Yeesh Sunny, 3 from 3.

1. So the biggest economy in Europe believes that the British fiscal stimulus policy is deluded (not fiscal stimuli in general – just ours) because the British economy is already running an 8% deficit. This is pretty much what the Tories have been arguing, to derision from the Government. Wouldn’t you acknowledge that?

2. It’s Government inconsistency in operation here. Are capital intensive projects the best way to get us out of recession? That’s what the Government has told us, and said that opposition to this idea is delusional and at odds with the rest of the entire world. If so, why are they cutting spending on captial intensive projects? It doesn’t make any sort of sense. Painting this as the Tories being inconsistent is just bizarre.

3. Well Iceland must be delighted then. So must Zimbabwe. Anyone with even a quarter of an economic brain should realise that a falling currency is only a benefit up to a point. A continually falling currency has a deeply deleterious effect on public and private finances. As the pound reaches parity with the euro and continues to fall against the dollar, it’s going to get more and more difficult to borrow money on the international apital market. Plus, you might not have noticed this, but Britain imports significantly more than she exports…

Re: your third point..

Yes, a sinking currency helps us out in a recession (though not as much as it might, given our limited manufacturing base). Yet that does not alter the fact that the rapidity and depth of that sink is one of the clearest indicators there is of the severity of the recession we are experiencing, relative to other countries. A falling pound should not be ‘celebrated’. That would require celebrating recession, and our relative economic weakness.

You can add to the list Cameron’s citing of Trichet’s comments on deficits – conveniently ignoring that the three percent rule applies (If I recall correctly) to the countries in the Eurozone – which Cameron says he’ll never join.

Re. defence ‘cuts’ – of course they’re going to hang on to defence (esp. Trident) – the Tories probably still think that by culling benefit claimants, axing the aid and Arts Council budgets and depriving the Guardian of the revenue from the job ads in the Society section, they’ll save the world with a tax cut thrown in as a bonus.

I do hope someone in Labour is making a list and checking it twice: if Darling wasn’t so dull he’d have mullered Osborne by now.

I do hope someone in Labour is making a list and checking it twice: if Darling wasn’t so dull he’d have mullered Osborne by now.

I suspect Mandelson may well make Osborne a bit of a special project after the whole yacht business.

In which case, you almost have to feel sorry for him (Osborne)…

…but only almost.

Ah yes, those “half-witted” German ministers, with their budget surpluses and 11% domestic savings rates.

How dare they lecture the great genius Gordo, with our 8% deficit and zero savings.

How very dare they.

So a falling pound should be celebrated, not used as an economic football when you have nothing intelligent to say, Osborne.

Oh come on this is schoolboy stuff. The currency is a vote of confidence in the economy , helps exports yes but 80% of our trade is internal and it points to the day when we cannot sell any more UK vouchers . I cannot say I am desperately concerned about what anyone abroad has to say about us although as the Germans are the ones who would be paying their views are by far the most significant in the EU.

This means one thing .Brown is forcing interest rates down lower than they should be ( whatever the consequences) and timing it with a £12 billion unfunded tax giveaway with a view to a GE early next year . This sort of destructive manipulation was suppsed to have been behind us . We should have known better.

God help us all if he gets away with it

“2. It’s Government inconsistency in operation here. Are capital intensive projects the best way to get us out of recession? That’s what the Government has told us, and said that opposition to this idea is delusional and at odds with the rest of the entire world. If so, why are they cutting spending on captial intensive projects? It doesn’t make any sort of sense. Painting this as the Tories being inconsistent is just bizarre.”

Actually it’s perfectly consistent. The project still starts on time, but it takes longer, guaranteeing job security to construction workers for longer AND helping the MoD make cuts in the medium to long term. That’s not cuts right now, which would be inconsistent with the economic stimulus, but cuts at the time when Brown and Darling have told us their focus will be on paying back the amount they’ve borrowed. So it’s perfectly consistent with the approach they’re taking. The Tories, however, are totally inconsistent since they want us to make cuts now AND in the future.

