Four simple reasons why the Government’s economic policy is wrong


6:28 pm - September 5th 2010

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contribution by Owen Tudor

Ed Balls made a speech to Bloomberg last week, and Martin Wolf commended his argument in the Financial Times today.

Both are worth reading in full, but for the time-challenged, here’s a summary. Government policy rests on four pillars: Labour is to blame for the UK’s economic problems; the Government needs to cut expenditure massively because the markets are nervous of continued borrowing; lower government expenditure will lead to increased private sector spending which will create growth; and people who disagree with the Government are ‘deficit deniers’ who would wreck the recovery.

All four are (at least probably) wrong.

Here are the rebuttals, in brief.

1. The current economic position of the country is the result of the global financial crisis (there is an argument that liberalisation in the finance sector caused this, and Labour are responsible for that – but it was the Thatcher Government that started to liberalise).

2. All the evidence is that the markets are not worried about UK government borrowing – Greece, Spain and Ireland are all facing market jitters over their recessionary budget cuts, instead.

3. There is little evidence that, with global demand still weak, private sector investment will create jobs even to compensate, let alone outpace, the cuts in employment resulting from reduced government expenditure.

4. And, finally, if all the previous points are valid, the ‘deficit deniers’ are actually right – you get the distinct feeling that Martin Wolf’s (quiet) outrage is mostly the result of being lectured about economics by George Osborne.

Despite the hugely cogent argument advanced by Balls and Wolf (and, for over a year now by … ahem … the TUC), the real political poser is this. Will the public desert the coalition as the cuts develop from proposal into grim practice?

Or will the superficial intuitiveness of treating the public finances as if they were household finances (a problem identified by Keynes in very similar circumstances) mean that while people oppose cuts which directly affect them, they fail to translate that into generalised opposition to the Government’s overall economic policies?

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Reader comments


Consumer confidence has fallen since the election. So if we do go into a double dip recession it will be the responsibility of Call me Dave, Pip Squeak, and Clegg.

Last of the summer wine has got nothing on these prosperous clowns.

2. Chaise Guevara

Much as I like to speak ill of the Tories, Sally, I’m not sure you’re onto a winner trying to blame them for a double-dip recession that we’ve been worried about since before the election. And I think you’ll find that most people will be much quicker to blame Brown (also unfairly) than Cameron, at least this early on.

2

Yea, blaming Brown is all you got pal.

So that is the plan, fuck the economy even more by bringing in crazy spending cuts, and then blame it all on Brown. Ideological madness. Same old tories. They never change.

4. Chaise Guevara

“Yea, blaming Brown is all you got pal.”

All I got? Read my post.

@Sally

Steady on. Chaise is merely pointing out what most people will think and what the Tory press will spin if we go double-dip – that it was Brown’s fault. Whether or not it’s true is a different matter, and something that the next Labour leader will need to combat if the slide continues.

6. Chaise Guevara

Cheers, Pill!

Of course, economic miracles withstanding, the Tories will find themselves in trouble over spending eventually – repeating “it’s all Brown’s fault” will only work for so long. But they’ll be blamed for the national economy as they made it, not as they found it.

I don’t see why people with a brain will blame Brown when they lose their job because The tories abolish it.

Of course the tory media will blame Labour. If the moon fell from the sky they would blame Labour. No change there.

8. George W. Potter

@7 And if Labour decided to make it’s flagship policy killing every first born child then you’d still say they were doing the right thing.

The problem is Sally that a proportion or the population will believe them.

Given that the Conservative party enjoy a significantly loyal core vote – who will always support them regardless – the number of people they need to win over in order to win an election is actually quite small.

This is the problem.

AFZ

Your broad argument may be right; time will tell.

But your point two is weak/contradictory.
Why are the markets not worried about UK “austerity” if that is indeed their concern elsewhere?

http://www.bloomberg.com/news/2010-09-02/cameron-austerity-turns-u-k-company-debt-into-world-beater-credit-markets.html

“Given that the Conservative party enjoy a significantly loyal core vote ”

Oh yes, you only have to read the idiotic trolls on here to know that. The tory trolls are drilled and will defend their policies until the end of time. But the majority of people in this country voted for cenre left parties. Labour and Liberal got over 50 % of the vote at the last 10 elections.

58 % voted against Thatcher.

