Cameron, rebooted

I posted this video earlier on. It’s not the subtlest bit of work I’ve ever done. David Cameron didn’t in fact take his standing ovation to the sound of “Kill The Poor” by the Dead Kennedys. (His choice instead was to misappropriate “Move On Up” by Curtis Mayfield, actually an anthem for an entirely non-Thatcherite kind of upward mobility.)

I’m not a fan of the Tory party, and their conference reminds me on a yearly basis why that is. But with the video done, and out of my system, it’s worth saying a few words about my reading of this well-written speech.

For what it’s worth, I think the speech shows up Cameron’s shortcomings as a politician and as a prime minister. And to defend that view I’m going to cite two hotbeds of seething leftism: The Economist magazine and the International Monetary Fund.

The Economist first. Bagehot, reporting from Birmingham, says it was “a notably more right-wing conference than last year”, and in response Cameron “indulged his party in a populist, rightward feint”.

This is the latest, clearest tactical move away from Cameron’s original incarnation as a ‘moderniser’. Seven years ago, in opposition, he began his leadership of the party by attempting to moderate its image. He talked about global warming, travelling to the Arctic to have his photo taken on a husky sled. He championed gay marriage as part of a wider message of social tolerance. Most famously he talked compassionately about the disadvantaged in a series of statements now remembered under the label “hug a hoody”. Close advisers spoke about the need to “detoxify the Tory brand”, and cited Tony Blair’s New Labour project as a model.

Seven years later, with the warm glow of forming a government now faded, and with the economy continuing on its path of unremitting gloom, discontent has spread both on the backbenches in parliament and among party activists in the constituency associations. Familiar resentments against welfare claimants and immigrants have deepened. The taste is sour. A practical need to safeguard the coalition’s parliamentary majority with a series of minimal concessions to the Liberal Democrats has further distanced the leadership from the rank and file. In response a critique has hardened against what is perceived as an insulated, privileged, metropolitan clique, running the country from West London during the week and the Cotswolds at the weekend.

This resentment broke very visibly into the open earlier this year when backbencher Nadine Dorries went on television to call Cameron and chancellor George Osborne “arrogant posh boys”. Asked what she meant by this, she explained that she was trying to

“speak directly into the heart of Number 10, and to the leadership who have become slightly disconnected from the rest of the people who are working very hard for true Conservative values and causes.” She said the main problem was that Mr Cameron saw himself as “a social liberal”.

As we’ve seen in the press over the last few weeks, David Cameron confronts an increasingly unpleasant party management problem. And you’ll notice that I’ve described the situation without yet mentioning the single biggest issue currently riling up grassroots Tories: Europe. Europe has been a Tory headache for decades. It was the principal cause of Mrs Thatcher’s downfall. Thanks to Europe, the Tory party tore itself apart in government (John Major, 1991-97, rest in peace) and relinquished power to the Labour party. It took a decade to restore a plausible claim to be a party of government.

Back in the 90’s the party was split, and the fights were vicious, between a populist rump strongly represented in cabinet and a core group of pragmatic, mildly pro-European moderates (Major himself, chancellor Ken Clarke, deputy prime minister Michael Heseltine). Today the party is far more uniformly europhobic. The differences between Tories these days come down to the precise degree of eye swivel and the amount of spittle in the mustache. And the problem for today’s government comes from the constant and insatiable call for dramatic action against the european menace.

Cameron’s speech didn’t have much on Europe. He banked a warm round of applause by reminding conference of his “veto” of the european fiscal pact. Beyond that, he contented himself with mocking French president François Hollande as a whining Olympics loser:

“I was trying to think of my favourite moment. Was it telling President Hollande that no, we hadn’t cheated at the cycling, we didn’t have rounder wheels, it was just that we pedalled faster than the French?”

As standard Tory frogbashing goes, this doesn’t rise above the level of background noise. [For an example of background noise, a few days before the conference the government announced a knighthood for Bernard Arnault, Europe’s richest man and the owner of a luxury goods conglomerate (Louis Vuitton, Moët, Hennessy, Veuve Clicquot, Dom Perignon, Château d’Yquem, Christian Dior, Givenchy, Fendi, Donna Karan, Kenzo, Guerlain, Bulgari, TAG Heuer, Hublot, etc, etc) who a week previously outraged French opinion by responding to Hollande’s tax-hiking budget with an application for Belgian citizenship.]