Good job no-more-bust Gordon has proved so uncannily accurate a predictor of the future isn’t it Tim what with all these fine calculations of when we will be paying our 8 % deficits back. His calculations go no further than next June and the career of one Gordon Brown.

Not entirely convinced by that logic tim f. By spreading work over another year, the overall demand for labour will be reduced – leading to an increased likelihood of job losses. That’s why in all the rhetoric about this, the Government has been talking about expediting big projects, and not delaying them.

Besides as to the Tories being inconsistent, politics is famously about priorities. Your logic suggests that unless they want to cut every project simultaneously they are hypocritical to propose spending cuts. It is perfectly legitimate to propose overall spending cuts while at the same time opposing cuts in a defence budget that is acknowledged to be over-stretched already.

Tim J – I’d accept that logic if the Tories were honest about where they will make cuts. It’s one thing to say “we’d make enough cuts in this specific area that we can raise defence spending and still have a budget surplus”. It’s another thing to say “we’d make overall cuts but we won’t tell you what they are – however we will tell you exactly where we’d raise spending”.

When did the govt say capital intensive projects are the way forward? It has actually focused on consumption .

Oh please, comparing us to Zimbabwe is lame. The pound isn’t in freefall.

Have you also considered it might be falling because the fiscal stimulus doesn’t go far enough?

Sunny you will have your little joke won`t you. Even at the most optimistic appraisal of the economic outlook the government ( not me ) hopes revenues will recover by 1013/14. If you look at what happened in the early years of Blair you will see the pattern . By this spectacularly optimistic reckoning we will double the national debt a feat never before achieved in peacetime

It is only as I reach the wisdom of a man in his 40s that I see how my early life through the late 60s 70s was still under the long shadow of debts incurred in the war. The dark dank sectional fighting the grim Callaghan period , the craven apology of Heath and the rest. This is what lies ahead You are collecting your bonus now and letting our children pay the bills. The immorality of it verges on satanic …you are not actually possesed are you ?

Sunny – I’m sorry but your grasp of economics is weak to put it politely

1) The fact that a quasi socialist government disagrees with socialist Keynsisn economic policy is mildly amusing. But it does counter Brown’s bold assertion that his “plan” (which is King Knut like in its delusory attempt to stop the unstoppable) is going to save the world. A GCSE economics student could tell you why demand management never has, and will never work in the long term. I can’t be bothered, but think of it as a man who loses his job chosing to get another credit card and run amok with it, rather than cut back on his expenditure.

2) Most defence spending is capital spending, the government saying this is now going to be delayed is a flat contradition of their stated policy of bringing forward capital projects. Don’t understand how you can interpret in any other way

3) A sinking currency is indeed good for exports but has the distadnateges in that

a) We export the square root of bugger all nowadays, so the actual impact will be minimal

b) We import a lot, a falling pound makes imports more expensive, reduces demand and potentially imports inflation. Inward investment will stop and confidence in the UK economy will dwindle. Worse than that, it makes getting out of this hell-hole for a holiday, more expensive. On balance, for the UK, a falling pound is a BAD thing.

You might be interested in Krugman on the German economic policy

oh, and Sunny, what the hell is “(supposedly left wing)” doing there? What, you want newspapers to be ideological echo chambers? I would like to see more right wing commentary in left wing newspapers, and vice versa.

MM – again, it is the completion date that is to be delayed, not the start date. In some dockyards the preparation, order of materials etc has already begun.

It’s certainly not an exact comparison – but it does rather provide a counter-example to ‘falling currencies are an un-alloyed good for the economy, as anyone with half a brain knows’. They aren’t. It’s a matter of degree, and after a certain point more harm is done than good. The pound has lost more of its value against the dollar than it did on Black Wednesday. It’s approaching parity with the euro. Whether it’s in freefall is more open a question than you appear to believe.