The problem is that the CIA have now started sending over right wing clones to take over are left of centre parties. First Blair and now Clegg.

12. Chaise Guevara

I’m fairly certain that’s not the problem, Sally.

Everyone knows there is a conspiracy by US lefty magazine The Nation to infiltrate British politics, both Clegg and Ed Miliband were interns there 😮 omg, etc.

14. Chaise Guevara

AND a conspiracy among Scottish people to infiltrate British politics, as I am constantly informed by the internet.

Although the OP does not explicitly say the ConDems will cause a double-dip recession a lot of argument against the coalition do tend to argue that they will. In my opinion, that is the wrong argument. In some respects we are in danger of talking ourselves into a double-dip recession. The Q3 growth is heading for half the growth of Q2. The media will then say growth is falling and we are heading back into recession. However, 0.6% is British trend quarterly growth.

Nothing that the coalition have done so far can cause a recession other than their effect on expectations negatively impacting investment. Therefore, the argument should not be about causing a double-dip which if it was to happen would be caused by the private sector. The correct argument is their policies lead to a suboptimal outcome. Their policies are simply not the best way to getting the economy operating at its full potential. The VAT rise is particularly damaging and serves no useful purpose. Government borrowing can be brought under control without slashing and burning everything.

I doubt that Martin Wolf will lose much sleep over getting lectured to by Mr Osborne. Never has a Chancellor entered no 11 with such low expectations. I read that Martin Wolf was advising Mr Cameron, its maybe untrue or there could be something going on there. Martin Wolf’s daughter has certainly been a Cameron adviser for years.

@ 10. cjcjc

The global rally in bonds is because the market believes growth will be slower. Therefore, in that type of environment fixed income bond are a better investment than fluctuating equities.

Try this recent news report in the Daily Mail on the hosuing market:

The housing market is on the verge of a double dip crash with prices set to slump for the second time, economists warned yesterday. Fears were triggered by evidence from the Bank of England that the mortgage drought is getting worse. Last month net lending totalled just £86 million, a fall from £518 million the previous month and £1.6 billion in February.
http://www.dailymail.co.uk/news/article-1307671/Housing-market-double-dip-fears-mortgage-lending-crashes-new-low.html#ixzz0ygjK5Qcz

@14

Makes a change from the gay mafia that we were assured was running British politics a few years back..

@15 but Greece, Ireland have not participated in that rally…

Can’t have it both ways.

19. Chaise Guevara

@ 17

Indeed. Where are the Jews and the Freemasons when you need them?

@19

It’s political correctness gone mad, I expect.

How long did “it was all Thatcher’s fault” last? I’m still seeing bits of it now, after 13 years of a Labour Govt.

Blaming Brown has some way to go I think. Fair or not, it’ll still be said some time into the future.

“they fail to translate that into generalised opposition to the Government’s overall economic policies?”

Tsk, you have to understand that in the long run it’s all micro. Macro is only a short term thing.

[paraphrased]”Ooo it’s all the rich bankers’ fault, yeah those nasty wicked rich bankers, with all their money. Let’s tax them to the hilt, and of course borrow a bit more to make up the shortfall, and wish all our troubles away. SQUEEEEEEEEE!”[/paraphrase]

Look mate, very few on the right-hand side are blaming the poor for the financial ills of this country. But it’s quite clear that during the times of plenty those out of work were encouraged to forget about those ills and a nice juicy deficit would take up the slack. So while Keynes would have been advocating a surplus through the early 2000s and getting those out of work back to work, dear old Gordo was busy selling gold and lulling the 1 1/2 million unemployed (*) that the bottomless money pit would be the perennial fall back.

My point of view – and I disclaim all possibility of speaking for my party here – is that we should reduce the welfare bill primarily by getting people back to work.

Ah but fuck it eh? Reducing the overall tax take is “taking money out of the economy” [SIC] and we should just hope that the state spending money is synonymous with economic growth. Otherwise ZOMG it’s a double dip INNIT? Wicked Tories killing the economy right?

GROW UP.

(*) 1 1/2 million’s bad enough considering we kept the unemployment figure in six figures for TWENTY FIVE years from 1947 to 1972. And that’s without incapacity and all that. And it includes fifteen of wicked doley-massacring TOREEZ in power.

@22 Yeah 1.5 million out of work is bad… but imagine a government letting unemployment get to above 3 million, that’d just be absolutely bonkers.

