I would add to the OP:

“The irony that Conservative policies of drastic cuts in pubic spending are the exact opposite of what the French and German governments have undertaken appears completely lost upon Osborne, in his rush to deride Gordon Brown with the sort of punch and judy politics his chum Dave promised to do without”

The problem is that recoveries provoked by government stimulus usually run out of steam when the money is cut off – note the Roosevelt recession of 1937-8. Similarly the German “recovery” of the 1930s was based upon an economic stimulus that would have been brought to an end had Hitler not kicked off WWII. There is no guarantee that when private investment replaces state investment it will be invested wherever the state money was previously invested.

Paul Krugman in 2001 suggesting ways to stave off the economic downturn at the time:

“During phases of weak growth there are always those who say that lower interest rates will not help. They overlook the fact that low interest rates act through several channels. For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldn’t you lower interest rates?”

Interest rates were lowered to stimulate the economy. Several years later we have a housing crash. I fear that the current stimulus will simply create another bubble.

George Osborne has pointed out repeatedly (to those who will not hear) that the government’s stance is contradictory. I.e., the FSA insists that banks maintain a specified capital/loan ratio AND that they should lend to businesses.

The result is that banks have had to put up the cost of lending punitively, to cover the FSA’s requirements – and even that hasn’t been sufficient to encourage them to lend to the desired degree.

You also conveniently forget that Brown was borrowed to the hilt in the ‘good’ times, which meant that the economy was ill-equipped to enter the recession – the cupboard was bare.

That is why Osborne is correct to attack the far-left extremist Labour Party’s handling of the economy.

Quite right too.

http://faustiesblog.blogspot.com

Lol @ the idea that The City pays any attention whatsoever to the Fundamentaly Suppine Authority.

However, these are fair points about Brown’s economic foolishness in the good years. We are, however, now into the bad years. A gleeful attack on public spending could well do more harm than good….

“both France and Germany have had far larger such packages than we have”

Anyone got the figures on that? A quick google tells that the German package was about 50billion euro, which sounds rather smaller than our 175 billion deficit this year.

But this is a real request for information. What were the sizes of the three stimulus packages?

Merkel has opposed Brown’s packages. It was not just low interest rates which caused aset bubble but also credit available. Brown based his spend on taxing the City and the housing bubble both which are unsustainable as Cable has pointed out. Cable pointed out the dangers of personal, corporate and national debt in 2003. The FSA allowed Northen Rock to follow it’s disasterous business model.

Both Labour and Tories ignored the bubble post 2002 but Labour just increased spending.

Tim,

Surely you’re not saying that our £175billion deficit is 100% due to our stimulus package, are you? And then implying that the German stimulus was a mere £50billion whereas ours was £175billion?

Because such an implication would be wrong for lots and lots of reasons. I suspect you know that…so what did you actually mean?

“so what did you actually mean?”

That I don’t know what size the respective stimuli were and was hoping that someone who did know would tell me.

“But this is a real request for information. What were the sizes of the three stimulus packages?”

That is what I said, isn’t it?

Wait, is that the same Germany whose foreign minister lambasted Britain’s “crass Keynsianism,” and who Paul Krugman called “boneheaded” because of their lack of stimulus?

http://www.imf.org/external/pubs/ft/spn/2009/spn0921.pdf would seem to be the latest IMF publication on the size of government deficits, and it’s broken down into their discretionary and non-discretionary parts (see the appendix, p. 26). The UK’s stimulus is bigger than France/Germany as a proportion of GDP on every count for the year as a whole, but all bets are off as to which is the bigger relative to the size of the output gap absent any expansion.

#9….that’s one of the reasons I asked (and thank you #10 for the answer) for I’m awaiting the Krugman NYT column telling us why he is still right…..

that’s one of the reasons I asked… for I’m awaiting the Krugman NYT column telling us why he is still right…

I’m nobody’s economist Tim, but are you confident that issuing requests for Mea Culpas is the correct strategy to take at this moment in time?