Besides, I haven’t noticed you addressing the point that since we import more than we export, the exchange rate differentials are going to hurt more people than they help.

Wow, Sunny. You appear to have been triangulated!

Weird that you would draw on Bush’s support for the stimulus considering his record on economic policy.

tim f – and your point on precise budgeting goes to Danny Finkelstein’s argument that it’s effectively impossible for an opposition to do this with any credibility. Look at 2005, where Howard’s argument that he could cut £35bn from public spending was met by Gordon Brown’s assertion that such cuts could only ever be met by slashing spending on schools’n'ospitals.

In the PBR, Darling announced cuts of…£35bn, all apparently without affecting frontline services. It might look weak to say that there is clearly room for spending cuts but until we get into power we won’t know precisely where and how to do it. It’s also a statement of a fairly basic truth.

It might be a difficult thing to do but it’s still fair game to attack them if they’re claiming they’ll reduce spending but their only announced intentions point to the opposite.

Don’t know where you get the idea that the Indy is ‘left-wing’ from. Yes it was anti-Iraq and is pro combatting global warming; it is a defender of civil liberties and opponent of ID cards. But, as far economics goes it is as right of centre as they go. No-one could accuse Hamish McCrae or Jeremy Warner of being closet Keynesians! It’s regular columnists include Bruce Anderson and Dominic Lawson, with regular contributions from Blair’s apologist-general John Rentoul. Mary Dejevsky could hardly be confused as a pinko leftist and Johan Hari and Deborah Orr both mange to retain a ‘left-wing’ flavour (mainly in the case of Johan, by constantly reminding his readers of the fact) while supporting such ‘radical’ options as invading Iraq, tuition fees, workfare and rolling back the welfare state. Mark Steel is the token comedy lefty but, overall, any idea that the Indy is ‘left-of-centre’ only underlines how far right the media has shifted.

Sunny,

“Have you also considered it might be falling because the fiscal stimulus doesn’t go far enough?”

Sure. It doesn’t go far enough inasmuch as it won’t stop the country from sliding into recession. However, that is only one side of the coin because today’s stimulus must be paid for with tomorrow’s tax hikes (or fiscal inhibitor if you will – the Government is not keen to boast of the size of the fiscal inhibitor it is storing up for 2010).

It is perfectly posible for investors to think that, although the stimulus is too small to save us, it is also too costly to for the future economy to bear.

The game isn’t zero sum of course. If the Government can borrow cheaply then it makes sense to stimulate the economy to keep it going because the extra economic benefit of not having a deep recession (more people in jobs, paying taxes etc) outweighs the interest on the borrowing. That is the Keynesian argument for a big stimulus. But it can also go the other way.

Borrow too much now on the basis of figures that investors don’t believe (and the Treasury’s growth estimates have been too optimistic for years – even in the good times) and they will become reluctant to lend – so the cost of borrowing goes up. The higher the cost of borrowing goes, the more economic growth the economy needs to deliver in the short term in order for the strategy of borrowing in order to stimulate the economy to break even.

But the motors of the British economy were financial services, the housing market and the ballooning debts that went with them. As these three factors go into reverse, the prospect of borrowing our way out of the slump look more and more remote and the tax bill for trying gets bigger and bigger.

The worse this gets, the greater the risk of default and the higher the cost of borrowing goes. Which, you will note, creates a vicious circle.

And just to give the Treasury one further headache, the nature of vicious circles is that, once initiated, the cost of extricating oneself gets higher and higher. The goal is not therefore, to be as bold as possible and to sail as close to trouble as one can without getting caught but to ensure that the vicious circle never gets set up in the first place.