And remind me who got unemployment below 1 million for the first time in ages, again?

Economists at the British Chambers of Commerce are certainly worried about the risk of a double-dip recession:

Businesses fear cuts boost slowdown risk
http://www.ft.com/cms/s/0/c547a436-b39c-11df-81aa-00144feabdc0.html

“The recovery in the UK economy is fragile and the chances of a renewed slowdown are large, according to forecasts by a leading business body.

“’The huge scale of the retrenchment that the government wants to implement, and the decision to cut the fiscal deficit at an accelerated pace, will inevitably increase dangers of double-dip recession,’ said David Kern, economist at the BCC.

“’In spite of the relatively strong recent UK performance in the second quarter, the recovery is still fragile and risks of a relapse are high.’

“Mr Kern warned that the need to pay off consumer debts and strengthen the banking system were also likely to hamper the pace of growth, and that growth would remain below its historical trend for several years.”

Try too this sobering assessment of economic prospects in leading economies by Carmen Reinhart and Vincent Reinhart: Beware those who think the worst is past
http://www.ft.com/cms/s/0/7b9bbc72-b460-11df-8208-00144feabdc0.html

Their assessment is based not on ideology or wishful thinking but on looking at the aftermath of previous major crises in leading economies over the past 75 years.

The fundamental economic issues are about what private sector spending will make up for the cuts in public sector spending and how soon will private sector spending make up the difference?

18. cjcjc

‘ @15 but Greece, Ireland have not participated in that rally…

Can’t have it both ways. ‘

I don’t really follow what you mean, cjcjc. Greece and Ireland are outliers. Greece will default on their sovereigns unless they can generate decent growth. However, as long as they are in the euro they need an internal devaluation. The internal devaluation is working against them getting the growth. Ireland also needs an internal devaluation but what really makes their sovereigns risky is the huge liabilities the state are assuming from Anglo Irish Bank. It is perfectly rational that the driver for the bond rally would also suggest that Greece and Ireland are more risky in a lower growth world.

cjcjc

You have to remember that Greece and Ireland face far higher liabilities than the UK in terms of the proportion of their GDP and as such as a proportion of their plausible tax take. And even the recent downgrading of Ireland by S&P has been widely criticised for lacking solid basis in market data.

Add in that the UK has far less national debt than Greece (and most G7 countries) and that Brown lengthened UK bonds significantly and you start to see that there is little comparison between the UK and the PIGS countries.

btw – I know it isn’t fashionable to say the UK has less national debt than most countries – but it is still true even at this stage in a major recession hitting directly our single biggest sector. (Finance)

I was referring to point 2 in the OP, where he seems to be suggesting that UK “austerity” will spook the market in the way that it has (may have) done Greece, Ireland, etc., an argument which has been made here before…

28. margin4error

cjcjc

I take it back then. Sorry. ~Not sure the markets are at all spooked by the UK at present. If austrerity measures result in a new downturn that might create jitters. But that’s a way off yet and would probably only be severe if they announce plans in a Gove-esque confusing, mistaken, corrected and corrected again manner.

1. The current economic position of the country is the result of the global financial crisis (there is an argument that liberalisation in the finance sector caused this, and Labour are responsible for that – but it was the Thatcher Government that started to liberalise).

Really? It had nothing to do with spending a surplus AND also increasing government borrowing during an economic boom and counter-intuitive to the obsolete Keynesian theory that Balls now clings to? Also, have you looked at the root causes of this financial crisis in terms of the repeal of Glass-Stegall and the institution of the Community Investment Act in the US both acts executed by Bill Clinton? After all, didn’t it start in America? Also, which political party created the Tri-partite arrangement and the FSA and who was Brown right-hand man at the time?

2. All the evidence is that the markets are not worried about UK government borrowing – Greece, Spain and Ireland are all facing market jitters over their recessionary budget cuts, instead.

He does not understand, lose AAA rating and the cost of ALL borrowing increases, government, business and the populace at large. That directly impact the competitiveness of firms, impact government spending and impacts homeowners and consumers. That is the risk and a real one in the medium term if government spending was not curtailed. So much so, that policy now has turned the sentiment on bond markets are UK government debt is worth taking up allowing this government to steer its economic course with more “wriggle room” than the previous government

3. There is little evidence that, with global demand still weak, private sector investment will create jobs even to compensate, let alone outpace, the cuts in employment resulting from reduced government expenditure.

