There is validity in this analysis, although pumping endless money into the economy without benefit analysis is not one of them. Useful infrastructure projects, for example the Hoover Dam in Depression era USA were of benefit, but can we really expect this from a spiteful Labour Government on its way out?

Speaking of the Government, anyone angry over the illegal wars of the Labour Party considering direct action, you could do worse that considering George Monbiot’s offer in The Guardian. He has set up a fund to reward the person who affects a citizen’s arrest on Tony Blair. A good idea, but he’s aiming at the wrong person.

Gordon Brown is still the Prime Minister and is equally culpable for what happened and is happening in Iraq. Affecting a citizen’s arrest on Gordon Brown would send a more powerful message.

The article gives clear instructions on how this can be done in a lawful manner.

Although I agree with part 2 about interest rates, it is worth remembering that it was the Labour government that devolved authority for that away from the politicians – so for once, you can’t blame them for it.

As to the other points.

There is actually nothing wrong with an economy with a large financial sector, so long as it is regulated correctly. The system introduced by the current government spectacularly failed to do that, largely due to confused roles and responsibilities.

As to the fiscal stimulus, there is some evidence that government spending had a marginal effect, and the bulk of the calming measures came from the Bank of England “printing cash” – so we racked up the debt to negligible benefit.

However, even if the fiscal stimulus did work, and if more would have been better – who pays off the debt? Will those who benefit pay it back – or will our great grandchildren still be paying off debt we incurred?

I have no problems with the government spending money so I have a good time, but I am wary about the ethics of expecting your grandchildren to pay for my lifestyle.

On the final issue about jobs, while it is true that work subsidies can lower unemployment in the short term, it leaves so-called zombie companies functioning and a drain on the effective businesses that come through the recession. The short term is nice, but the long term impact is likely to lead to even higher unemployment than before.

In short, you come up with a series of plans to sort out the recession today – but at a considerable cost to future generations.

Why is that a good thing?

“And, more worryingly, is now starting to lag badly behind some other equivalent economies.”

Now? NOW? What do you mean ‘now’? Germany, France and pretty much every other G20 nation came out of recession months ago – our international embarrassment was not born yesterday, it was merely exacerbated.

bulk of the calming measures came from the Bank of England “printing cash” – so we racked up the debt to negligible benefit.

I don’t see how you can separate out the benefits of printing cash from the benefits of fiscal expansion (debt accumulation). After all, what’s the counterfactual …. debt increases are mostly automatic (lower revenues, higher expenditures) … if you want to say we didn’t benefit from that, you have to compare it to an world in which we cut expenditures in line with revenues. There’d have been riots!

your broader point … that it’s theoretically possible to stimulate the economy in the short run, at a too great cost in the long run (would anybody here trade 500,000 lower unemployment during the downturn (today) for 250,000 higher unemployment after we have recovered (say for the next decade?)) is often forgotten. It really might not be worth throwing money at problems today if this creates too greater problems tomorrow. But Lord knows how you even begin to assess whether that’s the case … it’s not obvious that any of these proposed measures have long-run implications for employment or output.

Thought people had been warning that the terms under which Labour gave away power to the Bank were very much 1980s concerns – the key duty was to fight inflation, so blaming the bank for keeping rates too high in 2008 is to blame them for ding what they were instructed in law to pursue as their main goal.

The government deserve credit for the manner in which they acted quickly to shore up the banks in the days following the collapse of Lehman. But that doesn’t get a pass out of the responsibility.

In political terms, Brown deserves the opprobrium simply because you can’t take the credit for supposedly good years and duck out of responsibility when it turns out bad. But he also deserves it actually because he was at the heart of the misguided economic policy he single-mindedly pursued for 9 years.

All roads for this mess lead to Brown. He devolved power to the bank on monetarist terms; he encouraged the city to grow to the point where the UK economy was over-reliant (leaving manufacturing pissing in the wind, in interest rate terms). He was happy for the unspoken part of this – house price inflation – to cover the problem with new labour lack of redistributive politics and economics.