Tim J – I think whoever is in power there will have to be slashes in services . There is very little room for manoeuvre on tax revenue and borrowing has its own limits. We have a future of European tax levels and US services.
This has never been about Friedman v Keynes, both have an insight but Keynes never suggested you build up debt in a boom .From Labour` point of view this is all about putting a sugar coating of rhetoric on the giant smelly turd that is the last ten years in which spending has got out of control.. They may get away with it until the bills come in which is why everything points to an early election .Look at the quick shifts right on immigration welfare and other vote losers . Look at the light legislative load. Brown is going to for it and he knows he had better be quick .Sunny talks about Policy but this has ceased to be anythiing that could be dignified with the name .

‘A GCSE economics student could tell you why demand management never has, and will never work in the long term. I can’t be bothered, but think of it as a man who loses his job chosing to get another credit card and run amok with it, rather than cut back on his expenditure.’

But that GCSE economics student might not have reached to module on the ‘paradox of thrift’, or grasp the fact that one person’s a spending is another’s income. Of course, if I’m in deficit and I cut my spending I’ll eventually get back in balance – but, if everyone does that… ?

And whatever the merits of a fiscal stimulus per se, the Germans are right to pour scorn on the VAT cut as the main method.

Still, glad to see that Sunny appreciates the value of having currency and interest rate flexibility….not available within the eurozone….hence Greece is rather under pressure…

What a disgusting thing to say Mr Hundal. Have you given a moments thought to those British companies that rely on imports before you declare that we should all be dancing in the streets about the crashing pound?

http://www.torybear.com/2008/12/liberal-idiocy.html

Chuck H – and an A-level student might have heard of Ricardian equivalence whereby people save any temporary tax cuts because they know they will be hammered later…

Too true Chuck H,

If we all had money and we irrationally withheld it then the Government would be right to ask us to spend it and maybe even to force us to spend it (by borrowing the money, spending it and then taxing us later).

But if the level of people’s spending was irrational to begin with then it is daft for the government to ask them to go back to spending it at a rate that could not be sustained. As I have pointed out elsewhere, the net increase in personal (non-mortgage) debt 2007-2008 represented 1.5% of GDP. Stabilising that debt alone would scrub a huge chunk out of the economy (because the £1000 you spend on the plasma gets recycled into the economy many times as the shop keeper pays his rent with it, the landlord buys his groceries etc.

The Germans have traditionally been very sensible when it comes to monetary possible. I wouldn’t write off their opinions so quickly.

The Germans have traditionally been very sensible when it comes to monetary possible. I wouldn’t write off their opinions so quickly.

You’re fucking joking, right?

The Germans have been a joke for over ten years, having only turned a corner in ’08. Individual finances are much healthier than the UK, but to claim that Berlin knows what it’s doing is rather odd.

Also, it always makes me giggle when people rant about economics with such certainty – as if they’re talking about an exact science.

Economics threads are always the most fun to follow. The dicks are always swinging.

Maybe…but who is laughing now?!

ie the ten years of “growth” much of which has been shown to be a debt-fuelled illusion?

Nice to see Aaron has been helping to prop up the brewing industry this afternoon. Very public spirited .

“The Germans have been a joke for over ten years, having only turned a corner in ‘08″

A joke in what sense?

Schröder ran significant budget deficits for a long time – much to the chagrin of German industry and the Bundesbank. He even proposed changes to EU law as Berlin was falling constantly foul of the 1997 Stability and Growth Pact.

Merkel has balanced the budget this year, although it’s unclear as to whether she can in ’09 when exports cool.

In fairness to Germany, its large ageing population is a severe handicap.

Significant budget deficits eh? Disaster! Of course, these were, what, 3-4% rather than the 8-9% we’re about to experience.

The German economic psyche (pseud alert) has never really recovered from the hyper-inflation of the 30s – re-inforced by their experience in the late 70s when they went in for a little fiscal loosening and nearly went under again. That’s why they’ve tended to err on the side of monetary rectitude, missing out on the booms, avoiding the worst of the busts.

Hold on Tim.

I’m not defending Brown. I think he’s a charlatan, and has been bullshitting us for a decade.