Again, this is not borne out by labour market surveys showing that the private sector in particular industry are hiring in numbers to absorp public sector cuts. Also, manufacturing is reporting more orders from Europe cementing its recovery. Construction is also rebounding strongly.

4. And, finally, if all the previous points are valid they are not, the ‘deficit deniers’ are actually right – you get the distinct feeling that Martin Wolf’s (quiet) outrage is mostly the result of being lectured about economics by George Osborne

And this is a point of rebuttal? Don’t forget it that New Labour’s economic policies were as much Ball’s economic policies as Blair, Brown and Darlings. Who was a key Labour figure during the “prawn cocktail offensive”? Who was Brown ever so loyal lieutenant until the farcical “Cuts v Investment” pack of lies? Who advocated government spending cuts only 0.5% GDP less than the Tories during the election?

As for deficit deniers, from a moral perspective our interest payments are higher than the cost of the education budget. From an economic perspective, Labour have stolen economic growth to fund their 1995-2007 spending splurge from today. From a political perspective, the single one issue threatening every single man, woman and child is the ability of this country to pay its way in the world. The deficit is the amount being added onto our debt every day, to say that we can carry on with a 12% GDP deficit is howling at the moon madness.

But why are the economists of the British Chambers of Commerce worrying NOW about the risk of a double-dip recession with the Public Spending Review in prospect? See the links @24.

The fundamental economic questions are about what private sector spending will fill the gap left in total demand after the public spending cuts and about how quickly will private spending step up to fill the gap?

Btw on “obsolete Keynesian thinking” try these links:

John Kay on: Economics may be dismal, but it is not a science

“The macroeconomics taught in advanced economics today is largely based on analysis labelled dynamic stochastic general equilibrium. The unappealing title gives the game away: the theorists are mostly talking to themselves. Their theories proved virtually useless in anticipating the crisis, analysing its development and recommending measures to deal with it.

“Recent economic policy debates have not only largely ignored DSGE, but have also been remarkably similar to the economic policy debates of the 1930s, although they have been resolved differently. The economists quoted most often are John Maynard Keynes and Hyman Minsky, both of whom are dead.”
http://www.johnkay.com/2010/04/14/economics-may-be-dismal-but-it-is-not-a-science/

Joe Stiglitz: Needed a new economic paradigm, from the Financial Times of 19 August 2010
http://ineteconomics.org/stiglitz-new-paradigm?page=7

Sadly, in many respects, keynesian economics is only too relevant in these times:

Try Paul Krugman’s review of Robert Skidelsky: Keynes – the return of the master (Allen Lane 2009)
http://www.guardian.co.uk/books/2009/aug/30/keynes-return-master-robert-skidelsky

“The problem is that the CIA have now started sending over right wing clones to take over are left of centre parties. First Blair and now Clegg.”

Hahahhahahah! Are you now going to say it was the Bilderberg group, or the Global Banking Families, Sally, you antisemitic twat?

“My point of view – and I disclaim all possibility of speaking for my party here – is that we should reduce the welfare bill primarily by getting people back to work.”

Whereas your party has put in place a wide variety of measures which will increase the number of people out of work quite substantially, and are now arguing about proposals to pay billions of pounds more out of work benefits to people in work.

If you want to reduce the welfare bill, you might be interested in the people who have explicitly set a target of halving unemployment, or who have set out proposals to cut unemployment through a “Right to Work”.

30,31.

Please explain why the US is sliding back into recession on the back of an unprecedented Keynesian fiscal stimulus?

Also, why the stimulus has failed to increase money supply?

What do Stiglitz and Krugman have to say except “more stimulus”? Nothing but excuses.

Roubini called this crisis and he is spot-on. It has nothing to do with spending and everything to do with debt. I’m sure the Austrians have a lot to say on that too.

“or who have set out proposals to cut unemployment through a “Right to Work”.”

That’s always rather amused me, the picking up of that phrase by the British trades union movement. For the phrase “right to work” has been used for decades in the US. It means no union closed shops.

A “right to work” state is one in which closed shops are illegal.

So, yes, I fully support the phrase, although perhaps not quite in the way it’s meant over here.

@35

[pedantry] Actually that’s right-to-work (note the hyphens) [/pedantry].