Thought people had been warning that the terms under which Labour gave away power to the Bank were very much 1980s concerns – the key duty was to fight inflation, so blaming the bank for keeping rates too high in 2008 is to blame them for ding what they were instructed in law to pursue as their main goal.

This is very true. The remit of the MPC is specifically and exclusively to direct monetary policy to maintain inflation at less than 2%. In 2008, inflation was running above their target rate – King was writing letters to the Chancellor to explain it – and arguing that they should then have cut interest rates further is to argue that they should ignore the sole terms on which they exist.

There is actually nothing wrong with an economy with a large financial sector, so long as it is regulated correctly.

Have you ever encountered the aphorism “don’t put all your eggs in one basket”? I would argue that it’s not a question of services vs manufacturing, or public vs private, it’s a question of having sufficient diversity and resilience in the system. Over-reliance on any one sector magnifies risk – or rather it magnifies the potential impact of risk. We need to diversify our societal investment portfolio.

Ironically, although interest rates for business do appear to have been high, for consumers throughout the period from 2001, I am pretty sure that they were too low – and that fed both the consumer credit boom and the house price bubble that occured at the same time.

With hindsight, would it have been better to allow a smaller less damaging recession in 2001/2 – that many other economies suffered at that time – rather than feed the asset price bubble in property by ‘adjusting’ the trend growth rate, changing the measure of inflation and going on a spending spree that we have yet to see any real effort to curb?

Splitting the BoE.

It is apparent that growth is being squeezed by lack of investment and capital resources coming from state owned, and non state owned financial institutions.

We need a State run National Business Bank, to spark up capital requisition, to allow businesses to grow, ensuring a speedy recovery to the current economic crisis.

10 – picking winners. This all seems so familiar.

an alternative to having state-owned banks that lend money to firms that private sector banks are unwilling to lend money to*, is simply to have something like a Ministry of Works**, with a queue of worthy projects (say, transport and energy infrastructure, energy efficiency, urban renewal, housing stock renewal), that can be accelerated during downturns and decelerated during good times.

* which any left winger with a realistic view of the workings of government combined with an understand of what it means to destroy capital, ought to take a skeptical view on (I’m not saying the government can never “pick winners”, especially if it designs its intervention cleverly and operates in certain sectors with public good characteristics that complement the private sector (some good reading on that here)

** or devolved versions run by councils, whatever

6. – I might be wrong, but I think David Blanchflower’s argument for lower rates was that inflationary pressures were temporary and forecast to reduce significantly (as they did) and that it was therefore unneccessary to keep rates high. And in fact reducing rates was neccessary to attempt to maintain inflation around the target – don’t forget the target isn’t “less than 2%”, it’s “as close as possible to 2%”

The government has proved, yet again, that the allowing the pound to collapse, while fiddling with the interest rate, strategy for getting out of trouble does not work. It’s never worked, not since Harold Wilson ranted on about “the pound in your pocket,” but the cream of British punditry still proclaims its genius.

The fact is that we’d have been out of this a lot faster if we’d had the collective wit to join the euro. We should join it now.

10 – picking winners. This all seems so familiar.

I’m generally not in favour of state intervention, but I hope you’re not trying to pretend the financial sector has been great at picking winners either.

“even though everyone not in thrall to the efficient markets hypothesis”

What on earth is that doing in there?

Adam, really, you’ve been talking to Richard Murphy too much. He keeps spouting off about how the EMH claims that “markets are efficient” and as we can show that they’re sometimes not then the EMH is untrue.

At other times he seems to think that it says that the EMH claims that markets will get the “right price” and as we’ve just had some lurches in prices thus the EMH is not true.

But that isn’t what the EMH says at all.

What it does say is that markets are efficient at processing the information available to them.

That’s all. Nothing else. In a market system prices will incorporate all of the information available to that market about what prices should be. That’s it.