Get your elbows in.

“but think of it as a man who loses his job chosing to get another credit card and run amok with it, rather than cut back on his expenditure.”

It would be quite rational for a man who lost his job to get a credit card to help him survive through unemployment, provided he expected to be in another job reasonably soon and then paid the debt back once he did get another job.

The problem with being a GCSE economics student is that you’re taught simplifications designed to get you to pass an exam. Once you do your degree you realise that matters are far more complicated, and you stop pretending on internet forums that people who disagree with you are merely ignorant of economic theory.

Yes, I read Osborne’s insane rant in the Indie. He starts of by trying to use Browns, ‘saving the world.’ Anybody with half a brain knows this was a slip of the tongue, but has now apparently become what Brown really meant in Tory land.

Still, highly amusing seeing the Conservatives sucking up to the Germans. It’s like the 1930’s all over again. No comment on the fact that the German govt is coming under attack by many Germans for their do nothing stance.

By the way Sunny, why don’t you do a piece on the revelations coming out of Wales about politicians claiming ludicrous amounts of expenditures. The Tory leader in Wales is in big trouble after having his bathroom done up at tax payers expense. Tories buying Ipods and flat screen TV’s costing £1000 a throw. One Tory bought 2. Another Tory spent £1000 on a flat screen TV then lost her seat. The Conservative party won’t comment on what happened to the TV she owned.

Quite interesting considering Cameron’s attack on welfare scroungers.

Once you do your degree you realise that matters are far more complicated, and you stop pretending on internet forums that people who disagree with you are merely ignorant of economic theory.

.Endless economists with endless letters after their name backed Brown up on his absurd no more bust theory , the entire profession should be observing a period of penitent and humble silence .As for the borrow your way out of trouble theory , well it depends . In our company ,( of four ), we have hacked off expenses , ruthlessly rethought everything , worked harder and paid ourselves less. That works and without it you cannot know if you can ever pay any money back so borrowing would be madness.
Continuing to waste money , which is what Brown is doing, seems to me to be close to the worst thing we could do given we are already over borrowed going into a recession .I cannot and will not believe that value is not at the heart of all this and ignoring supply entirely defeats all sense.

“Sunny – I’m sorry but your grasp of economics is weak to put it politely

1) The fact that a quasi socialist government disagrees with socialist Keynsisn economic policy is mildly amusing”

I stopped there. Brilliant, absolutely brilliant.

Oh dear… some people still buy the old Milton Friedman line that fiscal pump-priming has no impact whatsoever. This, from a man who’s central thesis was that financial institutions should be left alone and the Federal Reserve should never have been conceived. I’m sure the US financial companies are thanking him now for that piece of insight.

Um, Sunny? That directly contradicts most of what I’ve read on Friedman’s ideas. Specifically, borrowing money to keep the banks in liquidity and able to lend was what he got the nobel prize for, and it’s exactly what Brown is now doing.

He argued the Reserve needed replacing, because it had palpably failed, but unless you’ve read something that I’ve not found,Friedman was specifically in favour of the basics of Brown’s current policies. He also said that in times of deep recession Govts should ensure the money supply continues to expand.

I’ll admit I’ve not read huge amounts on Friedman (yet), but all the reading I’ve been doing on economics of late (last year or so, it’s an important field I don’t know enough about) says that what Brown is currently doing is very much along the lines of Friedman’s model.

That his ideas were miss applied, co-opted or barely implemented by a bunch of social conservatives who barely understood what he was saying (Thatcher most certainly never understood the difference between a liberal market and ‘the investment markets) isn’t a reason to dismiss him, Brown certainly hasn’t.

Friedman’s thesis was specifically that financial institutions should not be left alone in time of depression, and that the failure of the Federal Reserve to act prolongued the Depression.

The big problem in the US financial sphere was consolidation into big corporations combined with lack of new companies entering the field to compete effectively. Oligopolies and cartels, especially Govt mandated in the way that Mac and Mae were, were the root cause of this crisis.

