The “Austerity” debate

 

   Yesterday I was asked to debate the so called “austerity” policy for the UK economy. Lord Desai and I defended the policy of reducing the public deficit as part of  a recovery programme for the UK economy.  Lord Skidelsky and William Keegan argued that the “austerity” policy had done damage to the UK economy.

      In the initial poll of the OMFIF audience a large majority sided with the critics of deficit reduction. After the debate the gap had narrowed, though there was still a majority against the policy.

       It was one of those unsatisfactory modern UK debates because the other  side of the argument seemed completely unaware of the numbers. Any examination shows that public spending went up throughout the last four years, more quickly at first, then  at a slowing rate subsquently. This is at variance with the thesis that higher deficits produce better growth, as there was no growth for the first couple of years of larger deficits and faster growth in spending, followed by gr0wth in the later period when the deficit was down a bit and spending under a bit better control. The other side argued that there had been cuts that were too far and too fast in the early years of the Coalition leading to no growth, followed by some relaxation in public spending subsequently, along with monetary stimulus, which led to the expansion we now enjoy.

         I explained that no-one in Parliament is in favour of austerity in the sense that no-one  wants a squeeze on people’s living standards and real incomes. The political debate is about how government can best assist the growth of living standards. Average living standards contracted very sharply between 2008 and 2010 during the Great Recession, and fell further during the early years of the Coalition. It looks as if they are now rising from  the lower base.

         More importantly, the economy has generated a large number of new jobs in the private sector in the last four years. The best way for an individual or family to experience an improvement in living standards is to move from unemployment into work, or to move to a better paid job. The large number of new full time jobs that have come available, and the sharp upturn in self employment, must mean there are now many who through their own efforts have improved their net income. The removal of Income tax from many more lower paid people has also helped.

          I  took the meeting through the twists and turns of monetary policy and the problems created by slimming down major commercial banks, as readers of this blog will recall. Monetary policy has had a  larger impact on the economy 2005-14 than public spending or the deficit, as the numbers in Quantitative Easing, the expansion and then contraction of bank balance sheets and the changes in overall credit are considerably larger than increments to public spending.  

            The two economists were reluctant to accept that a country does have to avoid excessive debts and deficits, just like an individual or company. They seemed to think there is a free money tree in every state’s back garden which just has to be harvested to make us all rich. They did not accept that if you print and borrow too much one day you run out of other people’s money to spend.

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74 Comments

  1. Lifelogic
    Posted May 1, 2014 at 6:02 am | Permalink

    This is really rather a silly way to frame the debate. Clearly if government or individuals spend money doing something daft, that produces little or no return it makes us all poorer. If however they spend it on doing something sensible that produces a good return it makes us better off. This applies to both government and private expenditure.

    The problem is governments nearly always specialise in pissing money down the drain on HS2, renewable energy subsidies, electric car nonsense, second rate education systems, pointless university courses, paying/pensioning the state sector 50% too much, tamiflu stockpiles, propaganda, the dysfunctional death causing NHS, the Olympics, the Millennium Dome, the EU, payments to further augment the feckless, badly run overseas aid ……. It is not their money they will spend it wastefully on things that produce no return at all if they can – they simply do not care in general.

    Clearly if you have a recession you have under used resources of labour, factories, machinery, materials, energy etc. The best way to get this into action is to cut the huge government waste and give money back to businesses with tax reductions so they can put it to work sensibly. The cutting back of government and taxes generates confidence too.

    There may be the odd sensible thing government could invest in sensibly, but they so rarely do anything much of any real value beyond defence and law and order. They are pretty useless at those too as we see with the slow absurdly expensive and rather arbitrary, multi level legal system and the defence procurement fiasco.

    Aircraft carriers with no aircraft, ill equipped soldiers sent to pointless wars (even on lies) and years (and £millions) spent trying to deport on or two undesirables.

    Buy a posh car (or HS2 type things) for say £100K and after 3 years you might have £30K left but put £100K into a business producing a 23% PA return and you will have “200K nearly seven times wealthier after 3 years (this is before tax alas).

    It is not rocket science all you need is an envelope and a pencil.

    HS2, Millenium dome, the Olympic stadia and green energy subsidies are actually far worse than posh cars!

    Government buy pointless posh cars things and businesses and individuals invest sensibly (on average). Clearly there are drug addicts and daft people too but on average they are far, far, better than the state. The ones that are not good anyway end up giving their money to others who are rather better at it.

    • Lifelogic
      Posted May 1, 2014 at 11:23 am | Permalink

      So Miliband now wants to destroy the property rental market again with rent controls and the legal inability to get tenants out, through changing the tenancy laws. The moronic and disastrous rent act part II one assumes. Does these fool learn nothing. Buy to let mortgages will become very hard to get and much more expensive, there will be far fewer flats available to rent as people will get out of the business and slow up build. Yet more jobs for parasitic lawyer too a total disaster.

      What is needed for lower rents is more properties to rent this will clearly create fewer what sort of Economics do the teach at Oxford. Miliband proposal is idiotic and will not even help tenants as it will restrict supply.

      Another price we will all have to pay thanks to Cameron throwing the last election, ratting on the EU, his green crap drivel, his 299 tax increases, his IHT ratting, his bloated incompetent government and the fact that he now has virtually no chance now of winning the next election.

      Thanks a lot Cameron! Why on earth did this man not join the Libdem he clearly is one – a greencrap, pro EU, bloated state, 299 tax increasing ratter to his very core.

      Personally I would still rather suffer the economic lunacies of Miliband than have ratter socialist Cameron back. Even if it will clearly cost everyone.

      At least them we might get a sensible party to replace them eventually.
      With Cameron that will never happen.

      • uanime5
        Posted May 2, 2014 at 12:59 am | Permalink

        there will be far fewer flats available to rent as people will get out of the business and slow up build.

        If people sell these flats then they’ll be more flats available to buy, which will benefit those who would rather buy a property than rent it.

        What is needed for lower rents is more properties to rent this will clearly create fewer what sort of Economics do the teach at Oxford.