I ask because the internet has not exactly been buzzing with tear-streaked apologies from the backseat drivers on your side of the aisle who spent the last couple of decades yelling Turn right, you commie, turn right! at the man behind the wheel.

Quite the opposite, in fact – if anything, they’ve spent quite a lot of time attempting to pin the blame for this particular crisis of capitalism on an excess of socialism, despite the fact that the latter has been more or less extinct for twenty years.

“far-left extremist Labour Party”

Can I live in your world please? It sounds much nicer than the real one.

FR – what do you mean? Socialism has been alive and well spending its way into huge deficits for the last decade, and just lowering interest rates when a slump comes along. And when the recession hits, the answer is spend more!

Ok, maybe we shouldn’t call it socialism (Bush was the worst offender by far). Lets just call it big government! Driven by various interests that always demand the government spend more and more.

“I ask because the internet has not exactly been buzzing with tear-streaked apologies from the backseat drivers on your side of the aisle”

Well, some of the people on my side of the aisle (the Austrians for example) are the people who have actually been proved correct. Low interest rates in order to avoid a recession are just going to store up trouble and create a bigger problem later…..

FR – what do you mean?

Well, I thought I meant collective ownership of the means of production, distribution, and exchange, but that’s because I was unaware that the meaning of the word “socialism” had become broad enough to include Thatcherites and Reaganauts.

Perhaps I need to buy a new dictionary.

Low interest rates in order to avoid a recession are just going to store up trouble and create a bigger problem later…..

Fair enough, although I’m sure you know that I was thinking in longer and rather more Greenspanny terms than that.

Well there is collective (i.e. state) ownership of the means of exchange. The state retains a monopoly on money. Without that it wouldn’t be able to control interest rates and hence wouldn’t be able to spur on borrowing whenever some minor economic turbulence threatens an election. So by that definition, we have socialism in finance.

These sort of posts are why I wish I was asked before they get mirrored here – I’ll happily admit that economics is not my strong suit, and I’m not surprised I was probably wrong on France/Germany having larger stimuli – this was quickly written and not properly checked, and didn’t expect it to be posted here. Irrespective, it does still undoubtedly show that our over-reliance on the financial sector has to be corrected, and that’s the very last thing that the Tories are going to do.

The state might print the notes and repurchase the bonds, but it absolutely does not hold a “monopoly on money”.

Sure it does. It can force people to accept payment in its preferred currency. The alternative is explained here: http://www.iea.org.uk/record.jsp?type=book&ID=431

“Low interest rates in order to avoid a recession are just going to store up trouble and create a bigger problem later”

Congratulations, you have just defined the word ‘borrowing’ – but hey, sprinkle the word ‘Austrian’ atop it and it’ll sound like some kind of wisdom…

There ain’t no wisdom like the oldest.

An interesting post but why the nasty title?

Nick

Paul Krugman:

For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldn’t you lower interest rates?”

Why? Because lower interest rates mean that savings and the currency rot against inflation meaning everything imported gets more expensive. The reason why we’ve had a credit crunch can be fairly laid at the door of the excessively low interest rates set by Alan Greenspan at the end of the dotcom bust to “stimulate” the US economy (ie keep it from contracting. Arguably, by not allowing the US economy to not go into a smallish downturn, Greenspan actually made the eventual bust a lot worse.

If a Nobel winner in economics can’t understand this, then G-d help us all.

“our over-reliance on the financial sector”

Interesting fact. We’ve had two major periods of globalisation….1980s to now, 1870s to 1914.

Both times the UK specialised in finance and Germany in heavy industry.

If it had happened once one way, the other the other, we might think it was about policy choices etc. That it happened the same way both times doesn’t of course mean that it wasn’t about policy choices, could simply be coincidence. But it does strengthen the idea that, if both times we’ve had a surge in the international division of labour and specialisation, that the division and specialisation go the same way, that the UK might actually have some comparative advantage in finance, Germany in heavy industry.

