Exposing the Myth of Austerity: An Interview with Benjamin Studebaker
by Benjamin Studebaker
A couple of days ago, I did an interview with Robbie Bennett and Jakob Lount from the People’s Resistance, an organization devoted to challenging the British government’s austerity policies. The interview predominately covered austerity and UK and US economic policy, though there’s also a little bit about me personally and my academic work, if that interests you. They have kindly permitted me to share the interview with you in full below–you can also read it on their WordPress or their Tumblr, and they are also on Facebook and on Twitter. The introduction and the questions are their words, the answers are mine:
Exposing The Myth of Austerity
An interview with Benjamin Studebaker
Interview conducted by Robbie Bennett and edited by Jakob Lount on behalf of the People’s Resistance
Since 2010 Britain has been living with austerity, yet few know what it actually means beyond cutting public spending. Benjamin Studebaker is a blogger with an upcoming PhD in politics – born and raised in America, he currently studies here in England (resuming in Autumn). In 2012, he started his self-titled blog in order to express his thoughts and feelings of the politics of America, England and the world. On the 2nd May 2015, a post entitled Britain: For The Love of God, Please Stop David Cameron received an incredible 900,000 hits, and his carefully detailed deconstruction of David Cameron’s economic policies was representative of a growing number of economists, political writers and everyday people questioning whether austerity was necessary at all.
However, this feeling never made it into mainstream discussion, and David Cameron’s Conservative party was re-elected with a surprise majority – confounding everyone from pollsters to members of the Conservative party itself. People believed austerity had worked so much, despite growing evidence to the contrary, that they voted for another five years of it.
Here, Benjamin talks to The People’s Resistance about what austerity truly is – and why it may not be working as well as we’ve been lead to believe.
Hi Ben! Thanks again for doing this interview. Tell us a little about yourself. What do you do, and how did you get involved in politics/economics?
Hi Robbie! I’m happy to be here. I’m an incoming PhD student at the University of Cambridge. My research focuses on democracy and inequality, on the ways that our democratic processes can create and perpetuate inequalities and on the ways that inequalities can warp and distort our democratic processes.
I grew up in the United States–I started paying attention to politics when I was 8 years old during the 2000 Gore/Bush election. When I was 18, I decided to do my undergraduate degree in the UK at the University of Warwick so that I could focus exclusively on politics (American programs have you take a lot of general education requirements outside your subject area). After a brief stint doing an MA at the University of Chicago, I’m very pleased to be coming back to Britain this autumn.
What did you do your MA in?
Chicago has an MA program in social science, so I was able to do some interdisciplinary work. My MA thesis focused on the effects of economic inequality on economies and political systems.
Interesting. Could you give us quick summary of your thesis findings? And what are your plans when you return to Britain in Autumn?
My thesis found that high economic inequality tends to produce economic instability (booms and busts), and that the more inequality you have, the worse the busts are. When you have a really devastating bust, it leads to social deterioration, and this forces states to make significant political changes. Think of the period between the World Wars and immediately after World War II. There was so much instability and suffering brought on by large wealth disparities, and this caused many people to abandon democracy in favour of fascism or communism, or to implement radical new policies, creating welfare states, health services, and other sophisticated government programs.
At Cambridge, I’m hoping to really expand on this and get into it on a theoretical level, to sort out what it is about our governments that leads them to increase economic inequalities even though they make the overwhelming majority of citizens worse off.
Interesting. Tell us more about your blog; we first came across it with your post that went semi-viral, urging Britain not to vote for the Conservatives and David Cameron back in due to their poor track record on the economy. Tell us a little more about this post and the blog itself. What sort of topics does the blog cover? What were your reasons for starting one?
I started the blog in the summer of 2012. I was initially sceptical—who pays attention to blogs, anyway? But a few friends had told me that they wanted a way to keep up with what I was thinking about, and I decided that even if no one read it, it would be a useful way to keep a record of my thoughts and ideas, sort of like a journal. I cover political and moral philosophy, economics, international relations, and contemporary political and cultural issues, predominately in the United States and Britain.
I like to tie current issues into larger principles and systems of thinking. I recently wrote the post “Britain: For the Love of God, Please Stop David Cameron” which has received nearly 900,000 hits. It makes the argument against austerity in a way that I hoped would be accessible to people who don’t regularly read about economics. You can check out my blog at benjaminstudebaker.com.
A lot of people misunderstand economics, especially at governmental and national/international level. How can you explain economics to the average person? What do terms like debt, deficit, a credit rating and other common terms actually mean?
It’s a major issue, because these terms get used in the media without further explanation. The people who write about politics often assume that other people are like them, that politics is something they spend all their time reading and thinking about. Most people have lives; they have other interests and responsibilities. Here’s how I’d define a few common terms:
Debt – The total amount of money the government owes.
Deficit – The amount of additional money the government borrows in any given year.
GDP – Gross Domestic Product. The total amount of economic activity occurring in a given place.
