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From the doom loop to an economy for work not wealth

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Research and reports
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3. The ‘scientific error’ behind the doom loop

The economics commentator Ambrose Evans-Pritchard justly reckons the “self-fulfilling doom loop” arises from “scientific error”. 13 Paul Mason captures the process in three steps: 14

Diagram: self-fulfilling doom loop

The fuller economics of the process involves four steps, which underpin the action of the Treasury and analysis of the Office for Budget Responsibility:

❶ First in the face of deteriorating public finances the government acts on calls for cuts in public expenditure.

❷ Too-low ‘multipliers’ – that capture the relation between government policy and the economy – understate the effects of this contractionary policy on the economy.
So cuts to government spending reduce significantly aggregate demand and lead to significantly lower GDP growth. 

❸ This consequent failure of outcomes is wrongly (but almost automatically) attributed to supply deficiency rather than demand deficiency.

The economics behind steps ❷ and ❸ are unquestionably contentious, even extreme. OBR multipliers and the associated notion that cutting public spending ‘crowds in’ private spending are monetarist in substance, the doctrine of Milton Friedman and Margaret Thatcher. In their October 2012 World Economic Outlook the IMF vigorously challenged the low multipliers deployed by many countries (reckoning forecasts were based on 0.5 and judging that outcomes were consistent with multipliers in the range 0.9 to 1.7); the OBR reported the analysis but made no change in its approach.15 And in parallel related academic infrastructure has proved flawed in quite basic ways.16

Likewise any retrospective account by the OBR of why the supply-side of the economy has failed so disastrously are little beyond pure conjecture, with no international evidence brought to bear. Strikingly the preferred initial explanation was that “financial crises are typically associated with large output losses that persist for many years after the event” (Economic and Fiscal Outlook, Nov. 2011, p. 51), and then progressively worse outcomes were explained by these effects proving larger than first thought 17

‘Supply deficiency’ is supported by a one-sided reading of productivity outcomes. On a demand view low productivity outcomes are simply the residual of the labour market adjusting to weak GDP growth through price (wages) rather than quantity (jobs).  It is a fallacy to presume productivity statistics must indicate a supply failure, as outlined in the Royal Economic Society Newsletter and a fuller TUC account of the international landscape. 18  To stress: supply is deficient, but the the immediate cause of this deficiency is aggregate demand.

On this view productivity statistics are not measuring in any meaningful sense what might be analagous from a business view. Assessed on the basis of macreconomic statistics, productivity is simply one part of an accounting relationship alongside output, pay and employment (and other factors from the income measure of GDP). And accounting relations do not indicate causality. 

On the demand view the disastrous and without precedent failures of wages and the quality of work are a consequence of wrong policy.  The relation between cuts in government spending and reductions in GDP growth is unambiguous on an international view (TUC, 2019). TUC (2019) shows GDP growth reduced in all 32 out of 32 advanced economies that cut government expenditures.

❹ Critically the failure of the economy means a failure of the public finances. George Osborne’s weakest recovery (GDP) for at least a century translates into the worst public finances (public debt as a share of GDP) outcome for a century – as shown in the TUC pre-Autumn Statement commentary (and charts 3a and 3b below). 19

Figure 3a and 3b

❶ The government acts on calls for cuts in public expenditure.

Contents
01
1. Introduction
02
2. The doom loop in real GDP, wages and public services
03
3. The ‘scientific error’ behind the doom loop
04
4. 'Fictional black holes’ versus self-fulfilling doom loops
05
5. Inflation and doom loops, before and after the pandemic
06
6. Moving forward on the immediate horizon
07
7. On a longer view: doom loops in GDP and boom loops in assets
08
8. An economy for work not wealth: relearning the lessons of the past
09
9. The potential for financial collapse
010
10.The global climate crisis
011
11. The economy and the balance of power
012
References
013
Annex A: The General Theory in very brief
014
Annex B: Private indebtedness
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