British floods demonstrate the myopia of fiscal austerity

Last year (June 10, 2015), I wrote a blog – The myopia of fiscal austerity – which in part recalled my experiences as a PhD student at the University of Manchester during the Thatcher years. I noted that during my period in the city there were two major failures of public infrastructure – first, a rat plague due to spending cuts that had led to the reduction in rat catchers/baiters who had worked on the canals that go through Manchester; and, second, widespread collapses in the Manchester underground sewers which caused effluent in the streets, traffic chaos and long-term street closures. Major inner city roads were closed for a good 6 months while repairs were rendered. The reason – cut backs in maintenance budgets. The repairs ended up costing much more than the on-going maintenance bills. That experience brought hometo me the myopia of austerity. While the austerity causes massive short-term damage, it is clear that it also generates a need for higher public outlays in the future as a response to repairing or attending to the short-run costs. The problem wasn’t confined to Manchester. Margaret Thatcher’s destructive reign undermined public infrastructure throughout Britain. It seems that the Conservative British government is repeating history, this time the impacts are significantly more severe in human and property loss. In early December, the North-West of England experienced devastating floods. Areas south of Carlisle down through Lancaster were inundated with floodwater, which destroyed houses washed away bridges and claimed human life. On November 5, 2014, the British National Audit Office released a report – Strategic flood risk management – which warned the British government that “current spending is insufficient to meet many flood defence maintenance needs”. Now the repair bill will be many times the claimed expenditure that was cut in the name of fiscal austerity.

In part, this story is also about the on-going denial by conservatives about the growing impacts of climate change. Extreme weather events are increasing around the world and while they might be recurring, long-cycle episodes, the evidence appears to be they are the result of climate change driven by human action.

In Britain, the National Audit Office report noted that:

Autumn and winter 2013 and 2014 saw the wettest period in the south of England for 250 years … the Environment Agency (the Agency) estimated that 1 in 6 homes in England is at risk of flooding from coastal, river and surface water. Climate change means that the weather is becoming more unpredictable, leading to increased risk of severe weather events. Effective flood risk management is important so that the country is in the best position to protect against these risks, and to safeguard homes, communities, businesses and infrastructure.

The Report aimed to “the sustainability of current funding approaches, and how flood risk management activities are managed and delivered”.

Its key findings were:

1. “climate change will significantly increase flood risk in the UK. This is increasing the load on assets, which may in turn increase operational costs, if current performance is to be maintained”.

2. The “long-term investment” necessary just maintain the “current overall level of risk … would need to increase by an average of £20 million every year … until 2035”.

3. “However, between 2010 and 2013, capital and revenue funding was reduced by 18% and 10% respectively”. This is, of course, the first three years of the current Conservative government’s tenure and was in the early period where George Osborne vehemently pursued austerity cuts.

4. “total funding decreased in real terms by 10% between 2010-11 and 2014-15”.

5. “The Agency has prioritised funding for maintenance on a national level, primarily based on benefit-cost ratio … These decisions will have significant effects on individual geographical areas. In particular, where the Agency deprioritises maintenance in areas where assets have lower benefit-cost ratios, asset failure in these areas will become more likely …”

6. “The Agency anticipated it would achieve a programme benefit-cost ratio of at least 8:1 for its flood defence projects”. To put that in plain English, it means that for every £1 outlaid on flood prevention, the agency saves £8 in damage. It reports, that as at March 2014, efficiencies had raised those savings to £9.5 per pound outlaid.

As the Report says “The Department and Agency have limited resources to spend on maintaining and enhancing the standard of flood protection in England” but “is achieving value for money”.

And then it issues its warning to the British government:

However, current spending is insufficient to meet many of the maintenance needs the Agency has identified for its assets. In the areas where maintenance has been deprioritised – typically, where there are a low number of homes – this will increase the danger of asset conditions degrading, so increasing ood risk. The Agency may be faced with decisions on whether to replace affected assets earlier than would otherwise be the case, or to let them lapse … As a rule, our experience is that ad-hoc emergency spending is less good value than sustained maintenance … The impact of climate change will also continue to increase pressure on defences.

The two obvious points:

1. This key public infrastructure is underfunded by the British government, which has significantly cut spending in the area.

2. Responding to disasters with sudden handouts by way of repair or compensation is an inferior strategy to sustained maintenance. The outlays required in emergency situations when systems have collapsed are always larger than providing proper investments over the longer-term to maintain and improve vital public infrastructure assets.

Back in 1983, Britain was mired in mass unemployment as the full impact of Margaret Thatcher’s fiscal cutbacks took their toll on the British labour market. The national unemployment rate reached 12 per cent in early 1984, having risen from around 5.5 per cent when Thatcher took office.

At the time, experts in sewerage and water infrastructure will warning the British government that major investment was required in this area to avoid a calamity arising from collapsed sewers or flooding.

There was an article in the New Scientist Magazine (March 10, 1983) – Sanitary sanity – which noted that:

In Britain, about 10 sewers collapse each day, and the highest incidence is in the North West of England … One thing is certain: we cannot just amble on and it is going to cost us dearly …

The article indicated the sort of investment that the National Water Council had deemed necessary to maintain the sewerage systems in Britain.

