The game of managing the economy

 

                 A government trying to manage an economy is rather like a child trying to play that game of placing a number of small ball bearings into a series of slots on an  enclosed board. The game proceeds by nudging or shaking the board in different directions to try to tempt each ball into one of the slots. If you nudge too hard or in the wrong direction  you dislodge some of the balls you have already placed in the right  holes. Success depends on  administering the right series  of shocks in the right directions to complete the task. Too much force will wreck it. Too little will not achieve it. There may be some way of calculating the right forces, but in the real world it comes down to experience and judgement, to trial and error.

               So it is in practice with managing the economy. The government does not have the luxury of just getting one ball into one hole and declaring success. It needs to keep inflation down. It needs to curb the deficit. It needs to preside over decent growth of output. It wants real wages to go up, without inflationary wage rises.It wants more investment and saving, and fewer imports. It’s a lot of balls to juggle.

                 Time was when government simplified things. They decided there was a  misery index. If you added the inflation rate to the unemployment rate you had the index. If it rose too high – into double figures – too many people would  feel badly off and the government’s popularity was at risk. The last government gave up on that and declared the Credit Crunch was to blame.

                           It’s still a good start to keep the unemployment and inflation rates down. A combined index of under 10% is an exacting target which would make people feel better. However, it’s not enough. The government does have to hit targets to get the deficit down, and need to keep the growth rate up. There are at least four balls to juggle.

                        They are related. If inflation goes too high, curbing it will damage the growth rate and could boost unemployment. If the deficit is not brought down, that too can drive up long term interest rates and cause slower growth and less employment. Higher inflation with wages under strict control cuts spending power and therefore reduces domestic demand.

                        Last year public spending was still going up, the deficit was too high, inflation was rising. The good news was growth resumed, job creation picked up and unemployment started to come down.  This year, to keep growth and job creation going, the authorities have to get better at hitting inflation and lower borrowing targets. If they don’t the nudges to sort them out could dislodge the areas that are working.

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55 Comments

  1. lifelogic
    Posted January 21, 2011 at 6:42 am | Permalink

    There are a great deal of balls they could usefully leave well alone – as they are just wasting money and causing harm. Concentrate on reducing public spending hugely, a good affordable (with UK courts as final arbiters) legal system, sensible (non green) energy provision, infrastructure and defence and control of borders.

    In the main the rest can sort itself out rather better than the government can if it is just left alone and not over taxed and over regulated.

    • Stuart Fairney
      Posted January 21, 2011 at 11:18 am | Permalink

      Tom Woods tells a great story about government education in New York city. They (eventually) discovered the education authority employed about 6,000 bureaucrats to “juggle the balls”

      The privately funded catholic diocese by contrast only educated about one-sixth of the number that the city educated. So how many pen pushers did they need? 1,000 right?

      Nope.

      27.

      Oh yes, and they achieved better educational outcomes with around 5% of the staff.

    • lifelogic
      Posted January 21, 2011 at 12:30 pm | Permalink

      I hear on a BBC radio 4 “advert” for a program relating to trust in science that 30% of the British believe that global warming has been exaggerated. Just “exaggerated” mind you – surely it must be higher that 30%.

      I think about 60% of proper scientists think AGW is largely bogus (as there are far too many uncertainties/variables to make sensible long term predictions – and the money is far better spent doing things with proven benefits).

      Surely (outside the BBC) over 90% must think, at the very least, it has been “exaggerated”.

      In true BBC fashion I imagine the message will be – the BBC/political view of the science is clearly right so why on earth can we not able to convince the people of this. What can we do with our programs to indoctrinate them further.

      I shall listen with interest.

      • Ken
        Posted January 21, 2011 at 2:50 pm | Permalink

        I am all for the BBC. I think there is a gap in the market for unfettered, unbiased, un-spun news, devoid of judgement and comment.

        However, the BBC provides the opposite: judgemental, opinionated and speculative coverage masquerading as news. I would say that a typical news program provides about 25% facts and 75% opinion whether that opinion is BBC innuendo or marshalled from carefully selected contributors.

        Global warming is a classic example where the BBC could have provided a vital service in informing us rather than being participants in the debate.

        The BBC can no longer be trusted on this issue and I think that is unforgivable.

        • lifelogic
          Posted January 23, 2011 at 11:55 am | Permalink

          Yes.