        And where are all these properties going to be located. Some areas have housing shortages because there’s no where to build houses near where people want to live. There’s also the problems of infrastructure.

        It’s flawed economics to assume that a variable can be indefinitely increased.

        • Lifelogic
          Posted May 2, 2014 at 8:52 am | Permalink

          Rubbish you can go up and up and even down and down. Have a look at population densities for some part of the world compared even to London and even London has loads of space.

          But if we had rather selective World Wide immigration instead of Cameron’s open door to all in the EU it would be far less of an issue.

        • Tad Davison
          Posted May 2, 2014 at 9:15 am | Permalink

          Did you consider the effect that Labour’s ‘open door’ immigration policy has on the supply of housing and the shortages it creates?

          • lifelogic
            Posted May 2, 2014 at 6:13 pm | Permalink

            Indeed it also lowers gdp per cap in the short term as they tend to be low earners.

    • Lifelogic
      Posted May 1, 2014 at 11:40 am | Permalink

      I would not be too surprised if Cameron came out in agreement with Miliband on his idiotic rent controls – as he too is such a lefty dope with so little understanding of economics and business.

    • uanime5
      Posted May 2, 2014 at 12:55 am | Permalink

      The best way to get this into action is to cut the huge government waste and give money back to businesses with tax reductions so they can put it to work sensibly.

      The government tried this and it failed because the companies used the tax cuts in order to boost their profits and to give their executives bigger bonuses. It also seems that reducing corporation tax hasn’t create jobs or encourage companies to invest in the UK.

  2. Mike Stallard
    Posted May 1, 2014 at 6:28 am | Permalink

    We thought these days would last forever…

    If you are in debt, your creditors are in control of your life. Our debt and that of the USA are well above the safety level and verging on the fatal. Who do we owe the money to?

    If we just renege, then who will ever trust us again (cp Communist Party of the USSR among others)?

    If we try to pay back or reduce the debt, we do not get elected. There are always “populist” people who will promise that it is all OK really. And the Labour Party is heavily subscribed by the TUC who just cannot see the problem.

    • Anonymous
      Posted May 1, 2014 at 8:26 am | Permalink

      It depends which ‘populism’ the politicians take note of – and that which they ignore almost completely, hence the rise of Ukip.

      Britain has a huge democratic deficit. Ask the average person what they’d like to see done about various things and the answer would be the same.

      Where is this point of view represented in Parliament or the media ?

    • Lifelogic
      Posted May 1, 2014 at 11:27 am | Permalink

      If you default then in many ways you become more credit worthy not less as you do not have the debt hanging over you.

      Just as Iceland did with lots of UK local councils tax payers money!

  3. Andyvan
    Posted May 1, 2014 at 6:35 am | Permalink

    How does government spending less squeeze people’s income? I suppose all those that have allowed themselves to become reliant on benefits might suffer some loss of income. All those that work in mostly unproductive and economically damaging state bureaucracies might have to find a real job and live on less money. Yes that would squeeze them but for in the medium to long term everyone would be better off. The economy would boom if large scale tax cuts were implemented and regulations were abolished. Government always pretends to be essential when in reality it is a giant leech sucking the vitality from the free markets. Less is always more when it comes to government, a fact that has been forgotten in Westminster and particularly the Conservative party.

    • uanime5
      Posted May 2, 2014 at 1:06 am | Permalink

      I suppose all those that have allowed themselves to become reliant on benefits might suffer some loss of income.

      Such as all those people in low paid jobs who need tax credits and housing benefit.

      All those that work in mostly unproductive and economically damaging state bureaucracies might have to find a real job and live on less money.

      Are you planning to close these departments down or do you believe they can operate despite having no people in them.

      The economy would boom if large scale tax cuts were implemented and regulations were abolished.

      Corporation tax has been reduced almost every year yet it hasn’t resulted in any booms so far. All abolishing regulations will do is make workplaces less safe and allow employers to abuse their employees; neither of which will benefit the economy.

      Government always pretends to be essential when in reality it is a giant leech sucking the vitality from the free markets. Less is always more when it comes to government

      Like the banks which went bankrupt and needed a bailout because the government didn’t regulate them enough. It’s clear that that the free market isn’t capable of existing without help from the government.

      • Tad Davison
        Posted May 2, 2014 at 9:25 am | Permalink

        Which government failed to regulate the banks properly? Go on, you know you can do it if you try, be honest for once!

  4. alan jutson
    Posted May 1, 2014 at 6:56 am | Permalink

    Your very last paragraph sadly sums up the thinking of many in our country and indeed the World..

    “The two economists were reluctant to accept that a country does have to avoid excessive debts and deficits……”

    But pray tell me why they call themselves “economists” surely they should simply be called “Socialists, or spendthrifts”.

    The question to ask these people is surely:

    Do you or your immediate family continually spend more each year then your annual income.

    If they say yes then they look a fool, if they say no, then simply ask why not, as that is what they are proposing for the rest of us.

    • Tad Davison
      Posted May 1, 2014 at 12:22 pm | Permalink

      I agree entirely Alan, which is precisely why this is so scary. Understanding basic profit or loss, credit and debt, is schoolboy stuff, so why don’t lefties get it?

      And people think we should trust them with our economy?

      The big money men to whom we would be eternally endebted must be rubbing their hands with expectation and glee. I can see the day when we become economic serfs unless we get this debt under control.

      Tad

    • waramess
      Posted May 1, 2014 at 1:46 pm | Permalink

      Pretty well on the button however, the point is that if you do spend more than you earn you appear to be more wealthy than otherwise for the time being.

      Eventually the pigeons come home to roost and you have to pay the price of past excessive spending by cutting back even harder.

      That’s how it is and governments are no different: either cut back or increase your income, nothing else will work.

      Far too much fanciful thinking these days and the Conservatives are no different given they have now doubled the UK debt since they took over

    • uanime5
      Posted May 2, 2014 at 1:09 am | Permalink

      Do you or your immediate family continually spend more each year then your annual income.

