea of printing and granting cash to lubricate the economy out of a malaise still sounds ridiculous, it must be reiterated again and again: this is already how banks are granted the cash that they lend out. It is created digitally by the central bank when a retail bank approves loans. We’re only creating imaginary money anyway. So yes, you can “just print the money”, we already do. We are moving on to the next question: whether we allow banks to keep benefiting from middlemanning this process or whether we give it directly back to the very citizens who collectively and legally own the central banks that do that printing in the first place!
5. Is it even about the money?
When it comes to most social issues, be they health, education, welfare, childcare, whether we should bail out citizens or investors in times of crisis, or single mother support – people are playing one of two possible games.
Some are playing the game of: “How do we protect the vulnerable and fund that protection in a way that’s fair?”.
Others play the game of: “How can we stop the undeserving from getting stuff they shouldn’t get, regardless of how little it costs me or the rest of society?”
The fact that so many means-testing programmes around the world cost about the same as the difference in savings from rolling that welfare out to everyone no questions asked shows our ability to confuse the technical and the moral. Which game are we playing, exactly?
I’m not claiming that there isn’t some merit to the arguments of the frugalists here. It’s certainly possible that welfare could create dependency and stifle people’s growth by granting them too comfortable an environment for them to be incentivised to strive and develop in life. But what’s wrong with saying that? Why pretend that it’s about the money?
A good working example of how so much frugalism isn’t actually about the money is the relative ill will towards welfare cheats as compared with bailed out banks after the 2008 crisis.
It can be frustrating to see between a fifth and a half of your wage packet skimmed off by the government, so if we were that worried about parasitic drains on the exchequer, it should be about the money.
I’ve done some back-of-envelope sums using Irish figures for the 2008 bank bailout as compared with our annual welfare bill.
Assuming 10% of welfare recipients are ‘cheats’ then the bank bailout cost us roughly 32 years worth of all dole cheats’ claims.
I’m naive to think it’s only 10% you say? OK, with one in five being cheats, that makes the bank bailout worth about 16 years worth of dole cheats’ claims.
Even if that’s still not enough and you wanted to say every second welfare recipient is a cheat – the bank bailout still cost us six and a half years worth of their bleeding the exchequer dry.
Take your pick:
|Chunk of Welfare Recipients ‘Cheating’||Years’ worth before costing the same as the bank bailout.|
|One in Ten||~32 Years|
|One in Five||~16 years|
|One in Two||~6.5 years|
Of course, this is to believe the suggestion that it’s about the money. But is it?
While it has to be conceded that this paperwork heist was less visible to Joe and Mary Bloggs than perceived welfare cheats in the post office line, I would also suggest that the mismatch in outrage is at least partly driven by snobbiness and hatred of the poor or, turned on its head, the feeling that at least the bankers put on a tie and went to work before raping the exchequer for €64 billion!
When it comes to working out how to help our vulnerable the first thing we need to decide is if the issue is can’t or won’t?
This brings us back again to how once you scratch the surface, the argument for frugalists seems more about whether or not the vulnerable deserve the pittances they need, and not whether or not it can be done easily.
Putting aside who’s vulnerable and who’s not, and who deserves support and who doesn’t, at the very least we should be honest about the fact that that’s the argument we’re having. But they seem to need to pretend it’s about the money – they need to pretend that their argument is about something other than it is.
I sense that, if the Frugalists thought they could win this argument, they’d be more interested in having it.
by Cian Walker