          The BBC’s legacy looks like being a countryside carpeted in pointless white elephant windmills and a very large bill and worse still the UK being subsumed into a socialist non democratic EU.

  2. Norman
    Posted January 21, 2011 at 7:00 am | Permalink

    To continue the metaphor, I’d rather that government Ministers laid down the balls (no pun intended on new Shadow Chancellor), stepped back and left it up to an expert juggler. Just because a lot of people in the country tell you you can juggle, your friends tell you you are wizard at juggling, and you believe you are, doesn’t make it so.

    Far better left to others rather than you try it and drop a clanger.

    This governments main economic focus should be on how they can spend a great deal less money.

    Everything else will look after itself.

    Reply: When you start from a position where half of all our National Income is spent by the state you do need to know what the government is up to with our money, as it will have a big impact on the outturn.

    • norman
      Posted January 21, 2011 at 9:36 am | Permalink

      Thank you for the reply, and, yes, the main problem is that government is spending over 50% of our money. That was the point I was trying to make, although somewhat muddled.

      If you can get spending down to 1997 levels (oh, for 1897 levels!) in the forseeable future then you would have less balls careering around your Minsters heads and distracting their attention and they could make a better fist of it.

      • APL
        Posted January 21, 2011 at 11:38 am | Permalink

        norman: “If you can get spending down to 1997 levels ..”

        Meanwhile in the real world this supposedly Tory government is proposing to increase public spending over the coming years.

  3. Stuart Fairney
    Posted January 21, 2011 at 8:30 am | Permalink

    Setting aside the mixed metaphors, isn’t government really like an ancient feudal king? They debase the coinage and claim it to be lawful, they collect taxes by force, engage in pointless overseas wars.

    As for the misery index, do you think anyone takes the official figures seriously anymore? They are getting like the East German tractor production stats. Our experience of filling the car or buying food or paying the (expletive deleted) taxes suggests inflation maybe somewhat higher than claimed, and the official rate of unemployment underestimates those not working by at least 100% as the labour force survey shows.

    Stop trying to juggle, put the balls down and leave us alone; you maybe surprised just how well we can manage without you.

    • Sally C.
      Posted January 21, 2011 at 10:05 am | Permalink

      Your comparison of the state with ancient feudal kings is so apt, as is your comment re true price inflation versus official figures. Petrol prices at the pumps have gone up ten percent in the last four months alone.
      Also, JR, although the good news may be that ‘growth resumed, job creation picked up and unemployment started to come down’, the bad news is that this only happened due to record low interest rates as over-indebted companies and households totter along. The Bank of England is deliberately misleading all of us with signals (ie. artificially low interest rates) that encourage would-be property developers, for example, to keep buying land and building new houses or apartments. There are approximately ten building projects going on within 500 yards of my house. However, the epitome of the new housing bubble that the B of E is encouraging was on the front page of yesterday’s Times’. ‘Billionaires’ block of flats marks boom in the gloom’ was the headline. It was about the £1 billion One Hyde Park building in Knightsbridge where the four penthouses have already been sold for – wait for it – £135 million or $ 216 million each! According to the article – ‘the average UK salary of £26,000 would only pay for the space occupied by the fitted Gaggenau coffee maker’ .
      Basically the banks, which we now know are state backed, should be forced to employ as many people as possible until they can no longer make the huge profits that then find their way into the hands of the fortunate few. We, the citizens of the UK, are backstopping all of the UK banks, implicitly if not always explicitly, therefore they have an obligation to employ as many of us as possible. This would be one way to cut youth unemployment.

  4. Gary
    Posted January 21, 2011 at 8:35 am | Permalink

    And now we get to the nub. Keynesians, communists and socialists across the spectrum believe that there is a role for govt to “nudge economic balls”. On the other side the free marketers say govt has no role in the economy. If you believe the only way to discover price, the unit that governs all investment signals, is to hold a free and open auction called the market, then if the govt, or similar, “nudges” the proceedings the price will be distorted. This is the impossibility of Economic Calculation.

    • lola
      Posted January 21, 2011 at 9:34 am | Permalink

      Exactly. This is JR’s confessions of a latent leaning to Socialism.

      Reply: A latent dose of realism – government does spend half the money in the economy, sets the official interest rates, tax rates and regulations.

      • lola
        Posted January 21, 2011 at 10:20 am | Permalink

        Exavtly. It shouldn’t ‘spend half the money in the econonmy’. Which is 100% taxation.