      Any sensible economist will respond:

      “No because unlike the state I can’t print more money to make up any shortfall”.

      They may also point out that the state can’t due of old age so there’s a much lower chance of these debts not being repaid.

  5. Robert K
    Posted May 1, 2014 at 7:10 am | Permalink

    It sounds like a repeat of the debate you participated in at the Sheldonian last year. The term “austerity” is highly misleading; first, because it implies a wicked state refusing to spend money to help impoverished citizens, when in fact the inverse of austerity is more tax and debt. Second, because as you rightly point out, public debt has been increasing throughout the period of so-called “austerity”. Also, the tax burden on middle incomes has increased substantially with the steady reduction in the threshold in 40% marginal tax to the point where it is almost in line with average earnings. For a real recovery to take place, more money needs to be left in people’s pockets.

    • uanime5
      Posted May 2, 2014 at 1:13 am | Permalink

      The term “austerity” is highly misleading; first, because it implies a wicked state refusing to spend money to help impoverished citizens, when in fact the inverse of austerity is more tax and debt.

      Firstly austerity has resulted in many benefits being cut in real terms, which harms these impoverished citizen.

      Secondly austerity has resulted in the bedroom tax and benefits sanctions, both of which increase the number of impoverished citizens who need food banks.

      Thirdly unless these additional taxes are on things that these impoverished citizens buy or disproportionately effect those on low incomes it won’t be as harmful as austerity.

  6. Narrow shoulders
    Posted May 1, 2014 at 7:11 am | Permalink

    Prior to the recession the stimulus was coming not from government largesse but from banks creating broad money through debt mainly in the overheating housing market. The rate of increase in money supply dwarfed the spending of government which was covered mostly by taxes generated by the stimulus.

    When this credit was removed from the economy due to assets being revalued due to availability of credit there was a slump which could only be partially countered by QE and government continuing to run a deficit.

    This is why the Chancellor has attempted to reboot bank lending with various schemes since 2010 the bank money supply has greater effect than government tqxing paye serf greater amounts and cutting benefits had an effect on the economy which has now been mitigated by help to buy.

    Government could have actually cut spending instead of increasing it and reduced our taxes had it managed to get the banks lending sooner.

    That is actually a dangerous state of affairs and will lead to another bust when assets are again revalued. The Chancellor should have taken the opportunity (and pain) of moving to sound money rather than focus on being reelected. But the name of the game is the next campaign unfortunately.

  7. A.Sedgwick
    Posted May 1, 2014 at 7:16 am | Permalink
  8. Tad Davison
    Posted May 1, 2014 at 7:37 am | Permalink

    John,

    That truly bothers me, particularly the last paragraph. I would have thought anyone could understand your rationale. How anyone can consider themselves ‘experts’ on the economy, yet cling to those beliefs, is just plain mad. There may be times when borrowing can be justified on a limited and temporary basis, but for these people to see it as a remedy in the way you explained is crazy.

    As many others will agree, the UK’s debt is still massive, and given certain circumstances, could yet be our undoing. Personally, I would have cut public spending further still. One or two ‘too big to fail’ banks would also have gone to the wall.

    For George Osborne to say Labour didn’t fix the roof whilst the sun was shining is true enough, but I know some people don’t quite understand what he means. I think he ought to spell it out in real terms and explain Labour’s failed economic ‘tax, borrow, and waste’ policy just in case people might be tempted to vote for them again, although the present government isn’t exactly without sin.

    Tad Davison

    Cambridge

    • Horatio McSherry
      Posted May 1, 2014 at 8:06 am | Permalink

      Tad,

      I agree entirely. It still amazes me why the coalition (or at least the Conservative members of government) didn’t make a huge song and dance about the state of them economy they inherited and actually use their media time to explain in lay terms the huge, catastrophic mess Neo Labour had left the country in. I think if they’d have done that they may be polling a little higher on the back of some good-will.

      • alan jutson
        Posted May 1, 2014 at 9:29 am | Permalink

        H M

        I totally agree with your comments, and indeed I suggested (on this site) exactly the same plan of action be completed after they had been in power for 6 months and had been able to go through the books in detail.

        A simple state of the Country broadcast showing our financial plight would have put Labours record on file once and for all.

        Instead we have had the sham policy of cuts which were in fact increases, while still calling them cuts (I notice they do not do that now) and tax increases a plenty.

        Rather too late now to expose the Labour mismanagement, as the moment of opportunity has long since passed.

      • Gary
        Posted May 1, 2014 at 12:33 pm | Permalink

        Labour or Tory or LibDem or any combination are all in essence the same. They all believe in the existing system, they only differ marginally in how to tinker within the same flawed system.

        This false dichotomy is a mirage to keep the prols arguing among themselves and miss the big picture of organised theft.

        • Tad Davison
          Posted May 1, 2014 at 3:06 pm | Permalink

          I’ve got a lot of sympathy with that too Gary!

          Tad

    • Anonymous
      Posted May 1, 2014 at 8:29 am | Permalink

      Too late for Mr Osborne to do that, Tad.

      The next bust is his baby.

    • Peter Davies
      Posted May 1, 2014 at 8:44 am | Permalink

      The problem with economists is that you could put 5 of them in a room and they may all disagree on something. To exasperate this as I see it the problem with left wing economics is that many have been schooled in Keynesian print and borrow approach as the answer to all their problems and most conveniently leave out the fixing the roof bit when times are good bit.

      I believe Milliband and Balls have taught economics in the US which is scary – they both come from the Gordon Brown school of thought.

      Also you have the Blanchflowers/Kruggers of this world and many people listen to them – Blanchflower is clearly of the opinion that is doesn’t matter how high your national debt is, you simply print and borrow huge amounts of money and don’t do any public spending reductions until the economy heals then everyone one day will be alright. Blanchflower in particular has stated that if anyone disagreed with him he would kick them out of his classroom – if you disagree with something he says on Twitter, he goes into a spin and will block you.

      Little wonder I cant stand socialism.