It’s such a blindingly obvious piece of truth that I still don’t understand why anyone bothers to try and argue against it.

15 – the record of Governments’ industrial policies is significantly worse than the private sector’s. Remind me which of the ‘winners’ picked out in the 1970s are still alive?

Perhaps the author could point the way to the artices written by the TUC which predicted the impact on technology and globalisation since 1945. The TUC did not appear to predict the impact of computers and electronic control systems on employment in manufacturing or the print industry; the use of gas as a fuel in electrical generation, the rise of the internet and impact on employment in shops etc, etc,.

the record of Governments’ industrial policies is significantly worse than the private sector’s.

How are you measuring this?

3) the Government did not seize the chance for a bigger stimulus before the Tories and the right wing press made public borrowing the big political issue

Ahh, of course. It’s all the Tories fault.

More seriously though, do you think the government actually listened to the Tories and the papers when they formed their response? If borrowing wasn’t a problem then Gordon would have spent and borrowed even more. It wouldn’t have mattered what the Tories said because he would be justified in all that extra borrowing when the economy started growing strongly again. The idea that the stimulus was insufficiently small because of Tory whining is laughable. Labour are the government, they have a good majority. If they thought borrowing wasn’t an issue, then they would have done more.

The fact is that the deficit was an issue BEFORE the recession, and that meant that Labour were severely limited in what they could do in terms of a fiscal stimulus. That’s why we got a VAT cut, rather than raising the personal allowance to £12,000, or something similar (which would have cost around £30-40bn).

Tim J@17 – You are deliberately limiting the scope of the question. 1970′s Britain does not have many industrial success stories, but there are plenty of successful stories of government intervention outside that limited view on things.

Chris@14 – I’d say that there’s a fair argument that a floating exchange rate plus control over monetary policy has given us a good deal more flexibility than a lot of other nations. I don’t think there’s really much proof that we’d be better off in the euro.

You are deliberately limiting the scope of the question. 1970’s Britain does not have many industrial success stories, but there are plenty of successful stories of government intervention outside that limited view on things.

Of course there are, but I was specifically responding to the idea of a National Investment Bank that would invest in businesses selected by the Government. That is basically what 1970s British industrial policy consisted – picking winners – and it hasn’t been repeated because it was such a God-awful failure. Because Governments are not good at determining which companies are worth investing in.

Because Governments are not good at determining which companies are worth investing in.

Like I said, I’m not actually advocating the govt do this but you have no evidence to back this up. It’s just ideological rhetoric.

In fact the markets are also incredibly bad since they’re short-termist in focusing only on short term share-price fluctuations, rarely invest for long-term development and can also be run by highly incompetent managers (propped up thanks to monopolies or oligopolies)

Like I said, I’m not actually advocating the govt do this but you have no evidence to back this up. It’s just ideological rhetoric.

Sheesh Sunny, have you read a history of the 1970s? The actual empirical results of a State Investment policy are a matter of history, not ideological conjecture. The creation of heavily state-backed corporations (British Leyland, British Steel etc etc) means that the decisions that are taken over investment become political/electoral ones and not commercial/investment ones. Loss making employers are propped up by subsidies that do more, in the long run, to guarantee collapse and big lay-offs than contemprary restructuring would have done.

Look at what happened at Longbridge for example. The prospect of Rover workers losing their jobs (as would have happened under the venture capital proposal to hive off the profitable bits (MG…) and lose the rest) was impossible in a marginal-heavy area coming up to an election. So the ‘keep all the jobs’ Phoenix plan was backed. It was a business decision taken on purely political grounds.

Now, you can argue if you like that the National Investment Bank would operate on a strictly non-political basis, but if that’s the case, and given that private enterprise can raise money more cheaply, what would be the point of it?

“can also be run by highly incompetent managers”

Sure, any and every system can manage that. What we’re interested in though is who does the selection, how the selection is done and how to get rid of the inevitable mistakes.