You do yourself and your arguments a disservice by using Friedman as a bugbear to blame the worlds ills on, he wasn’t what you think he was, and most certainly wasn’t what the politicians who proclaimed him without understanding him wanted him to be. He was, like Keynes, Mill, Ricardo and Smith a brilliant economist whose ideas have all been built on. blaming a theorist for the actions of a Govt is nearly as bad as invading a small country because God tells you to, it misses the point entirely.

I like this little metaphor:

The Brownite conceit in this crisis has been that of the experienced captain steering the ship through troubled waters, so that when the iceberg hit and water started to pour in through the lower decks, he could say with confidence: “This way to the lifeboats”.

Having scrambled overboard and apparently to safety, the passengers may be starting to realise that the lifeboats, too, have sprung holes.

From Iain Martin in the Telegraph.

“Endless economists with endless letters after their name backed Brown up on his absurd no more bust theory , the entire profession should be observing a period of penitent and humble silence”

That’s a reasonable view of the profession, but its a bit hypocritical if you hold that view and then try to argue from authority and pretend your opponents are ignorant of economic theory – which has tended to be a common rhetorical tactic of conservatives and libertarians online. In this thread alone there are several comments that to all intents and purposes accuse Brown of economic ignorance because he is pursuing a policy they disagree with. Its a view that is clearly absurd.

“Once you do your degree you realise that matters are far more complicated, and you stop pretending on internet forums that people who disagree with you are merely ignorant of economic theory.”

True-ish, although I find that if anyone cites GCSE economics as a meaningful explanation of anything, then assuming that they are entirely ignorant of anything beyond that is a reasonably effective rule of thumb.

@ John B: It does seem to be another of those fields where the more I learn the more I realise how little I know. Then I realise how much more I know that so many otherwise informed people and get very scared.

I think I now understand more economic theory than the entire Tory front bench, which is just WRONG, damnit. I am of course completely outclassed by the Lib Dem front bench, even if you ignore Cable’s PhD.

I think I now understand more economic theory than the entire Tory front bench,

It has nothing to do with economic theory except at the most basic level . There were growing concerns about the extent of debt in this country for a long time before we got into a position when we needed to borrow far more . Why ? Ask Gordon Brown whose 40% rule was supposed to apply over an economic cycle There is nothing the Conservative front bench believe that he has not professed for ten years .That economic cycle is going to be about a fifty years one now. If you remember back to Major period and if you look at the debt tax receipts etc. from that period coming out of recession put perilous state was entirely predictable . It is also obvious that heavy debt will put pressure of interest rates which , at some point will have to rise . Brown has no choice . He cannot raise taxes and even if he did he cannot get revenues in this break with what he has himself said has been forced upon him by his overspending and political inability to cut public sector spending .

What frustrates me listening to this baloney about Keynes is that it is such a transparent lie , and afalse argument set up bty the New Labour spinners .I suggest you look a bit harder at the facts before you start worrying about economic theory. Friedman andKeynes both have insights that are broadlyaccepted across the spectrum, . That is not where we are now and pretending it is insulting New Labour spin. The decision now is to what extent it is wise to borrow still further given world class deficits which cannot be cut for years .The answer to that is obvious and you do not require “theory” to see it . Just the ability to retain Information .

I doubt you understand more economic theory that the entire Conservative front bench’s pet goldfish

Good work Mat. I look forward to your first-class honours from Oxford then, given that that is what Cameron got for a degree in Politics, Philosophy and Economics. Like William Hague, who also got a first in PPE. Like David Willetts, who also got a first in PPE. Or Alan Duncan who was a Kennedy scholar at Harvard. Or Phillip Hammond, or Oliver Letwin or Damian Green…

I’m sure there’s a lot of things to criticise in the Tory front bench, but their lack of theoretical knowledge of economics is decidedly not one of them.