      This approach we know gets economies into trouble because you have markets, borrowing interest rates and inflation to contend with – the list of casualties we know is long, look at Latin America – Argentina used to be rich at one time yet these people still carry singing the same tune.

      • rick hamilton
        Posted May 1, 2014 at 11:10 am | Permalink

        The print and borrow enthusiasts seem entirely oblivious of the external value of the currency which they always want to debauch so as to make the national debt appear smaller.

        I have been monitoring the GBP / JPY exchange rate for a very long time. When I first visited Japan in 1973, one pound would buy Yen 740. It now buys Yen 170 (and was as low as Y120 not long ago).

        And they tell us the pound is strong – maybe against the US dollar it is. I gather the USD has lost 98% of its purchasing power since the Federal Reserve was established 100 years ago.

        Watch these economists with their complicated theories of money – they will destroy your wealth in the long run, probably with the best of intentions if it’s any consolation.

      • Tad Davison
        Posted May 1, 2014 at 11:51 am | Permalink

        Absolutely, this is one reason I like to listen to Max Keiser on RT and the guests he has on his programme. Beats the lefty pro-EU BBC hands down. He might clown about sometimes, but the message is solid enough. And for those who haven’t already done so, they should listen to what Max Keiser has to say about Gordon Brown selling our gold!

        Economic competence? Gordon Brown couldn’t run a sweet shop, and woe betide us if Miliband and Balls ever get near our money again!

        Tad

        • zorro
          Posted May 1, 2014 at 7:32 pm | Permalink

          Max puts his economics across in a fun way and makes his points well.

          zorro

      • uanime5
        Posted May 2, 2014 at 1:17 am | Permalink

        Blanchflower is clearly of the opinion that is doesn’t matter how high your national debt is, you simply print and borrow huge amounts of money and don’t do any public spending reductions until the economy heals then everyone one day will be alright.

        In other words what Obama did in the USA that resulted in the US economy recovering.

        • Richard1
          Posted May 2, 2014 at 12:10 pm | Permalink

          You are mistaken, check the numbers. The US defecit was lower than the UK’s at its peak, ran at approx the same level for a period and is now lower. There have been actual cash reductions in public spending in the US, unlike the UK. The US has c. 10% lower state spending / GDP than the UK. Taxes are lower and of course energy is much cheaper due to shale gas and less green crap.

  9. Iain Gill
    Posted May 1, 2014 at 7:58 am | Permalink

    You are dealing with a public force fed a certain view by the established media and journalistic class. It is hardly surprising given what they are fed that the public feel the way they do. You are also dealing with a media and political class dominated by those with an arts education with limited ability to do maths or scientific reasoning.

    Give the public the facts in a balanced way and they will come to the correct conclusions.

    • Tad Davison
      Posted May 1, 2014 at 12:33 pm | Permalink

      I totally agree Iain, but that isn’t going to happen any time soon. I try my best to steer people away from domestic ‘news’ sources, to where they can get a more balanced and educated view. Until the BBC has its funding withdrawn, and is made to work hard for the viewer instead of following a socialist brief, we’re stuck with interminable propaganda.

      Tad

  10. Ex-expat Colin
    Posted May 1, 2014 at 8:00 am | Permalink

    Mrs Thatcher operated on the principle of running the country’s economy on the same principles as a home budget…as we know. That worked and logically should do if indeed your home has a carefully managed in/out arrangement. That also includes contingency in the event of the unexpected. End of – Suck Eggs

    Anything other than that attracts huge risk and swift realisation of near catastrophe. Using other peoples money of course matters not for some we also know. I am sure there should be severe penalty on those who adopt recklessness in regard of the state’s functions. All we see is prizes for it and its completely absurd!

    There are a good number of people holding professional positions who don’t seem to know/understand these simple things about living. Are they near bankrupt ?

    • Gary
      Posted May 1, 2014 at 11:56 am | Permalink

      Margaret Thatcher was the architect of the financial Big Bang. And we are reaping the whirlwind today. Financialization is killing us. The fawning memories of Thatcher’s policies are built on a myth.

      • libertarian
        Posted May 1, 2014 at 3:12 pm | Permalink

        Gary

        As you haven’t got the remotest clue what Big Bang was I think it would pay you to actually find out.

        • Gary
          Posted May 1, 2014 at 5:22 pm | Permalink

          The Big Bang was the deregulation of the banking system in the 80’s in every way EXCEPT for one the crucial point : the banker risk was transferred from themselves onto the taxpayers via the govt and the Central Bank. It became socialize the risk, privatize the profits. It was unfettered capitalism without consequence for the capitalists. That is certainly not a free market, it is closer to fascism. It was fueled by the start of an orgy of money printing and the accompanying cheap credit with the attendant boom(Late 80’s, late 90’s, 2003-2007) and busts(early 90’s, early 2000’s and 2008).

          How else did we get to Too Big To Fail ?

  11. acorn
    Posted May 1, 2014 at 8:15 am | Permalink

    One thing to consider, however, is that the UK, which was hit hard by the financial crisis, is still playing catch-up with some of its peers. Its economy is still smaller than its pre-recession peak in early 2008 – a milestone Germany and France surpassed years ago. (Reuters).

    What more do you need to know about “austerity”. Can I suggest you have a quick read of Warren Mosler’s little book. “The 7 Deadly Innocent Frauds of Economic Policy”. Sweet Shop economics simply does not apply to a government that can spend its own money into existence.

    Reply The UK was hard hit by the crisis, as it was a banking crisis made in the UK when the UK had a very large banking sector compared to say Germany. Mending the banks and getting them into a shape to finance a normal recovery was the main task facing government after it presided over the 2008-9 fiasco.