        • APL
          Posted January 21, 2011 at 1:39 pm | Permalink

          Lola: “It shouldn’t ‘spend half the money in the econonmy’”

          Don’t worry, the Tory plan to reduce the amount of government spending in the economy is to increase in real terms the amount of government spending in the economy.

          Umm!

          Reply: It’s not as bad as that! The aim is to cut the proportion of government spending in the economy, by increasing spending less than the overall growth rate.

          • zorro
            Posted January 21, 2011 at 4:51 pm | Permalink

            …just a little bit as bad…..

          • lifelogic
            Posted January 21, 2011 at 8:35 pm | Permalink

            Growth( measured in real hard currency terms) will probably only happen if the government reduces in size first.

      • Robert K
        Posted January 21, 2011 at 10:23 am | Permalink

        Yes, but should it? I would vote for a party that would reduce public spending as a proportion of GDP from 50% to 25%. The way to do that is to create an enterprise economy based on less regulation and low taxes. As you have pointed out regularly, if you reduce tax rates, you promote growth and increase the absolute amount of money raised by the state. How could anyone argue with the consequences: more liberty and prosperity for all and a bigger safety net for the needy?

        • zorro
          Posted January 21, 2011 at 4:50 pm | Permalink

          Abolish income tax!……cut government spending and let a thousand flowers bloom (Mr Gove will approve of the Maoist reference). Honest, abolish my income tax and I’ll sort my own health and unemployment insurance out.

          Cheers
          zorro

  5. waramess
    Posted January 21, 2011 at 8:57 am | Permalink

    Actually, if they persist with these stupid Keynesian and monetarist solutions it’s a bit like trying to play snakes and ladders on a Monopoly board. it should by now be clear they will not work and we should put interest rates up, but better still leave them to market forces, reverse the QE, bring an end to FRB, reduce the size of government and the tax level, and stand clear whilst the economy rebalances.

    Ah, that’s better, a snakes and ladders board, and something that makes sense again.

  6. alan jutson
    Posted January 21, 2011 at 9:00 am | Permalink

    The problem we have John is, even when all the balls are in the right slots, our politicians continue to juggle because they want to be in control all of the time.

    Just look at the farce of education changes over the decades, pension regulation, new laws, prison sentences, traffic management, health and safety laws, rates, poll tax, council tax, pollution taxes, benefits system, vat rates, income tax rates, capital gains tax, inheritance tax, tax allowances, Nhs, defence, immigration, etc.

    This constant movement of the goalposts on EVERYTHING, means that attempting long term planning by either Government or the individual, is a farce, as decisions made in one year, look a complete nonesense a few years later.

    We need to get back to basics (where did I hear that from) the state to provide just the basics, lower taxes, reduce regulation, reduce peoples dependancy on the state, and let us get on with it to live our own lives, with the assurance of a sensible safety net in case of dire emergancies only for those who have paid into the system.

    • APL
      Posted January 21, 2011 at 11:52 am | Permalink

      Alan Jutson: “We need to get back to basics (where did I hear that from)”

      Yes, but that was a moral crusade ( am I allowed to use the ‘c’ word 😮 )
      We need the economic basics, more like 1960s Hong Kong than 2010 Europe.

      Alan Jutson: “.. the state to provide just the basics, ..”

      Yep, the less the government does, the less damage it can do.

      • alan jutson
        Posted January 21, 2011 at 4:58 pm | Permalink

        APL

        Hong Kong agreed, posted about that as an example a few weeks ago.

        Given the difference in management you would never think we were in control of it. If the truth were known, given it was so far away our Home Government probably did not get involved much at all, just shows what can happen when they leave well alone !.

  7. Brian Tomkinson
    Posted January 21, 2011 at 9:28 am | Permalink

    Control of inflation has been delegated to the BoE who have failed miserably. Deficit reduction appears to be heavily dependent on tax increases which can reduce demand and cause less growth and higher unemployment. Public spending is still rising and will continue for the whole of this Parliament yet all we hear is talk of cuts. What happened to the deficit reduction plan of 80% cut in spending and 20% tax increases? We know that the government is spending more than Labour did and this will continue. Which departments are increasing their spending? I wonder just why the markets still think that this government is seriously going to tackle the massive and inexorably growing public debt mountain.

