Debt: The Elephant in the Economy

"It doesn't matter whether a cat is black or white, as long as it catches mice," a quote from Deng Xiaoping, the former de facto leader of the People’s Republic of China. Looking at the state of the British economy, one might ask, do we need a Xiaoping? A sceptic who's willing to enter the House of Commons and challenge the status quo. There are many things about our society that keep me awake at night, but here I'll be taking aim at austerity and explaining why it doesn't catch mice. So what's the theory behind austerity? To put it simply, through taxation the government takes money to pay off its debt, and gives back less in government spending than it takes. This is combined with a reduction in taxation. When these policies are coupled together, they're given the oxymoronic title 'expansionary contraction', the belief that we shouldn’t worry about the government taking money out of the economy because lower taxes will create growth. Sounds good, right? It would sound good if it weren’t for the elephant in the economy - private debt. According to the OECD, private debt in the UK was at 218% of GDP by the end of 2014, compared to the 114% of government debt. So why do our politicians focus more on the government debt? Because most politicians and economists believe private debt is merely wealth redistribution from creditors to debtors, and as a result has no economic impact. This is wrong for two reasons. Firstly, it presumes that all debtors can actually pay back their debts. Secondly, it assumes that all of this debt has no effect on the way people spend and save. The first problem is self-explanatory, the second requires more explanation. Economists see people as 'rational, profit-maximising consumers'. This is not quite true. People try to be rational, a slight difference, but I digress. But on the assumption that this is true, is it true when private debt is at the highest in our history? The answer is no. Businesses and individuals don't try and invest their way out of debt. They use their income to save and pay off their debt. Even if they did want to try and invest their way out, they couldn't because there’s so little demand, as consumers are refraining from spending to pay off their debt. So the economy contracts. Supply and demand together decrease, unemployment increases, and then the taxpayer is burdened with keeping the unemployed off the street. But this isn’t quite what happened. In February 2015, the unemployment figure was 5.4%. Though not ideal, it’s far smaller than what's usually associated with the word 'recession'. But it has to be taken into account that the government has encouraged 'self employment' and extensive use of zero-hours contracts to fudge the actual figures for those in work, thus creating a class of under-employed. The office for National Statistics estimates that 744,000 of people in Britain are working under a zero-hours contract. So what about growth. If my theory is correct then the economy should be shrinking. After the shrinking of the economy by 4.3% in 2009, every year since then the economy has grown, albeit not very much. Why is this? It's because the Conservative Party are actually closet Keynesians, specifically Class Keynesians. Their dictum is stimulus for the bankers, austerity for everyone else. As Labour’s Chris Leslie stated, “On average working people are now £1,600 a year worse off since 2010”, which is worse than the fall in wages of every other European country except Greece. Has the government debt at least been shrinking? Again no, government debt has increased since 2010 from 89.9% to 114.1%. So we know that, like all good Keynesians, the Conservatives are not above borrowing and printing money, just as long as it doesn't benefit those at the lower end of the income scale. The money pumped into financiers through tax breaks and quantitative easing just gets used to inflate the stock and housing market in the affluent parts of the country, as the rest crumbles. I believe the prescription for solving this crisis should begin with debt restructuring. There's a lot of 'bad debt' in the economy that hasn't been invested into productive capital, and this debt will have to a degree be cut. This would need to be followed by government stimulus, meaning decreasing private debt at the expense of increasing government debt, but as the economy will be growing again the aggregate debt will shrink. We should also be thinking about alternative forms of quantitative easing and a government jobs programme. But until private debt begins to shrink, our economy is going nowhere. )