    • Gary
      Posted May 1, 2014 at 11:53 am | Permalink

      “Reply The UK was hard hit by the crisis, as it was a banking crisis made in the UK when the UK had a very large banking sector compared to say Germany. Mending the banks and getting them into a shape to finance a normal recovery was the main task facing government after it presided over the 2008-9 fiasco”

      That is exactly the opposite of a free market solution. In a free market , the cause of the problem gets eliminated not resurrected. The market will not bear inefficient enterprises. The banks should have failed. If the govt insisted on meddling and a bailout rather than a free market , then retail depositors should have been bailed out, and the rest let go. It would have been cheaper and we would already have been on the way to a sustainable recovery. How do we know this ? Look at history.

      • acorn
        Posted May 1, 2014 at 2:57 pm | Permalink

        Gary, the reason they could not let them go bust was the threat of collapsing the retail / transaction side of the bank. That is, all the accounts that are part of the payment clearing and settlement system. The BoE, as the “master clearer” and the Treasury, knew that if “clearing” fell apart, the economy would come to a stop shortly afterwards.

        Hence, the banksters held the whip hand and they knew it. Now you know why US banksters wanted rid of the Glass-Steagall Act; and, UK banksters are now making such a huff and puff about Vickers “ring-fencing”. They don’t want it, “The City”, will lose its grip on the politician’s short and curlies.

        At the time, some were shouting “nationalise the ba****ds” (with no compensation except for retail deposits); but “apparently”, there was no law that would allow BoE or Treasury to do such.

        BTW. In 2008, it would not have been any different under a Conservative government than actually happened under the Labour government. All the same officials and advisers, would have been at BoE and Treasury. They would have been advising exactly the same course of action to an equally totally baffled Chancellor. Two years later, austerity was the very, very last thing the UK economy needed.

      • Tad Davison
        Posted May 1, 2014 at 3:19 pm | Permalink

        Gary,

        I heard that some of these ‘too big to fail’ banks made an absolute killing on the backs of the bailout. Do they depend upon an ill-informed public in order to get away with it, or could it be that a controlled media keeps it from them and never allows a proper debate?

        Tad

  12. Brian Tomkinson
    Posted May 1, 2014 at 8:18 am | Permalink

    Is it really surprising that these economists “seemed completely unaware of the numbers”? Why would they want the facts to blur their argument? They were of course aided and abetted by your colleague Osborne who has peddled the myth that he has been “taking those difficult decisions” about spending “cuts” for the last 4 years. I have argued here before that this trick has suited both sides. Labour are happy to play along in the hope of creating some differentiation. I am grateful to you for highlighting that overall spending has increased and the, less the promised, reduction in the deficit is due entirely to increased taxation. The TaxPayers’ alliance state that: “Government is shown to have implemented or planned 299 separate tax rises but only 119 separate tax cuts. This means that the Coalition has been responsible for 180 more tax rises than tax cuts since it came to power.”
    Maybe you should have another debate with your Conservative colleagues about the small state and low taxation – something once espoused by your party but now apparently dispatched to the waste bin.

  13. Horatio McSherry
    Posted May 1, 2014 at 8:19 am | Permalink

    Good morning John,

    Are many of these debates you appear in online to view? I have only seen one (Cambridge Union?) and debates like these should be more widely available.

    Regarding your last paragraph, I think a large part of the battle (with the public at least) is terminology. Readers of this blog and people with an interest in politics can sift through terminology and get to the truth (or unthruths) of things, however I don’t think the general public are able to do that (purely through not being as interested as we). For example, the term “government spending” is highly misleading but is incredibly effective at distancing money spent with where the government has got it from in the first place, which leads to the widespread nonchalance about increasing budgets. “We have increased government spending here by x amount.” No, you have spent more (of people’s) tax there by x amount.

    Reply I expect these debates are available. This one was organised by OMFIF who will probably put it on their website.

  14. Bert Young
    Posted May 1, 2014 at 8:26 am | Permalink

    Taking part in a debate such as the one you describe was a hiding to nothing . I am always amazed how people are ignorant of basic facts : – if you eat a lot you get fat , if you are fat you become more lethargic , and so on . Debt is not something that disappears and , in any responsible society , it has to be repaid . The appetite for debt is no different to discerning the amount and what you eat in order to get back into shape . Being healthy means you can get the maximum enjoyment from your life and the same is true of any economy .

  15. Posted May 1, 2014 at 8:51 am | Permalink

    ” The two economists were reluctant to accept that a country does have to avoid excessive debts and deficits, just like an individual or company.”

    Neither William Keegan nor Lord Skidelsky would have been at all reluctant to accept that a country, like the UK, should avoid excessive debts and deficits. They are welcome to correct me if I’m wrong in saying this about their views. Yes, debts and deficits can be excessive. No economist would deny this. When they do become excessive we see high inflation in the economy as governments looks to utilise resources, which are not present, by excessive spending.

    They would have perhaps pointed out that you can’t compare the economics of a currency issuer , like the UK or US government, with currency users, like you and I or companies which operate within those economies.

    Governments have to be in debt to give everyone else a store of assets in their currency of issue. Their debts, including the monetary base, are our assets. If we give up our assets to government as some individuals do, when they die, the government debt decreases but our assets decrease too.

    Add up all the Government debts worldwide and they total nearly $60 trillion. Even successful economies have large debts. Germany has a debt on a par with the UK , in GDP terms, even though it runs a balanced budget. That $60 trillion isn’t money we owe to Mars or Venus. It is the store of all our financial assets.

    Reply They did not state that there is a limit to how much a government can borrow.

    • Gary
      Posted May 1, 2014 at 11:39 am | Permalink

      “Governments have to be in debt to give everyone else a store of assets in their currency of issue.”

      Absolutely correct, if you accept the premise that this debt based money system is the best way to organise an economy. I contend that it is one of the worst ways to organise an economy for the reasons I have posted elsewhere here on this topic.

      That the govt MUST become mired deeper and deeper in debt to facilitate growth is a fact of how we DO operate, but it is an abomination of theft and graft compared to how we SHOULD/CAN operate an economy.

      This is what really irritates me. Most economic arguments are based on accepting the status quo as the premise, and then trying to organise the economy around that. It is like the old joke when asking in the street for road directions to someplace, the answer was “I would not start from here !”