My bet is that it’s the legal system but that’s not really the point. We know that the division of labour and specialisation are what increase wealth in general. So why should we stop doing what we’re good at?

Tim Worstall. Bismarck’s policy of Blood and Iron was to develop the industrial capability to support the military. The ability to abstract nitrogen from the atmosphere to produce nitric acid was important for the manufacture of explosives. Germany did not have access to the guano deposits of S America. Steel able to cope with high pressure and temperature was need to manufacture cannons. The success of Prussia in the Franco Prussia showed their success.
The decline in agricultural income from 1870 to 1914 in the UK, resulted in the aristocracy taking employment in the City rather than moving into trade and technology. In Japan, post 1870 The Samurai families moved into trade and technology.

I have heard that the Great Exhibition of 1851 was partly instigated because Prince Albert was concerned about the poor quality of much of manufacturing and waned to boost the quality. The lack of universal primary education in 1870 meant much our workforce were very poorly educated and unable to use the more advanced technology available in Germany post 1870. There is the argument that the UK started losing the tehcnical/manufacturing race to Germany and the USA from 1870.

The UK financed much of the development of the World post 1870, especially the USA . The inability to create advanced technical education meant professors had to imported to teach industrial chemistry at The Royal College of Science ( Imperial). In 1914 , the UK had to import dye from Germany via Holland for our uniforms. The UK has been very good at advancing our scientific and technical expertise ( look at the number of Nobel Prizes and patents we obtain) but we have been poor at turning into manufactured goods people wish to buy. The joint masters in car design between Imperial and the RCA produces large numbers of graduates snapped up by foreign companies. One area we lag far behgind is in production engineering; designing constructing and operating the equipment used in factories to make the goods.

The book “Spitfire ” by leo mckistry demonstrates all our strengths and weaknesses. Mitchells design of the Spitfire combined with the Rolls Royce Merlin engine, perhaps produced the greatest machine of all time- the almost perfect blend of function and form. The production of the Spitfire was a shambles, apart from Chamberlain who realised the importance of needing an aeropalne to defend the UK from bombers.

If the UK could greatly increase our production engineering /manfuacturing capability, I have confidence we still have a unique design capability. The Japanese marvel at our innovative design skills.

If we could increase our manufacturing from 15 to 25% of the economy by developing manufacturing in the former industrial parts of the UK; we could greatly increase social mobility, balance N and S of the UK, reduce our reliance on finance and property.

Fuck me, you know, all these years of being a socialist and thinking the world was moving in the other direction to me. And had I but known it, we had socialism all the time.

In other libertarian news, Everton beat Arsenal this afternoon as their late goal proved they were in charge all the time.

“The book “Spitfire ” by leo mckistry demonstrates all our strengths and weaknesses. ”

Grandpa worked on that program as a testing pilot so of course that argument has resonance.

“The UK has been very good at advancing our scientific and technical expertise ( look at the number of Nobel Prizes and patents we obtain) but we have been poor at turning into manufactured goods people wish to buy. The joint masters in car design between Imperial and the RCA produces large numbers of graduates snapped up by foreign companies. One area we lag far behgind is in production engineering; designing constructing and operating the equipment used in factories to make the goods.”

But not that much. For, seriously, who gives a shit who makes the damn stuff? Or designs it, finances it, invents it or carts it away in a handbag when it’s crocked?

What we do care about is that we get the maximal amount of “stuff” from the resources available to us. And if getting that maximal amount means that Hans and Wilhelm build the cars, some yodeller build the machines to make the cars, Gideon finances the car making and John Smith designs them then great, just absolutely great. What we care about is how many cars of what standard we have to drive around on the roads.

Seriously. Who gives a shit about how or through whom they get there?

Just as the local division and specialisation of labour makes us all richer (”more shit to be consumerist about”) so does the international.

What about this point is so difficult for people to understand?

The absence of “us all” getting “richer”, Tim. It’s more obvious theoretically (especially to the people who actually are getting richer) than it is practically (especially to those large numbers of us who ain’t).