If we ask the politicians to run the industries then we’re choosing who runs the industries by who can persuade the most people to vote for them on a wet Thursday in Wigan.

Yes, sure, democracy is lovely, but it doesn’t really sound like the best way to choose who runs the oil, steel, cement, etc industries now, does it?

“In fact the markets are also incredibly bad since they’re short-termist in focusing only on short term share-price fluctuations, rarely invest for long-term development and can also be run by highly incompetent managers (propped up thanks to monopolies or oligopolies)”

It is simply too simplistic to assert that investment in the stock market is simply interested in short term share-price fluctuations – read the investment advice and papers produced by Warren Buffett and others and you will soon realise that investment is long term – it is the return on investment that is of interest.

The growth of short-term investment has been a relatively recent phenomenon aided by computer based trading which enables very short-term trading explointing tiny margins but large numbers of trades.

In terms of long term investment, you also need to look at debt financing and gilts (corporate guilts in this argument) which are also of interest.

The largest (in terms of asset value) group of investors in the UK are the pension funds and insurance companies – and they are by law restricted in terms of what investments they may make in certain categories, in order to ensure that their investment is long term – to meet their obligations to their members, pensioners and insured.

“The largest (in terms of asset value) group of investors in the UK are the pension funds and insurance companies – and they are by law restricted in terms of what investments they may make in certain categories, in order to ensure that their investment is long term – to meet their obligations to their members, pensioners and insured.”

Quite so but then how come the banks are paying out these massive bonuses to mere bankers then if the really important investment decisions are located in the pension funds and insurance companies?

On short-termism, I felt this comment attributed to the late James Tobin (of Tobin-tax fame) rather illuminated the realities:

“Nobel laureate James Tobin reports that one of his Yale students went to work for the Chicago Mercantile Exchange as an assistannt to an active trader who was a former economics professor. After a few weeks, the young man asked about the long-run calculations that governed the trades. He was told ‘Sonny, my long-run is the next ten minutes.’” Robert Solomon: Money on the Move (Princeton UP, 1999) p.14.

One day we might get a proper public debate about why the UK economy remains so anemic after six quarters of shrinkage. And, more worryingly, is now starting to lag badly behind some other equivalent economies.

That pattern – first in, last out – seems to be all too typical of the UK during recessions, which suggests something far more structurally wrong over a much greater period of time.

On this point..

One day we might get a proper public debate about why the UK economy remains so anemic after six quarters of shrinkage. And, more worryingly, is now starting to lag badly behind some other equivalent economies.

I think it’s wrong to say that the UK is lagging behind right now, a year and a half is not the kind of time frame to make that kind of judgement. I think it’s also worth pointing out that while the UK’s recession has been longer than others, the loss of output has not been as steep. It’s also worth pointing out that unemployment is far lower than the the 3 million people were predicting in 2009.

Tim J@22 – There are still questions here as to whether the failure of British industry was down to government decisions coordinating investment or other factors. My personal view is that labour relations played a pretty big part in what happened. I’ll also point out that despite the fact that there are few businesses left from that era, the actual record of the 70s for economic growth was actually pretty good.

Sunny,

you follow this:

… you have no evidence to back this up. It’s just ideological rhetoric.

with this:

In fact the markets are also incredibly bad since they’re short-termist in focusing only on short term share-price fluctuations, rarely invest for long-term development and can also be run by highly incompetent managers (propped up thanks to monopolies or oligopolies)

now, where’s your evidence for that lot?

How have you measured whether (investors in private capital) markets are short-termist or long-termist? If markets really did only focus on the short-term, investors with an eye to the long term could clean up. If share prices fall because of short-term woes, long-term investors can make easy money buying them at that point. When share prices rebounded recently, do you really think that was because of good short-term prospects? When companies raise money on the stock market, don’t you think investors look at their long term prospects? How did Vodafone get where it is, without “investing for long-term development”

How on earth do you quantify “incredibly bad” … relative to what? It’s easy to find examples of markets making what looks like mistakes, but that’s one hell of a sampling bias, you need to characterize the performance of the system as a whole. I’m not sure what the fact that companies can be run by incompetent people tell us; governments can be staffed by incompetents too.