      Oh, and by the way, monetary inflation is oversupply of money and the resulting price changes are the effects of monetary inflation.

    • Posted May 1, 2014 at 9:12 pm | Permalink

      Mr Redwood,
      ” They did not state that there is a limit to how much a government can borrow.”

      Governments cannot borrow more than exists. But, if they are a sovereign Government, they control the issue of their own currency. They create new money as they spend it so it isn’t a problem. Borrowing, isn’t really the right word. Governments cannot borrow their own IOUs anymore than you or I can borrow our own IOUs. We either write out new ones or tear up old ones.

      So governments can write out as many IOUs as they like. But they shouldn’t . They should stop, or at least slow down, when inflation rather than recession is the main political and economic priority.

  16. Gary
    Posted May 1, 2014 at 9:07 am | Permalink

    The Keynesians are a danger to society.

    They assume that debt is benign, because all growth must be fuelled by borrowing. On the face if it, that is true. But when the debt is also a function of the money supply, as our money is, then you have a problem.

    The money supply should be constant, where borrowed money is not freshly created new money, but money transferred from lender to borrower and forfeited by the lender for the duration of the loan. If the loan is successful the lender gets paid interest and gets the principle returned, if not the lender loses the principle and gets no interest, the borrower loses collateral. Risk is shared. If the economy grows as a result of the loan being successful, then more money is demanded and so each unit of money becomes more valuable and so each unit of money can be DIVIDED DOWN into subunits. The TOTAL amount of money remains the same, the subunits increase. In this way the borrowing interest rate matches exactly the growth rate of the economy and savings and investment are linked through the savings interest rate. This feedback provides information to investors and savers about how to allocate money.

    When new money is created for every loan and interest is charged regardless, the supply of money monotonously increases, its value monotonously decreases, we have persistent inflation. Investment and savings feedback is lost and asset bubbles are creates and destroyed in never ending boom and bust. This situation is only good for money parasites in the govt and banking sectors and these two sectors grow like a cuckoo and crowd out the productive economy, eventually killing it.

    Keynesians are parasites and they rule over us for their own nefarious ends.

    • Posted May 1, 2014 at 9:29 pm | Permalink

      Gary,

      Even if the money supply were held constant it would still be a debt to whoever created it. Imagine a closed economy of 1000 people. They elect a government which issues everyone with 10 units of currency. That’s a 10k debt to that government. Whether or not it is later increased, that doesn’t change.

      Even when money was on a gold standard the supply was not constant. As new gold was mined that supply increased. That well known “danger to society”, Keynes suggested, half jokingly, that governments who weren’t on a gold standard might want to create pots of new money from time to time , bury them and have the population engage in some kind of treasure hunt!

      Clearly that is a large waste of effort. Governments would be much better creating the money and have that effort directed towards the building of schools and hospitals etc. That is the basis of Keynesianism. Incidentally without Keynesian economics WW2 would have been lost with hardly a shot being fired. It would have been considered unaffordable by the bean counters of the time.

    • uanime5
      Posted May 2, 2014 at 1:41 am | Permalink

      The money supply should be constant, where borrowed money is not freshly created new money, but money transferred from lender to borrower and forfeited by the lender for the duration of the loan. If the loan is successful the lender gets paid interest and gets the principle returned, if not the lender loses the principle and gets no interest, the borrower loses collateral. Risk is shared.

      So if a person puts their savings in a bank, the bank lends this money to someone, and the loss on the loan is greater than the borrower’s collateral the person who put this money in the bank has to absorb this loss rather than the bank which made the bad investment. There’s a reason why this model of loans was abandoned centuries ago.

      If the economy grows as a result of the loan being successful, then more money is demanded and so each unit of money becomes more valuable and so each unit of money can be DIVIDED DOWN into subunits.

      So we go from a system where a bank can hold £1 in cash and can loan £2 to a system where a bank can have £1 in cash and can loan 2 subunits. Not sure how a system with a separate currency for loans is any better.

  17. Gary
    Posted May 1, 2014 at 9:13 am | Permalink

    Keynesians steal from the productive economy at the real rate of inflation, not the rigged rate of inflation as measured by their leaky CPI basket, which omits all the big ticket necessities, but the rate we actually have to pay, day in, day out.

  18. Denis Cooper
    Posted May 1, 2014 at 9:26 am | Permalink

    As I said the other day, the question is not so much whether there will be continuing economic recovery over the next year but how much that rise in prosperity will benefit the coalition parties at the general election.

    At present public opinion seems to be divided more or less equally between those who mainly blame the last government for their loss of purchasing power, those who mainly blame the present government, and those who blame both; for example, in this recent opinion poll, on page 2:

    http://d25d2506sfb94s.cloudfront.net/cumulus_uploads/document/l1m6nd2qg3/Sunday_Times_Results_170414_Economy.pdf

    “Who do you think is more to blame for people’s incomes not keeping pace with rising prices?”

    “The policies of the last Labour government” – 27%
    “The policies of the present coalition government” – 25%
    “Both equally” – 26%.

    Only 2% of those who intend to vote Labour blame the last government.

    • Tad Davison
      Posted May 1, 2014 at 3:34 pm | Permalink

      That’s the problem laid bare before us Denis. So I wonder if anyone can tell us how we can finally get a better informed public?

      Tad

      • Posted May 2, 2014 at 1:06 am | Permalink

        Playing the blame game is not what the electorate want to hear at the moment. Unless they are totally blinkered by party loyalty, or have a very low level of intelligence, they will know that all parties are at least partially responsible. The Conservatives have to accept they weren’t advocating the sort of policies in the 2000-2007 period to avoid the crash, Even though they were in opposition they could have done that if they’d been aware of what was happening in the world economy.

        Get the economy moving again, reduce the deficit, if that is what bothers you, by growth and exapansionary fiscal policies and at the same time providing better jobs for everyone and they won’t care whose fault it all was.