Debt to GDP Ratio – The total amount of debt as a percentage of GDP. Even if the government is running a deficit, if GDP is growing at a faster rate, the debt to GDP ratio can fall anyway. This is how the relative size of the debt is most often reduced – surpluses are rare.
Credit Rating – Ratings agencies rate the reliability of the government, the extent to which they feel that the government can be expected to repay its debts.
Bond Yields – The government borrows money by selling bonds, and the higher the bond yield, the more interest the government must repay. Even if ratings agencies are downgrading the government, the most important thing to look at is the bond yield. If bond yields remain low, the government can still borrow comfortably. In recent years, we’ve seen a lot of instances where the credit rating for a country falls but the bond yield remains low. The US’ credit rating was downgraded in 2011, but this has had no effect on bond yields and the US still borrows at very low interest rates.
And how would you explain economics itself at a governmental level, especially when talking at a national/international level? Many people equate governmental finances with household finances when this is surely not the case?
There are important differences between your household or business’ budget and the government’s – the government can raise taxes and it can change the value of the currency it borrows the money in. This allows the government quite a bit more flexibility than ordinary people have when dealing with its debts. Ordinary people cannot change the inflation-adjusted value of their debt or force their employers to give them more money. The government’s revenue also increases as the economy grows because the tax base grows alongside the economy, even if there is no change in the tax rate.
It’s like if your wages automatically went up as the economy went up, even though you stayed in the same job. As a result, it’s very hard to force a government with its own currency into defaulting on its loans, much harder than I think many people understand. But lenders understand, and bond yields have stayed very low for countries that have their own currencies, like Britain and the United States.
Who lends governments money? What do you mean by defaulting on a loan?
For the most part, governments borrow from their own citizens – often from banks and pension funds. They can also borrow from foreign investors and foreign governments, and their central banks can even lend them new money that has been created out of thin air, though governments have to be careful not to overdo this and generate inflation. When a government defaults on a loan, it stops repaying it.
In this country the term Austerity is thrown around without much explanation being given as to what it actually is. What exactly is Austerity? How did it come about?
Austerity is the idea that when the economy is depressed and deficits are high, the solution is to increase confidence in the government’s financial position by reducing public spending. During and after the global economic crisis in 2008, a lot of people, particularly in the United States, were in a great deal of debt. When US housing prices collapsed, these people could no longer sell their homes to repay their debt, and they started defaulting.
A lot of banks went under, and to reduce the amount of damage this would do to the wider economy, governments bailed out the financial system to prevent it from collapsing. They also used stimulus spending to put money into the hands of workers and consumers to keep people spending money. To pay for the bailouts and the stimulus, governments had to borrow a lot of money, and many people grew fearful of the size of the debt and the deficit. These people began suggesting that the real problem was not lack of spending by consumers, but a lack of confidence in the long-term financial stability of the governments, and in 2010 the debate on both sides of the Atlantic shifted from “how can we get people back to work and put money in their pockets” to “how can we get the deficit down”.
Republicans won control of the House of Representatives promising to deal with deficits in 2010, and the coalition government displaced Labour on the same grounds in the same year.
Is the reason our government and the Republicans are implementing Austerity related to what you stated above, or do you believe there are other reasons too? If so, what do you think those other reasons might be?
A little of both – as I said, the government thinks that austerity will make businesses more confident in the long-term health of the economy and that this will cause them to spend more on new equipment and hiring. But they also think that they have no choice, that if they do not do austerity, there will be a large spike in bond yields and it will become enormously expensive for the government to borrow money.
Do you think Austerity is necessary then? Is it working?
The research that has been conducted over the last five years does not say that at all. The IMF’s research indicates that when the government reduces spending, it takes money out of the hands of people who would spend it, and this has a negative effect on growth. The consensus view is that under current conditions, a 1% reduction in spending will reduce economic growth by at least 1%. Some estimates put the figure at 1.5% or higher.
Reduced economic growth means reduced government revenue, and reduced revenue makes it much harder to reduce deficits. The claim that bond yields will spike is also not supported by research—the latest paper from the IMF says that most of the advanced countries have quite a bit of room to borrow more without seeing a major spike in borrowing costs. It recommends that most countries focus on generating economic growth to raise revenue and reduce the size of the debt relative to GDP, even if this means running larger deficits in the short-term.
So research suggests that Austerity isn’t necessary, but has it ever been successful in practice?
Over the last half a decade, we’ve observed a strong negative relationship between austerity and growth. The more austerity you do, the more it hurts growth, and because of the revenue reductions, it’s a very costly way to reduce deficits. In the UK, the coalition government did most of its austerity during the first two years, between 2010 and 2012. Growth rates were much lower during this period in the UK than they were in places where there was less austerity.
So, even if the government believes Austerity is necessary and will work, despite research suggesting otherwise and it having a negative effect in practice, why do you think they are pressing ahead with it?
In response to the awful growth rates Britain was seeing, the coalition made a U-turn in 2012 – almost completely stopping the cuts. When you stop reducing spending, the negative growth effects stop too, so the economy bounced back during the last three years. The government claimed that the good performance in the last three years was due to their austerity policies, when the reality is that Britain recovered because the cuts stopped. They think they’ve been vindicated and have promised more austerity.