It noted:

But one should not be too dismayed by the sum that we will have to fork out before the end of the century, to replace sewers. Increased public investment is essential to economic recovery. Spending money on the sewers certainly has benefits in the battle against national depression and the creation of jobs.

Of course, investing at times of depression creates additional demand … for every £100 million spent on sewers, the present real cost to this nation … would be rather less than £50 million … Sewer renovation requires large numbers of labourers. The ordering of building materials would help greatly the building supplies industry that is at present in the doldrums. Much less unemployment benefit would be paid out …

It also noted that in high risk areas where there was public underinvestment in crisis prevention, private sector investment was reluctant to enter. It said “Local authorities that have modernised their water systems stand a much better chance of attracting new investment than do those that have not”.

This point is vital. The mainstream macroeconomic mantra is that public spending ‘crowds out’ private spending because according to the textbook models, interest rates are forced up by the public borrowing scarce funds from the private sector to fund the spending.

Even ignoring the reality that a currency-issuing government does not borrow funds in order to provide it with increased capacity to spend beyond its tax revenue, the monetary operations associated with government spending are more likely to put downward pressure on interest rates than the opposite.

Please read the following introductory suite of blogs – Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3 – for basic Modern Monetary Theory (MMT) concepts.

Further, the idea that there is only a finite pool of savings available which the public and the private sector compete for goes back to the classical Loanable Funds theory, which was categorically demonstrated to be false by the work of Keynes and others during the Great Depression.

Increased government spending increases GDP (and national income) which then stimulates increased household saving, given that the latter is a residual after consumption spending has occurred. Consumption is a positive function of disposable income.

Another way of saying this is that spending brings forth its own saving. So the most basic tenet of the Loanable Funds theory is in denial of reality.

That reality consistently tells us that public infrastructure spending actually ‘crowds in’ private investment spending as the New Scientist article intimated.

Private investors leverage off first-class public infrastructure because it reduces their overall operating costs. High-quality transport systems, water systems, sewerage systems and the like provide benefits to private capitalist firms that encourage further investment.

When the sewerage systems collapsed in Manchester, Margaret Thatcher was engaged in a manic fiscal cutback phase, which not only drove up unemployment but also degraded the quality of the public infrastructure and increase the risk of it failing.

Sure enough, it failed and the costs of repair were significant.

So even using the logic of the Conservatives, that is, trying to minimise the amount of dollars and cents that the government spends, fiscal austerity is typically a myopic strategy. They end up spending more when public infrastructure fails than they would have spent if they had of maintained the assets in prime operating condition.

The other point to note is that politicians find it hard to cut recurrent spending – that is, spending where the benefits are exhausted within a single year – because the political costs are much higher.

Cutting into a pensioners heating allowances, for example, or income support for disability etc is typically, highly visible, and carries immediate political costs.

Even the most vehement neo-liberal governments find it more difficult to cut welfare spending than they do when cutting public infrastructure investment.

This is because it takes some time for public infrastructure that had been previously maintained properly to degrade. We don’t really see cracks in rail bridges or increased risk of flood damage until it is too late.

So capital infrastructure outlays are often the area that austerity-seeking governments target.

In the case of the British National Audit Office report that I referred to earlier, it openly states that:

The Agency has not communicated to communities the local effect on future flood risk from the de-prioritisation of maintenance in some areas. The Agency holds estimates of the relationship between maintenance expenditure and asset lives for various flood defence types, and it has used this information nationally, but it has not communicated the effect of this change in maintenance regimes in some local areas in future years …

In other words, the likely political fallout of communities realising that government cutbacks are placing them at risk is suppressed because the information of the consequences of the cutbacks are hidden within the bureaucracy rather than communicated in a transparent manner.

This is a common problem where governments mislead their citizens by refusing to release the full impacts of their fiscal austerity decisions.

The UK Observer article (January 3, 2016) – The Observer view on the floods and budget cutting – noted that:

The water pouring into defenceless homes and businesses symbolises the disastrous effects of George Osborne’s economic ideology.

In addition to the flood damage that has been magnified by the underinvestment of the British government as detailed in the National Audit Office report, the Observer article says that “other examples may reveal themselves in the years ahead, as Osborne presses on with his pledge to establish a surplus in the public finances by the end of this parliament.”

It mentions the “underfunded and understaffed” prison system and underfunding in the national health service.

It concludes that “public policy-makers should also reflect deeply on the damage that continues to be visited on Britain’s economy, and on vital public infrastructure, by the singleminded pursuit of deficit reduction.”

Conclusion

I am in San Francisco at present (until Tuesday). After a few long runs since I arrived here the same myopia is evident here. There are thousands of jobs that could be created here improving the public amenity and repairing the decaying public infrastructure.

The British floods are a stark reminder of the failure of neo-liberal governments to understand their fiscal capacities and the long-term damage that trying to pursue fiscal surpluses at all costs engenders.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.