  19. Denis Cooper
    Posted May 1, 2014 at 9:34 am | Permalink

    Off-topic, JR, have you any insights into why Boris Johnson has ducked the Newark by-election? It would have been a great opportunity for him to get back into the Commons; is he too cowardly, too “frit”, to put himself forward unless he can be parachuted into an absolutely rock-solid safe Tory seat? The excuse that he’s already fully occupied with something else seems pretty feeble, he could have just dropped all those other plans he had and gone to concentrate just on Newark, couldn’t he?

    Reply He has to fulfil his promises to the electors of London. He might decide to fight a General Election seat as that is closer to the date of the ending of his Mayoralty. The Conservatives selected their Newark candidate months ago when Mr Mercer resigned from the Conservative whip, so there was no vacancy this week anyway. Even Boris has to find a seat where the members of the local party think he is the best person for the job.

    • Tad Davison
      Posted May 1, 2014 at 5:36 pm | Permalink

      The thing that worries me about Boris, is that it is said he voted for Clarke in the 2005 leadership contest. Can we really trust a man who demonstrates such a singularly foolhardy lack of judgement?

      Tad

    • sjb
      Posted May 1, 2014 at 8:30 pm | Permalink

      Never mind Boris, why isn’t Nigel Farage standing?

      If the polls are accurate, it appears UKIP will come first in the 2014 European Election. That should give UKIP even more publicity and perhaps a bandwagon effect leading up to the by-election on 5 June.

      • Denis Cooper
        Posted May 2, 2014 at 8:25 am | Permalink

        Why should Nigel Farage stand?

        In case you haven’t noticed, at the moment he’s already fully engaged in an carefully planned election campaign across the whole country, that’s to say when he’s able to do that without thuggish opponents resorting to physical violence to try to stop him.

        So why should he want to be shunted off to a siding in Newark?

        • sjb
          Posted May 4, 2014 at 2:38 pm | Permalink

          UKIP lost the 2013 Eastleigh by-election by about 1,800 votes. It would be surprising if it had not occurred to some UKIP supporters that had Nigel Farage stood UKIP might have won the seat and thus finally had representation in the HoC for the 900k+ that voted for UKIP in May 2010.

          Farage is a more prominent public figure now and so arguably would attract thousands of more votes than a local candidate. With UKIP riding high in the opinion polls it seems extraordinary not to maximise their chance of winning the by-election and all the favourable publicity that would ensue. Plus, imagine the vista of Farage challenging Cameron at PMQs.

    • Denis Cooper
      Posted May 2, 2014 at 8:18 am | Permalink

      Boris Johnson’s term as Mayor runs until May 2016. So what you are saying, JR, is that it would be OK for him to break his promise to Londoners a year before the end of his term but not two years before the end of his term. But in any case we’ve heard that MPs are finding they don’t have a lot to do in this last year before the general election; so he could have got himself elected as the MP for Newark, “a glittering prize” according to the Telegraph, and still devoted most of his time to his present job as Mayor of London during the next twelve months. I’m sure that the chap who’d already been selected as the Tory candidate for Newark would have been willing to step aside for somebody who Cameron has said he want back in the Commons; in exchange he could have been fixed up as the candidate in another constituency where they haven’t yet completed (or even started) the selection process, and where once again he would not be a local man, just as he is not local to Newark and nor was he local to Newcastle in 2010. Maybe even the Hampshire North West constituency, which is being mooted as a nice safe seat for Boris Johnson.

  20. Roy Grainger
    Posted May 1, 2014 at 9:36 am | Permalink

    As you note “austerity” is a very miseleading term. You could argue that Mr Milliband’s proposal for rent controls impose austerity on buy-to-let owners, similarly his higher top rate of tax proposals. What austerity really seems to mean in the press is reducing benefits.

  21. Gary
    Posted May 1, 2014 at 9:42 am | Permalink

    In a Keynesian economy, money is supposed to be created for a loan and destroyed when the loan gets repaid. In truth, because there is no lender out of pocket awaiting payback, the loans can be rolled over indefinitely and because there is no limit to the creation of new money, infinite new loans can be made. Inflation is baked in.

    These systems always end in hyperinflation. Literally ,when trust is lost in the fiat currency and demand for the currency collapses and people turn to hard money like gold.

    • Posted May 1, 2014 at 11:03 pm | Permalink

      Gary,

      I presume you are referring to the practice of commercial banks ‘creating money’ when they lend? There is a lot of nonsense talked about this. It is really nothing to do with Keynes.

      The banks don’t do anything that you and I couldn’t. That is issue their own IOUs denominated in a particular currency. You could issue an IOU issued in NZ dollars if you wished. You wouldn’t even need to own any NZ dollars yourself . Those IOUs could circulate and be accepted as NZ dollars by anyone who considered you were good to your word and had the necessary financial base to make good those IOUs if necessary.

      Banks do have to be prepared to make good their own IOUs in terms of government issued IOUs. If they create an amount of money , as say as a loan to a business, that new money will be spend and respent. Each time it will attract governmt taxes: VAT, income tax, NI contributions, corporation tax etc. In a matter of months it will return to government.

      Govts don’t take commercial bank IOUs as payment for tax. They want their own back. That’s when the crunch comes for the banks. They need to hand over real government money for those payments!

  22. Neil Craig
    Posted May 1, 2014 at 10:47 am | Permalink

    Political “debate” is virtually entirely censored by the dominant state propaganda BBC organisation.

    Free debate, to which the electorate have access is a necessary and perhaps sufficient condition for a free and successful society. Unfortunately we don’t have that.

    I assume every MP there, including yourself, knew that the only way this would ever get reported to most people would br if the BBC took one line from somebody (either a labour supporter opposing “austerity” or yourself with a carefully selected line about needing cuts but omitting why) and that the decision of most of them what it would be safe to say was made accordingly.

    You are to be commended for your unusual honesty, but we need a system whereby honesty is not censored. BBC delenda est.

    • uanime5
      Posted May 2, 2014 at 1:48 am | Permalink

      Political “debate” is virtually entirely censored by the dominant state propaganda BBC organisation.