Instead, Cameron’s main response was to the remainder of the malcontents’ roster of complaints. Far from being an elitist, Cameron strove to depict himself as the champion of the aspirational man in the street. The cutbacks of the austerity programme were presented as a welfare crackdown on benefit scroungers. Controversial education reforms were portrayed as an assault on entrenched leftists in the teaching establishment.

Now, having taken Cameron’s words ever-so-slightly out of context in the video, let me be fair to him here and let Bagehot speak up in his defence:

“The prime minister tried to lay out how the compassionate conservatism he espoused in opposition relates to the deficit-cutting and often painful transformation of the welfare state that have characterised his term so far … The prime minister sought to revive the idea of an ‘aspiration nation’.”

Bagehot thinks that this was entirely successful, and that as a result “the tale of how to revive post-crash Britain is still his to tell for some time to come”.

I’m far less convinced. The compassion on display was pretty much identical to that on offer from Paul Ryan, the hardline candidate for America’s vice presidency. According to Ryan, the safety net has become a comfortable hammock. It’s a line that wouldn’t have looked out of place in Cameron’s speech.

And I’m not alone in detecting a change of tone on Cameron’s part. Joel Budd, editor of the Britain section of The Economist, had this to say: “I thought it was pretty Thatcherite. David Cameron calls himself a compassionate conservative. But there was considerably more conservatism in this than compassion.”

Of course, if you work for The Economist, ‘Thatcherism’ is very far from being a term of abuse. And the idea that Cameron’s sudden discovery of an overarching Thatcherite theme tallies poorly with his previous compassionate modernising is mine, not Budd’s. But if you click play on the podcast, you’ll hear Budd say

“I think most of the problems came in the moments when he spoke about the economy. Listening to Cameron’s speech you would think that the only things holding back Britain at the moment is pointy headed intellectuals, trade unionists, the Labour party, and a sort of lack of vigour. And that is fairly obviously simply not true. And it’s going to be obvious to anybody watching the ten o’clock news where they see economic trouble in America and in Europe that the reasons for the sluggish economy are not distinctly British. So I thought that was an implausible aspect of David Cameron’s pitch.”

Whatever you think of the supply side arguments familiar from the 1980s and freshly repurposed for Cameron’s right-facing self-reinvention, the main problem facing the British economy is a lack of demand, both domestic and international. Weak demand is depressing investment and stifling growth.

All of this creates a real problem for Cameron when he attempts to defend austerity. As we’ve seen, austerity was presented in part as the removal of counterproductive state coddling for the workshy. This can be seen either as a fairminded championing of aspirational ordinary Brits who play by the rules and want to make their own way in life (Bagehot), or as a piece of pandering to the resentful Tory base motivated largely by political self-interest (me). I wouldn’t disagree if you decided the truth lay somewhere in the middle.

But Cameron had more to say on the subject, and this is where the problems multiply. For his conference crowd he doubled down on his existing justification for austerity:

Right now, while we’ve got a deficit, the people we’re borrowing money from believe that we’ll pay it back – because we’ve set out a tough plan to cut spending and live within our means. That’s why our interest rates are among the lowest in the world, even though the deficit left to us by Labour was one of the highest in the world.

If we did what Labour want, and watered down our plans, the risk is that the people we borrow money from would start to question our ability and resolve to pay off our debts. Some may actually refuse to lend us that money. Others would only lend it to us at higher interest rates. That would hurt the economy and hit people hard. If you have a mortgage of £100,000, just a 1% interest rate rise would mean an extra thousand pounds to pay each year.

Labour’s plan to borrow more is actually a massive gamble with our economy and our future. And it would squander the sacrifices we’ve already made. We’re here because they spent too much and borrowed too much. How can the answer be more spending and more borrowing?