  8. lola
    Posted January 21, 2011 at 9:32 am | Permalink

    Oh for God Sake man! If you seriously think that the government can ‘run the economy’, or even worse, ‘manage the economy’ we’re in an even bigger hole than I thought we were.

    At the very best, government A might not cock it all up as bad as government B, but the more you ‘interfere’ with he economy in the deluded belief that by doing so you can make it all better the worse it bloody gets. What you are advocating is Socialism.

    The only things you can do is over-tax us and mess about with the money and use graft and corruption to misallocate our capital into vanity projects and those that you think’ll buy you votes.

    What the very best that you can do for us is get out of the bloody way of ‘the economy’. And while you’re at it, hand back to us the freedom to make our own money. You’ve proved in spades that you’re utterly hopeless at running that.

    All we need from you is to see to foreign relations stuff (treaties and the like), defence of the realm, legislate and oversee the framework of English Common Law, and…..erm?, well that’s about it really.

    I s’pose you could administer a bit of ‘re-distribution’ by taking some land value tax and paying it out as education and health vouchers and then dish out the balance as a citizens pension, but really, what else? Just what else are you any bloody good for at all?

    This is the most deluded and utterly depressing post you’ve made.

    Reply: Government sets tax rates, interest rates, regulations and much else. Each of these decisions has an impact. You need to live in the real world. My writings show clearly I think things work better if government interferes less.

    • lola
      Posted January 21, 2011 at 10:22 am | Permalink

      Exactly. It should not set interest rates at all. It sets far too many tax rates because it taxes far too mush, ditto ‘regulations’ which is a euphamism for getting in the bloody way.

      Trouble I do live in the ‘real world’ of private business 9as i knwo you do in part). But in the other part, you don’t.

    • APL
      Posted January 21, 2011 at 11:58 am | Permalink

      Lola: “we’re in an even bigger hole than I thought we were.”

      Lola, we are in an even bigger hole than you thought we were. The whole thrust of government policy regardless of party since the war has been to buy votes and manage our economic decline. All the while increasing the business of the State – it not having occured to anyone in government that increasing the size of the state actually accelerates the decline.

      • waramess
        Posted January 21, 2011 at 2:56 pm | Permalink

        Lola, you get it and I’m afraid our host seems not to. You believe that government should do very little and he believes governments should just do less than they do now.

        The problem these days is that politicians on the right constantly seek to compromise. They do this for a variety of reasons, sometimes dishonourably because they think it might buy them favours from their more succesfull fellows to the left but often honourably because they think they can best seek change from within slowly.

        I am unclear why this is when they can see the activists on the left succeed quickly by taking a robust and vigorous position. Maybe they should be reminded there is only one life and doing things slowly often means not achieving much at all.
        Reply: I believe in a free enterprise freedom loving society. That still requires a rule of law, sensible government intervention and some roles for the state.

  9. Lucy
    Posted January 21, 2011 at 9:55 am | Permalink

    The only governments that have ever “succeeded” have been the ones that managed a very tight financial operation. Our present crew are not even attempting to reduce national debt, merely to reduce the rate of increase. All the time they focus on fiddling with their “balls” they fail. The whole ethos is wrong, nobody can manage an economy to the extent that is attempted these days, better to simply provide a minimum of public services and ruthlessly restrain inflation which is theft from the prudent.

  10. StrongholdBarricades
    Posted January 21, 2011 at 10:08 am | Permalink

    I sincerely hope that the current situation is all Balls!

    However, I do not believe that the Coalition is equipped to do the work of Red Ed and destroy the son of Brown’s political career

  11. lola
    Posted January 21, 2011 at 10:19 am | Permalink

    You do realise that the Who’s Pinball Wizard was a fantasy?

  12. English Pensioner
    Posted January 21, 2011 at 10:41 am | Permalink

    “There may be some way of calculating the right forces, but in the real world it comes down to experience and judgement, to trial and error.”
    And the problem, as far as I can see, is that the Tory Chancellor certainly has no experience anywhere in the financial field as far as I can ascertain, and I’m very doubtful as to his judgement. If he is relying on professional advice from the Treasury and Bank of England, all one can say is that their advice doesn’t seem to have done us much good so far!
    The whole cabinet looks like square pegs in round holes – someone with only PR experience as PM, a Chancellor who has no financial experience (thus ignoring someone like yourself who has), a Doctor in charge of Defence rather than the NHS and no-one seemingly with the guts to make real savings.