😉

“It has nothing to do with spending and everything to do with debt.

Claptrap.

The whole construction of modern capitalism is based on consumers spending more and more. Constantly buying more crap, that they don’t really need , and don’t really want. But without it the system is screwed.

37,

Capitalism is built on the idea of free markets. Supply is increased on the expectation of rising prices, Demand is increased on the expectation of falling prices. Where that expectation meets, that is the marketplace. The marketplace has been with us for several millenia.

Consumption is only one aspect of capitalism and of that there is autonomous consumption (food) and discretionary consumption (a cinema ticket).

Consumption is also based on opportunity cost and utility, you could shop until you were sick but you would soon tire of buying ‘crap’ (utility) also there is an opportunity cost of when your money has gone, it has gone. If you spend your own money, the cost of consumption is almost zero.

There lies the rub.

Labour thought that credit could make that spending last forever. Wrong. It actually stole the propensity to consume from the future by combining a higher marginal costs to every unit consumed (interest on debt). Or, a cost to consume. Credit in other words.

It also combined that with policies on a macro and micro level to reduce savings, the desire to save (propensity) and also the government to save.

That is the position we are in, the cost of consumption is actually now hinders consumption. People are maxxed out, they do not feel comfortable getting into debt for another TV for the house. The cost of consumption is now higher than the opportunity cost to consume. They would rather save.

That cost to consumption is deterring consumer decisions that would have been made if cost to consumer was closer to zero.

Capitalism is not based on buying ever larger amounts of crap because not everyone is so foolish to do that. Keynes does not make that assumption because it speaks in terms of demand regardless of where it comes from, he also fails to construct a definition of ‘money’.

That is the fundamental flaw with it or more precisely, Keynes lacks a viable credit theory.

“Capitalism is built on the idea of free markets.”

No. Absolutely not.

Capitalism is a description of the ownership of productive assets.

Markets are a method of exchange.

It’s true that the two work quite well together, but it absolutely is not true that capitalism is built upon free markets. You can most certainly have capitalism without markets: that would be monopoly capitalism and as Marx pointed out, it’s not a very good idea.

There is no such thing as the free market.

Fiest you have to have a currency,and that means someone has to issue that currency and somebody has to set intertest rates. Either national central bank or privatised banks setting there own rate. E

You could have markets without capitalism too. Capitalism is about the ownership of the means of production. No reason why workers co-operatives can’t compete.

Damm ignore 40, something went wrong

Try again…..

There is no such thing as the free market.

First you have to have a currency, and that means someone has to issue that currency and somebody has to set interest rates. Either national central bank or privatised banks setting there own rate. Either way you have just taken your first axe to your so called free market.

Then you need property laws. That means someone has to make those laws and someone has to interpret them. That means appointing judges. Well now your so called free market is on life support.

The free market is a fantasy like most conservative trolls beliefs.

“No reason why workers co-operatives can’t compete.”

I do say that, often. You can have capitalism without markets just as you can have socialism/mutualism/coops etc without markets. Similarly, you can have all those things with markets.

And if pressed, I always come down on the “we need to have markets” side…who owns the means of production is, at least to my mind, vastly less important than that we have markets.

37
Absolutely, without the constant built-in obsolescence and the creation of novel goods (not needs) the whole system would fall apart. It’s only the silly lending by financial institutions which has allowed the recent economic growth up to around 2007, now we are all paying for the failure of the system.

@34: “Please explain why the US is sliding back into recession on the back of an unprecedented Keynesian fiscal stimulus?”

You’ll need to ask those more familiar with the US economy than I am.

By international standards, Alistair Darling’s fiscal stimulus of the UK economy of c. £28 billions, announced in his Pre Budget Report of November 2008, was comparatively modest – see this IMF review in July 2009 of fiscal expansions by member countries:
http://www.imf.org/external/pubs/ft/spn/2009/spn0921.pdf

“Also, why the stimulus has failed to increase money supply?”

Because banks have collectively been reluctant to entend loan facilities and overdrafts for fear that borrowers will be unable to service their greater debts, a collective fear which is very likely to become a self-fulfilling prophesy because growth in business investment and consumer spending will be constrained as a result. This will increase the likelihood of slow GDP growth at best, or, at worst, enhance another recession downstream.