Tim Worstall. Having lived in the industrial parts of Britain in the 80s and 90s; driven through mile after mile of economic desolation, I would like people to obtain well paid, relatively secure jobs which provided satifaction and enabled them to regain their confidence and self -respect. We are a small country and moving people from the former industrial parts of the UK to SE England is not feasible. Therefore we need to develop manufacturing in the old industrial pars of the UK. As high tech/value manufacturing is not dependent upon proximity to raw materials, then there is no reason why industry cannot return. Design requires a few number of able people; it is the manufacturing which will reduce the unemployment and increase peoples salaries.

“The absence of “us all” getting “richer”, Tim.”

We’ve been trying this division of labour stuff for about 250 years now. Yes, those of us who have been partaking have *all* got richer.

It would take a certain ignorance of the facts to claim that we haven’t.

“As high tech/value manufacturing is not dependent upon proximity to raw materials,”

Ahhh, and there’s the rub. What high tech/high value things to manufacture do you have in mind and, as a supplementary question, if there is good money to be made by making these things, why isn’t someone already?

33. The iPhone designed by a Brit. Dyson. British expertise in film making but the City will not invest in production. In Germany many of the banks have holdings in the manufacturing companies and prepared to invest for years and makes them difficult to be bought. Banks do not supprt R and D . Research is the cheap part, the development costs money .

For example there are approx 100,000 employed in the Grand Prix industry based around Witney and Silverstone. Since 9145 much of the Brain drain has meant craftsmen, scientists and engineers moving largely to the USA which has boosted there industry but not benefitted the UK. I remember lunching with a lady whose British husband was in the biotech industry outside Chicago earning many times more than in the UK.

Many writers have pointed out that in future ideaopolis’s will dominate industry – silicon valley /berkely, calltech and stanford. The universities of Lverpool,Manchester and Leeds were used as spring board , for the M62 corridor, Durham and Newcastle in the NE, Warwick, Aston and Birmingham in the Midland, Bristol and Bath in the SW, Glasgow and Strathclyde in Glasgow, Edinburgh and Heriott Watt in Edinburgh, Cardiff and Swansea in S Wales , Leicester and Nottingham in E Midlands. Manchester U with A Turing and Ferranti could have started the World computer industry in the valleys of Lancashire in the 1940s! pharmaceutical industry is largely based in the home counties and uses it’s contacts with Oxford, Cambridge and Imperial.

In short , finance is not interested in the long term. The Tory party is the is the party of finance . Labour and the unskilled /semi skilled unions will not support the deveopment of technology which reduces employment of the un and semi skilled. Consequently many of our designers go overseas and /or sell their patents to foreigners or have the products made undr licence by foreigners so reducing income to teh UK.

Really interesting – thanks all for the posts. This is a great forum for proper debates rather than just rants.

Question: Are there any well-recognised ways for getting politicians (running on a 5 year electoral cycle or something similar) and finance or indeed the unions to think longer term?

“Are there any well-recognised ways for getting politicians (running on a 5 year electoral cycle or something similar) and finance….”

Corporations themselves do think longer term. The oil majors for example have 25- 50 year planning horizons.

Now, how we align politician’s incentives in quite the same way is a difficult question….

@36 Fair point about oil majors although I suspect smaller companies don’t/can’t think so long term.

I suppose only a heriditary system of government would think truly long term! (And then only if it decided to be responsible.)

Tim, 11:

… and here it is: http://krugman.blogs.nytimes.com/2009/08/15/perspective-on-the-eurobounce/

On the comparative sizes of fiscal stimulus among the larger EU economies, try this report with bar chart in: The Economist of 15 January last:
http://www.economist.com/world/europe/displaystory.cfm?story_id=12947570

The German stimulus is quoted there as having been increased to Euro 50 billion (USD 67 billion) – which is substantially larger than the fiscal stimulus in Britain (of UKP 28 billion) as announced in the Pre-Budget report on 24 November 2008.