  13. Éoin Clarke
    Posted January 21, 2011 at 11:28 am | Permalink

    Now that reds have a Shadow Chancellor opposed to the Euro, opposed to Turkey’s entrance to the EU.. and generally more to the right on immigration issues that most in his party, could his Economic Nationalism result in voters viewing Cameron as more pro-Europe than Balls?

    • Richard Calhoun
      Posted January 21, 2011 at 9:10 pm | Permalink

      I never realised that Balls was against the admission of Turkey into the EU.

      If correct it confirms my strongly held opinion that the Socialists have a problem not only with immigration but race and religion as well.

  14. Pete
    Posted January 21, 2011 at 12:05 pm | Permalink

    I see what you mean, but I do think there are two different types of goal here. Ultimately, all economic policy is trying to achieve sustainable growth and the falls in unemployment that would go along with it. Growth is harmed when the other things go wrong. High levels of inflation harm growth. High government deficits harm growth. Higher levels of saving would help growth.

    Growth is the goal, the other things are the means to that end.

    The danger is that the government goes for short term unsustainable growth by allowing inflation and deficit spending. That kind of growth is not sustainable. Eventually something has to be done about inflation and the deficit, and then the economy collapses into recession. Boom and bust.

    For this reason I don’t like the ‘misery index’. If you have high inflation and high unemployment, you have to tackle inflation first; it is not a trade-off. If you do that, you see sustainable growth and falls in unemployment. If you try to tackle unemployment first, you will create an inflationary boom followed by a bust. In that bust, of course, unemployment will end up higher than ever.

    By the way, I think the other Balls said something silly today. He said that reckless cuts to public spending were the cause of mass unemployment in the ’80s. That’s quite an admission—effectively it is saying that those people were previously in non-jobs, only working because of government subsidies. Many people on the political right may well hold that view, but it’s quite something hearing it from Labour.

  15. Geoff not Hoon
    Posted January 21, 2011 at 12:16 pm | Permalink

    Mr. Redwood, I know its a bit simplistic but arent we really trying to run UK PLC with the overheads of a huge successful country but in reality we have the income of something considerably less? You have confirmed on here several times spending in real terms isnt going to drop in the life of the coalition but income via tax etc. will go up. When you consider our borrowing has passed one trillion and the interest alone is nearly one billion per week how on earth will income ever rise to meet the ‘overhead’? I fear that old maxim is going to apply come the next election when unemployment is c. 3million that Labour wont need to win it Conservatives will throw it away. I hope I am wrong but surely you agree the numbers do not add up?

    Reply: Yes, we need to do more for less in the public sector – or in some cases do less – to make the numbers add up.

  16. Steve Cox
    Posted January 21, 2011 at 12:27 pm | Permalink

    I become ever more disillusioned with this government. According to Jeremy Warner in The Telegraph, Mr. Osborne actually said this:

    “Sometimes, politicians say the silliest things. In expressing alarm this week over the latest inflation figures, George Osborne said that he fully supported “what the Bank of England is doing in its fight against inflation”. It made me laugh, because to most of us, it seems like the Bank is doing nothing at all. In fact, it might be making things worse.”

    (Bold is my addition, and the article is here: http://www.telegraph.co.uk/finance/comment/jeremy-warner/8272613/Putting-growth-before-inflation-will-be-the-ruin-of-us.html

    There was also an article about how China’s growth has not in truth been based as so many people believe on its massive export machine, but on exploiting the savings of its people. I won’t bore you with my take on this, it should be clear enough, but the parallels with the present British situation are striking. Is the government/BoE hoping that by stealing peoples’ savings to give them at almost zero cost to either industry or to themselves, they will somehow start a “Chinese Wirtschaftwunder” here? Low interest rates plus high inflation equals theft. Chinese peasants have no say over it, but of course we are empowered and live in a democracy, so we of course have, umm, no say over it. 🙁

    The article is here: http://www.telegraph.co.uk/finance/china-business/8271226/Savings-of-Chinese-bank-customers-are-financing-the-boom.html

  17. Alte Fritz
    Posted January 21, 2011 at 12:43 pm | Permalink

    The public believes that there are cash cuts in spending. Local authorities encourage this with scare mongering. News reports suggest that we will have no street cleaners etc and no one asks how many pen pushers will go. No one talks of the role of natural wasteage in reducing the head count.

    An infantilised public would deliver Labour a landslide victory in a general election tomorrow. The government has lost the propaganda battle very quickly.