When talking about whether markets are good at “picking winners” you have to differentiate between allocating capital in what might be called the “real economy” (lending to firms) and making financial bets (hey, let’s buy lots of sub-prime mortgage backed securities!) and you need to benchmark their success against the available alternatives.

How would you find evidence to test the idea that markets are generally better at allocating capital in the real economy than governments? Well, the first step would probably be to compare the real economic output of economies that have used the two systems, and also look at economies that have moved from one system to another. See East/West Germany among others.

my point is merely that when it comes to being evidence based, that latter part of comment 23 is on fragile ground.

[anybody who interprets me as a simple "free marketeer" here, should re-read my post #12 and also the writings of Rodrik that I link to. It's not a case of deciding which is better, markets or governments, it's a case of deciding who is better at what]

Tim, if democracy isn’t the best way to run the oil, cement, steel etc industries then why would it be any better at running the criminal justice system, social policy, defence of the realm etc?

Isn’t the logical conclusion that we ignore what people are saying on a wet thursday in Wigan and just have a mixed economy with markets doing X and unelected bureaucrats/technocrats doing Y?

Because markets are entirely crap at running criminal justice systems (just think of competing jurisdictions being able to lock you up!) and armies n’stuff (the last time we had two competing armies in the country was the Civil War: not a time of great joy).

Markets are good ways of running oil, steel and cement.

Thus we use markets in doing what they’re good at.

“just have a mixed economy with markets doing X and unelected bureaucrats/technocrats doing Y?”

Because sadly a technocracy is even worse at running criminal justice systems etc than the results of a wet Wigan thursday.

*shrug*

The problem is that Brown was borrowing 2% of GDP at the top of the economic cycle when most other leading economies were instead paying down their debt. And the money wasn’t being spent on infrastructure either, it was being pissed away on a bloated and hugely inefficient public sector and the expansion of our welfare state – the morally corrosive lifestyle option for the idle

‘ 3) the Government did not seize the chance for a bigger stimulus before the Tories and the right wing press made public borrowing the big political issue; ‘

I would agree with the gist of the article except for the above. The reason Gordon Brown did not get a bigger fiscal stimulus was because of Governor King, just before the G20 London summit testifying against it at the Treasury Select Committee. After his intervention in fiscal policy it would have created a massive media story if Brown had gone ahead. There was some suggestion that Governor King was acting in collusion with the Chancellor who did not want a fiscal stimulus. Strangely enough the Prime Minister tried to sack the Chancellor a few months later.

The mind boggles that anyone can believe we would have been better off in the euro. It would have totally collapsed the economy.

The Bank do bear responsibility for tightening and totally misreading inflation 2008. It was not an overheating economy but almost entirely externally commodity price driven due to a seriously depreciating USD. The ECB were even worse and raised rates July 2008.

I would not read too much into the ONS estimate for 0.1% growth Q4. They are overestimating the UK fall in output as their numbers appear to be contradicted with other data. For example, labour market, consumer spending, retail spending, PMI surveys, company earnings and order books all suggest the ONS are overestimating. The ONS continue to revise their figures years after the initial release.

Without minimising the state of the UK economy as it is anaemic and will be that way for years. A variation of the ‘ Zarnowitz rule ‘ ( deep recessions are almost always followed by steep recoveries ) is a factor on why output is not bouncing back stronger. The UK economy has not had as big a fall in output as many others. Therefore, the bounce-back that is often driven by inventory restocking is also not as great as others and partially explains the tepid recovery.

the UK economy and the public finances were over-dependent on financial services for too long

What alternative industries are there that do not involve much electricity generation, polution, driving or low paid workers, and involve employers big enough to deal with the governments employment and other regulations without too much trouble?