      Free debate, to which the electorate have access is a necessary and perhaps sufficient condition for a free and successful society. Unfortunately we don’t have that.

      If only there was a non-BBC channel that these free debates could be broadcast on, such as every other channel. Or some non-television printed media, such as a newspaper. Or some sort of Internet forum that wasn’t part of the BBC. Oh wait all of these exist, so I guess the UK is a free and successful society after all.

      • Tad Davison
        Posted May 2, 2014 at 9:03 am | Permalink

        Balderdash! Then why is it the BBC or our domestic news media never seem to cover the stories that are either printed or broadcast elsewhere? Blinkered again.

        A friend of mine was on the BBC’s ‘Hard Talk’ programme some months ago, having been invited to talk about Israel and the middle-East. He said the programme ought to be called ‘Hard to Talk’ as they never gave him a chance to mention the real issues. He does far better on foreign news channels, even participating in lengthy debates. I want more for the money the BBC gets out of me, on pain of imprisonment if I don’t pay it!

  23. Richard1
    Posted May 1, 2014 at 12:18 pm | Permalink

    Interesting. Skidelskey wrote an excellent biography of Keynes which I can recommend but I think he’s really more of an historian than an economist. Certainly he is one of many neo-Keynesian Cassandras who supported the Balls-Milliband line who have been proven completely on wrong in their prognosis for the economy. They should also note the case of the US where there have been actual falls in public spending, and where public spending is much lower than the UK’s, yet there is now growth with narrowing deficits.

    What is odd about academic economists is they can go through their whole careers being completely wrong, constantly contradicted by the evidence, yet retain a dismissive de haut en bas tone with anyone who disagrees with them.

    One concept many don’t understand is opportunity cost of capital. This is why we get the ridiculous argument that because interest rates are low almost any public expenditure is worthwhile.

    • uanime5
      Posted May 2, 2014 at 1:54 am | Permalink

      They should also note the case of the US where there have been actual falls in public spending, and where public spending is much lower than the UK’s, yet there is now growth with narrowing deficits.

      There was also a huge stimulus in 2009 in the USA which resulted in high levels of growth and cutting this stimulus has reduced growth. Also this stimulus still hasn’t been reduced to 2008 levels so there’s hasn’t yet been a fall in federal spending.

      What is odd about academic economists is they can go through their whole careers being completely wrong, constantly contradicted by the evidence, yet retain a dismissive de haut en bas tone with anyone who disagrees with them.

      How are they wrong? The USA proves that a stimulus does result in high growth, while cutting this stimulus reduces growth. If anything it’s the people who promote austerity and giving the wealthy tax cuts who have been proven wrong.

      Reply The US public deficit was similar in size as a proportion of the economy to the UK’s in 2009 and was brought down more quickly, with cuts in spending by individual states.

  24. uanime5
    Posted May 2, 2014 at 2:00 am | Permalink

    Any examination shows that public spending went up throughout the last four years, more quickly at first, then at a slowing rate subsquently.

    Something that can be achieved by higher tax revenues, more borrowing, or printing more money. Also public spending increasing can result in the deficit becoming small in cash terms if you’re not borrowing the money for this increase.

    This is at variance with the thesis that higher deficits produce better growth, as there was no growth for the first couple of years of larger deficits and faster growth in spending, followed by gr0wth in the later period when the deficit was down a bit and spending under a bit better control.

    Higher deficits only produce better growth if the extra money is invested in the economy. You’ve also ignored that the higher deficits are used to stimulate demand in order to kickstart the economy and are then reduced once the economy starts to recover. So you’d expect them to be higher when there’s little growth and lower after growth has restarted.

    The other side argued that there had been cuts that were too far and too fast in the early years of the Coalition leading to no growth, followed by some relaxation in public spending subsequently, along with monetary stimulus, which led to the expansion we now enjoy.

    Well the UK did have a very slow recovery compared to countries which didn’t try to reduce their deficit. That’s why the USA, Germany, and France recovered faster than the UK.

    The political debate is about how government can best assist the growth of living standards.

    Well you could raise minimum wage and benefits by inflation so they’re not cut in real terms. Ending the bedroom tax and 3 year long benefit sanctions would also result in fewer people needing to use food banks.

    More importantly, the economy has generated a large number of new jobs in the private sector in the last four years.

    However this increase hasn’t resulted in wages increasing for most people and only recently has unemployment started to fall. There’s also millions of people who are underemployed as many of the new jobs have been part time or zero hours contracts.

    The best way for an individual or family to experience an improvement in living standards is to move from unemployment into work, or to move to a better paid job.

    As most of the people in poverty are working for many work does not provide a way out of poverty.

    the sharp upturn in self employment

    Many people who are self-employed became self-employed because they couldn’t find work. They’re also classified as in employment even if they’re not earning any money.

    must mean there are now many who through their own efforts have improved their net income.

    There’s no reason to think this. Unless these people’s income has increased at the same rate as the cost of living has risen they won’t be better off. At present many people are worse off than in 2010 because their net income hasn’t increased.

    The two economists were reluctant to accept that a country does have to avoid excessive debts and deficits, just like an individual or company. They seemed to think there is a free money tree in every state’s back garden which just has to be harvested to make us all rich. They did not accept that if you print and borrow too much one day you run out of other people’s money to spend.

    As long as a country can print as much money as it needs it can’t go bankrupt, unlike individuals and companies. So the UK can’t ever run out of money.

    If the debt is held by a bank owned by the treasury the UK can cancel all its debts at any time, unlike companies and individuals.

    Unlike an individual a state can’t die of old age, so a country can pay its debts off over a much longer period that the average person.

    So states have a lot of advantaged that individuals and companies don’t have so they can avoid the problems associated with debts and deficits far more easily.

    • Edward2
      Posted May 2, 2014 at 1:53 pm | Permalink

      You always seem to want the last word Uni.
      You come onto this site several days late, hit and run and then refuse to answer any responses.
      The idea is to reply to the original article.

      You are therefore nothing more than a heckler on this site

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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