    The one ray of sunshine may be Mr Balls and his endearing personality.

    • Ken
      Posted January 21, 2011 at 3:12 pm | Permalink

      I am not surprised. Look at the recent propaganda, especially from the BBC.

      Our current predicament is blamed on banker’s bonuses, bosses pay rises and the ‘Conservative-led government’. I am surprised Margaret Thatcher and Sarah Palin have not been blamed.

      There is no room left in the naughty corner for the Labour Party. No, quite the contrary, every other day the BBC has been copying and pasting their press releases high in the running order. Their rehabilitation is nearly complete and in record time.

  18. Gary
    Posted January 21, 2011 at 1:39 pm | Permalink

    It should not be that we have to work with what we have got, because that is the reality , but that we should change what we have got because it is patently not working.

    When free marketers point out that Hong Kong from 1961 onwards or the great industrial revolutions in the century before 1913, the latter on a gold standard with little or no taxes, were golden ages of economic performance, critics point out that there were innumerable bank runs and company busts over that period. What they fail to see is that bank busts, or busts of any enterprise is desireable and healthy where those enterprises have ceased to be economic. If the bad eggs cannot be discarded , then you have an economy perpetually and increasingly full of rotten eggs. The failure to allow the market to set all prices and the related failure of unmasking and allowing the bust of uneconomic enterprises is the biggest cancer our economy faces.That is when you get “too big to fail”.

    This policy of interference can appear to work in the beginning, especially coming off a low base or after a prior collapse, and malinvestment mistakes are temporarily masked by inflation until the rot gets so pervasive that it collapses under its own weight and nothing can be done to prevent it.

    I don’t see any will to really address this, apart from a few nudges.

    • Ken
      Posted January 21, 2011 at 3:14 pm | Permalink

      Governments are asked (by the media) ‘what are you doing about it?’

      Then government grows a little bit more.

      I blame Sarah Palin.

    • zorro
      Posted January 21, 2011 at 5:36 pm | Permalink

      i.e. we should not have bailed out the banks – they should have failed (well they did, but made to fail)…though I’m not sure that John would agree being a former Rothschild banker……

      zorro

      reply: If you look back to the crisis on this site you will see I argued strongly against the purchase of equity and the large bail outs, proposing ways of protecting deposits whilst letting the banks take the hit. I last worked for Rothschild in the 1980s. They did not buy my soul.

      • zorro
        Posted January 22, 2011 at 6:44 pm | Permalink

        I remember now that you did argue that case in the media, and refreshing to know that you did not succumb to the vampire squid….

        zorro

  19. Richard
    Posted January 21, 2011 at 1:45 pm | Permalink

    I do not include Mr Redwood in this comment, but politicians talk endlessly about the need to spend more and more money but rarely talk about how they are going to actually create wealth in the first place.
    I agree with Pete’s comments when he says growth is the most important goal. If we set policies to achieve sustainable growth then inflation and unemployment may well improve on their own.
    To use your analogy we seem to be at a stage where we have tried to juggle too many balls at once and we have seen them all crash to the floor.
    Perhaps we should now pick up just two balls and get them airborne before trying to juggle the other 10
    Rename the juggling act “Go for Growth”and try the 2 balls marked money supply and interest rates.
    Throw the one marked Keynes in the bin, its gone all dented and rusty

  20. adam
    Posted January 21, 2011 at 2:43 pm | Permalink

    The trouble is they reduce it to one variable, GDP. Everything is a quest toward maximising that, no matter the costs, and this results in all sorts of instabilities, such as high indebtedness.
    And before the Happiness economists jump in, reducing to GNH is no better.

    Human economy is too complicated for this fallacy.

  21. Winston Smith
    Posted January 21, 2011 at 4:29 pm | Permalink

    There are other issue policies that affect domestic unemployment. We have presently 5m unemployed and 1.5m working part-time, yet wanting full-time work. Even under Labour’s debt fuelled boom years, real unemployment remained above 3m.
    1)Governments have continually failed to provide and encourage investment in education and training. Sure Labour spent £bns on education, but that was for shiny new buildings, salaries and benefits for its voters (and funders) and all sorts of consultants, architects, etc.
    2)They have also encouraged immigration on an unprecedented scale, providing employers with cheap, highly motivated and often better educated workers.
    3)Labour have expanded the welfare State, entrapping several million people in State dependency. Their aspirations , incentives and responsibility have been stolen by ideological criminals. They are in no position to compete with the cheap labour imported in 2). I have no faith in the current administration enacting significant improvements to this situation. The debate is too dumbed-down and the aims only short-term.