People have also been told time and again by the newspapers and media that there is no choice, that any party that opposes austerity is economically illiterate or irresponsible. Labour believed the issue was a lost cause and did not even try to challenge this narrative. People believe the austerity was made necessary by Labour’s spending policies, so the narrative also serves to discredit Labour on economics more generally. Few people in the media and few in the general public are aware that most economists and political economists think that austerity is not a good policy for most countries, especially those not on the Euro.
Great, and you sort of answered my next question there! We obviously re-elected a Conservative government on an increased majority who were pushing a strong austerity agenda, suggesting that the majority of the public believe Austerity is necessary and working. Do you think the media are mainly behind this wrong perception or do you think there are there other reasons as well?
The media drives the perception, but I don’t think they’re necessarily being deliberately misleading. Many journalists and op-ed writers haven’t studied the latest research themselves. On economic issues, they’re lay people with larger platforms.
Are there potentially deeper reasons or more vested interests behind pushing the pro-austerity narrative or do you feel it is mainly down to a lack of proper research?
I think there are certainly some wealthy people who think they benefit from austerity and who buy newspapers or fund political campaigns and advertisements on this basis, but I think most of them are mistaken too. Austerity reduces growth for everyone, even for the rich and the affluent. The wealthy are hurting themselves – they are acting on a misinformed understanding of their class interests.
Some people have suggested that there’s a long-term aim to use austerity to shrink the state, with the hope that the wealthy would then be able to reduce tax rates, but even this doesn’t make a lot of long-term sense. Without the government stabilizing things, we get serious economic and social upheaval, and this is never good for the wealthy in the long-term.
There are wealthy people who want to do this, but they are making a mistake and harming themselves in the long run.
It is widely considered that irresponsible bankers caused the financial crash that led to the bailout, as well as a poorly regulated banking system. Assuming that’s the case, and correct us if it isn’t, how have bankers avoided prosecution and how come there have been so few changes in the regulation and structure of the banking system? Iceland is lauded for prosecuting bankers and introducing changes and regulations to the banking system, and they credit their recovery for this – why are so few countries following suit?
In many cases, the regulations were so loosely written that it was not possible to establish that any crimes were committed. Many of the worst practices were explicitly made legal by deregulatory legislation. There have been some improvements to financial regulation since the crash, but they don’t go far enough. There is fear that if you really regulate the financial sector, it will pull up stakes and move to some other country where the regulations are weak, and governments are afraid to lose the tax revenue and investment the financial sector brings in.
Governments could handle this by imposing strong international regulations, but many people believe this would impede trade and capital mobility, harming growth, and they are unwilling to prioritize long-term growth sustainability over short-term growth rates. This makes it difficult to start up serious negotiations. Growth in the affluent countries was stronger in the 1960’s when the global financial sector was more tightly regulated, but people don’t know about the history.
Even if we passed strong regulations, we still need to address the core problem, which is that the global economy is very dependent on a strong American consumer economy, and American median wages have not substantially increased since the 1970’s, adjusting for inflation. To keep the world growing, Americans have to spend more every year even though their earnings are not rising, and to do this they have to borrow a lot of money. Without higher wages, this borrowing is not sustainable, and we’re left with a future risk that another American private sector debt bubble will burst, spreading economic malaise even to countries where the wage growth is better and the regulations are stronger.
As long as the United States continues to keep its wages down and rely on consumer borrowing to generate growth, there is only so much other countries can do to insulate their banks from risk. If the US had effective regulations and reasonable wage growth, there would not have been a crisis in 2008.
What do you suggest Americans or America does from here? And for our audience here in the UK, how can we combat the effects of Austerity? And just as importantly, how do we combat the perception that Austerity is necessary and that it is working?
America needs to do more to re-regulate finance and to empower regulators to take actions on existing regulations. It also needs to boost wages, particularly in sectors of the economy that are not vulnerable to outsourcing. Minimum wage increases are a good start. Both American and British people can help by challenging the austerity, deregulation, and anti-wage narratives wherever we see them. If we stay silent, these narratives will only become more deeply entrenched. When you read a story with pro-austerity assumptions on the web, leave a comment. If you see it in the newspaper, send a letter to the editor. If you overhear someone making a pro-austerity argument, object. Even if you don’t convince the person you’re engaging, someone else might see what you’ve written or overhear what you’re saying, and you might get them to think about things differently.
And when you do see someone challenging the austerity narrative on the Internet or in a newspaper, draw attention to it and share it with the people you know. The government needs to feel strong public pressure against further cuts, and it needs to be encouraged to help those in need with further spending.
Great stuff. Well thanks very much for taking the time to talk to us, it’s been fascinating and we’ve learnt a lot from you!
Thanks for having me! It’s been a fun talk and a great interview.
Benjamin’s blog can be found at benjaminstudebaker.com, and he can be found on Facebook at www.facebook.com/bmstudebaker.