The first point to make is that there was only one crisis country where a government that “spent too much and borrowed too much” lay at the root of subsequent problems: Greece. The governments in Spain and Ireland ran surpluses in the years running up to the crisis. As did Estonia. The financial crisis came from a huge runup in private sector debt, and the sudden seizing up of credit in the international financial system. The ongoing euro crisis took the shock caused by the financial crisis, and worsened it thanks to the constraints of the single currency. Crisis countries in the eurozone cannot devalue to restore lost competitiveness, and as a result their uncompetitive economies now prove incapable of growth. Nor can they pay creditors by cranking up the money printing presses, which means that lenders extract a premium for the consequent risk of default, causing havoc in national budgeting.

Gordon Brown did run a deficit prior to the crisis. If for some reason you feel moved to defend him you might point out that the figures for those years are broadly similar – in fact slightly better – than the deficits run by Norman Lamont and Ken Clarke between 1990 and 1996. And you might add that in the early years of New Labour, Brown ran a surplus and paid down a chunk of debt. Even so, the fact remains that he ran a pre-crisis deficit. But the huge deficits racked up since 2008 are the consequence not the cause of the crisis. And David Cameron’s claim that “we’re here because they spent too much and borrowed too much” is straightforwardly false.

So much for the argument about how we got here. Does Cameron’s speech contain hope that he offers us a way out? The short answer is no. A very much longer answer can be found by reading the latest International Monetary Fund report on the World Economic Outlook. It’s been argued before that austerity in a recession hurts growth. In the jargon, austerity is procyclical. The IMF report confirms this. One of the Alphaville bloggers for the Financial Times quotes the paper’s front page story (“The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity”) and comments:

“To say it’s a big deal is possibly understating matters … The key game-changing finding from the IMF report is that activity over the past few years has disappointed more in economies which were implementing aggressive fiscal consolidation plans than those that weren’t. Which means the contractionary effects of fiscal consolidation are substantially bigger than policy makers were assuming.”

So, by doubling down on austerity, David Cameron damages the recovery. There has already been a double dip recession, and worse may yet be in store. Cameron claims that to respond by changing policy would “squander the sacrifices we’ve already made.” He and George Osborne are now in blood stepped in so far, that sunk costs dictate there be no turning back.

More substantively, Cameron tells us that without severe austerity, interest rates would rise. We saw his chain of logic in the passage I quoted above. Continued deficits may cause a drop in confidence in the bond markets which may lead government borrowing costs to rise which would translate into higher mortgage rates. It’s quite a contorted case to construct a major policy around. The IMF findings suggest that austerity, by depressing growth, is actually worsening the fiscal position, and that the policy is therefore failing on its own terms. But are Cameron’s terms even correct? Is there a risk of rising interest rates?

I’ve taken this chart from Paul Krugman.

One of the governments shown in the chart fought two unfunded wars in Afghanistan and Iraq, bailed out its banks, spent around $700 billion on stimulus (much of it in tax cuts), bailed out carmakers in Detroit, had its credit rating downgraded by Standard and Poor’s, has its national budget-making gridlocked with both spending cuts and tax increases blocked by politics, and is now marching towards a ‘fiscal cliff’ where an axe will be taken to the budget with highly contractionary consequences for the wider economy. The other government is David Cameron’s.

The two governments’ borrowing costs are essentially the same.
Indeed David Cameron’s costs are slightly higher.

The interest rates currently set by our central banks are effectively zero, and have been for a good while now. If rates could have gone any lower than that, they would have. And it will take a large and sustained rise in inflationary pressures to force them up off the floor. Krugman draws the conclusion: “Every advanced country with monetary independence has seen very low borrowing costs, reflecting the expectation of low policy rates for many years to come. It’s the weak economies, stupid.”

I’m not suggesting that deficits don’t matter (as Dick Cheney once said).
I’m suggesting instead what ought to be obvious: that Cameron’s case for austerity fails at multiple points.

Which leaves us with one last problem. As Krugman would no doubt concede, these guys aren’t stupid. What explains their insistence on the current destructive path, which failed in the 1930s and is failing now? I can only conclude that it comes from an ideological commitment to a shrunken state. Which may be a perfectly defensible commitment to have, but right now is a rotten way to run the economy, given the problems we’ve got.


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