  22. Acorn
    Posted January 21, 2011 at 6:04 pm | Permalink

    It is not compulsory for the government to keep creating more balls to fit into new slots. Particularly where each new ball is specifically made to fit into a slot representing a particular group of vested interest, negative GVA voters. Unfortunately, the government knows that only 5% of voters actually think for themselves, while the other 95% just watch television.

    Nick Clegg may be leading a party that drives down the middle lane of motorways; has one bottle of wine between ten of them at their local party annual dinners; but, his “Alarm Clock Britain” sounds like the basis for a new political party to me.

    BTW. Did you know that 4.5% of the global population buys 20% of the world’s traded goods and services. The 4.5% all live in the USA. If the USA consumer goes down, we all go down. Fright-ning-init.

    • Denis Cooper
      Posted January 22, 2011 at 1:56 pm | Permalink

      Unfair, I think; the 95% do think for themselves, but about matters related to their everyday lives rather than to national issues.

  23. Mike Stallard
    Posted January 21, 2011 at 8:10 pm | Permalink

    I do hope that you read Taki in the Spectator on inflation last week. Brilliant economic analysis.

    You see, as a boy he can remember the total worthlessness of the Greek Drachma. I personally can remember going to Turkey and waving away a L 250,000 note.

    Inflation is a bit like measles, he reckons, it spends a long time incubating and then – wham!

    Is he right?

  24. Javelin
    Posted January 21, 2011 at 8:20 pm | Permalink

    The Government spend 50% of our money. The other 50% is spent on junk from China. 0% is saved and invested in the future because interest rates are virtually 0%.

    That pretty much summarises our economy.

    • StrongholdBarricades
      Posted January 22, 2011 at 10:20 am | Permalink

      Surely the issue is that the government spends 50% of income, but the population at large has spent 75%

  25. Richard Calhoun
    Posted January 21, 2011 at 9:04 pm | Permalink

    “” too many people would feel badly off and the government’s popularity was at risk. “”

    Isn’t this the problem though John?

    Policy is decided first and foremost with the Governments popularity rating as the top consideration?

    With 5 years in power shouldn’t governments be putting the needs of the country and the electorate before the needs of the Party’s popularity.

  26. grahams
    Posted January 22, 2011 at 1:10 am | Permalink

    Your ball-bearings analogy reminds us that, in macroeconomic policy, everything affects everything else. But it is possible and desirable to “cheat” by using short-term measures, such as the car-scrappage scheme, to help balls drop into holes.

    The vital caveat is that such measures must be time limited so as to avoid distortions. The Bank if England forgot that so that its emergency 0.5 per cent interest rate, well justified at a time of emergency, has been with us for almost two years and is now causing far more harm than good.

    A short-term “Stability and Growth” Bill might include the following:

    1) Discount extra business loans of up to £5 million each from the calculation of bank ratios for three years. (A compromise on your own strictures against the FSA).
    2) Make the statutory minimum redundancy pay 26 weeks for the next 18 months to encourage public and private employers to redeploy staff rather than firing them while jobs are scarce.
    3)Extend the exemption from employers NICs by waiving NICs for five years for anyone aged between 19 and 25 hired in the next 18 months.
    4)Restore index-linked National Savings in an ISA format to help people save for a deposit on a home. This should give banks some useful competition for deposits.
    5) Sell a 50 per cent stake in the holding company for all the Treasury’s banking holdings in a mass public offer to cut the deficit immediately.
    You will have better suggestions.

  27. Lindsay McDougall
    Posted January 22, 2011 at 2:21 pm | Permalink

    The problem is time lags. We have to deal with the fiscal deficit now and we would be well advised to start reducing inflation. Doing both will reduce economic growth in the first year and a bit, and unemployment will initially grow as public sector jobs are reduced. There is a limit to the rate at which the private sector can create new jobs and it is highly dependent on public expenditure being contained. The Government is doing the right thing with the NHS because, with an ageing population, reducing the cost of the bureaucratic overhead is the only politically acceptable way of bearing down on the rate of increase in NHS expenditure.

    Unfortunately, (un)employment is a lagging indicator and is the last thing to respond as we pull out of recession. In the eighties, the recession was over by 1982 but unemployment peaked in 1986. Let us hope that today’s more flexible attitude – not demanding big pay rises and being willing to work part time – will mean that it is not so bad this time round.

    I am less worried than most about the consequences of dealing with the deficit and debt. The electorate knows that Labour’s rake’s progress was not sustainable. I am more concerned about a generational clash – so far the young have borne more of the pain than the elderly.

  28. lola
    Posted January 23, 2011 at 10:56 pm | Permalink

    Mr R, you might like to go here:-

    (SITE REF REMOVED AS NOT enough time to check it out)

    My comments on here were rather caustic, but it does absolutely terrify me when a politician says he is ‘managing the economy’, or going to try to.

    Reply: Government spends more than half the National Income, a nationalised Central Bank sets the interest rate and prints money, politicians chose tax rates and appoint bank regulators – of course government has considerable influence over the economy. Politics is a debate about how to use those powers, and for some of us an debate about how if the government did less it might work better. Purists live in an unreal world and attack those who they should support.

    • lola
      Posted January 25, 2011 at 10:19 pm | Permalink

      Nope, I do not ‘attack those I should support’, I have a debate. Trouble is if you let politicians go on thinking that they ‘run the economy’ we are doomed. The ‘economy’ can and does run itself very well thank you. Even when massively interfered with by politicians trying either socially engineer (a la Brown and co) or ‘nudge’ as you want to do. Behind that is the assumption that politicians are infinitely wise and know that their ‘nudging’ is the right thing to do. In my experience it very rarely is.

      Furthermore, whatever you do it will be the likes of me (and you, as part owner of Evercore Pan-asset) that will dig us out of this mess. We will have to create the wealth to pay for your contunuing profligacy and the utter failure of your leadership to make the required coherent anti-bureaucratic and anti-cod socialist agurments propounded by Balls and co. . ‘Sharing the proceeds of growth’ indeed. That was just risible.

      For 13 years I struggled to identify any robustness in your arguments and any real attempt to frame the argument to counter the rampant statism and proto-communism expoused by New Labour. Not a coherent peep did I hear. And as for standing up and giving that charlantan Blair an ovation when he went, well, words fail me.

      I live absolutely in the real world. I have spent the last 13 years ‘protecting the consumer’ aka my clients, from the ravages of New Labour catastrophic economics, only to find that their egenda is being continued by your colleague Mark Hoban who seems to have beome the puppet of the FSA. Which, may I remind you, has failed.

      I mention the FSA because it is proto-typical of the interfering approach you appeared to espouse in the first paragraph of your post.

      What has gone wrong with us is excess goverment at all levels. Too much interference. Too much social engineering. Too much (arrogant) nudging. The consequence. An infantalised electorate that has abandoned self reliance and responsibility under the sheer weight of all this nannying and become largely irresponsible. Straightforward moral hazard.

      So, no I am not not supporting you because of anything other than this persistent statist agenda.

      For the avoidance of doubt I voted for your party. I am having serious doubts as to whether that was wise. Except that even your crew are not quite as capable of cocking stuff up as New Labour. Oh, and in my humble opinion, being as how I am ‘on the street’ day by day, the Voter is quite capable af dealing with honesty and directness, so I think you only have pyurselves to blame for not getting a majority. Trust the Voter. Tell him the truth. Only you didn’t. Did you?

      Overall, having said all that I am sympathetic to your predicament. You appear to be hamstrung by the deluded economics of the likes of Mr Cable and others of your coalition partners. But there are those on your benches, my MP for example, who still really do not get it and are a latently statist as the rest of you.

      From here on out it seems to me that we have two choices. We are at a fork in the road as it were. The left hand fork leads to more statism, less liberty, more state ‘nudging’ etc etc. On the right hand fork we have the opportunity to have our freedom handed back. To become more responsible for our lives. To have less ‘nudging’. It’s a toss up which way we’ll go, and as I know which I prefer I will have a go at those whoever they are who look like taking us down the other route.

      Reply: I would have thought any reader of this site would understand I do not recommend statist solutions to most problems, and did spend a lot of time in opposition setting out a different way to prosperity. I did n to give Mr Blair an ovation on his departure, and advised against matching Labour’s spending plans in opposition. The fact remains that the state does have large powers, they will not all be removed by any government, and so we do need to discuss how they are used.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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