The mainstream keynesian position has long been that monetary policy by itself tends to be a weak policy instrument for countering recessions – Keynes’s memorable comparison was that monetary policy in recessions was “like pushing on a piece of string.”

With central bank lending rates to banks already at floor levels in the UK and the US, the only remaining scope for active monetary policy is “quantitative easing” – dubbed the Zimbabwe option by the Mail.

Even quantitative easing may not be effective – if additional cash balances put out into financial systems by central banks are initially hoarded and then spent later when economies are already picking up. Some fairly mainstream economists are already mooting the likelihood of an extended period ahead of “stagflation”.

“What do Stiglitz and Krugman have to say except ‘more stimulus’? Nothing but excuses.”

The fact is that recessions impose high real costs of lost GDP – as well as human costs – on economies. One effective stimulus is to fund public works – like the high priority Crossrail project in London to ease traffic congestion – by quantitative easing – which is the archetypal keynesian policy.

“Roubini called this crisis and he is spot-on.”

With due regard to Roubini, several observers of the UK economy were calling the house-price bubble back in 2002 and 2003, while Warren Buffett was warning about the opaque quality of derivaties back in 2003. The trouble was that few took their warnings seriously – house-price bubbles are very popular with home-owners. In Britain, the Conservatives kept pushing their Deregulation mantra – which Blair took seriously.

“It has nothing to do with spending and everything to do with debt.”

Britain’s national debt as a percentage of GDP at the onset of the financial crisis was relatively modest by international standards:
http://www.statistics.gov.uk/cci/nugget.asp?id=277

See Sam Brittan on: Why Britain should not fret about national debt:
http://www.samuelbrittan.co.uk/text333_p.html

There were valid reasons for concerns about the growing mountain of consumer debt, amounting at its peak in 2008 to £1.4 trillion, but that was reason enough for introducing more effective regulation of financial markets, not for more deregulation. Surely, we have learned by now that we can’t rely on markets to be sufficiently self-regulating.

“I’m sure the Austrians have a lot to say on that too.”

The Austrians had nothing of much use to say about resolving the depression in the inter-war years.

Goddam those novel goods.

Whoever needed a telephone, radio, car, computer, the internet, plane, drug anyway?

You decide what you need for yourself, jojo.
I’ll make my own decisions.

When will Keynesians sit down and do the simple maths? At such high levels of debt and deficits, it is incredibly hard for growth to outpace even the interest on government debt, let alone reduce it or allow for increased investment. As a rule, when debt/GDP hits 90% you can roughly subtract 1% of annual GDP.

Essentially all this stimulus is doing is kicking the can a bit further down the road, and propping up demand a little now at the cost of long term growth and added debt. It’s a purely political decision, rather than a rational economic one. There is no option but to clear bad debts and deleverage one way or another – I personalyl would ratyher have a short swift recession and deal with many of the underlying problems, regaining a competative economy and good growth profile rather than lumber the economy with a huge Japan style hangover where confidence is always subdued as peple don’t know the real scale of bad debt in an economy, and government spending becomes it’s only prop.

As for specific points;

1. The global financial crisis was caused by home loans resetting. The banks were involved, but the end user was homeowners getting over-leveraged on their properties, and becoming unable to make their repayments. This set off the chain of events. It was pretty bad in the UK, but in the UK we had the Labour government overspending before the crisis, running a large strucutral deficit whilst also pushing additional spending off balance sheet AND raising taxes, giving future governments less room.

2. UK bonds have rallied in line with US/German bonds on the back of global growth concerns. UK can print money still, and has some inflation so the bonds are still seen as a relatively safe bet. The UK can’t go bankrupt, but the bonds can be relatively worthless all the same….Greece is essentially bankrupt, certianyl past the 3y European bailout. Irish bonds are being hit by worriss about AIB and the capitalisation it may need rather than the effects of Irish austerity. Spain is effecitvely using government pension funds (which are massively underfunded) to artificially prop up its bond markets.

4. See my argument above. You can’t grow your way out of 12% deficits. Think about it, to get the deifcit to zero your tax revenues would have to grow three times the amount, given tax revenues run at about 35% of GDP. As added debt slows growth, it becomes a debt trap. Even Keynes acknowledged this – his theory was based on a closed system and running counter cyclical fiscal policy. If we run extra stimulus in the UK, to boost spending, it won’t be the UK which gains most of the benefits….it will be the manufacturing countries of the faf east.

I’m anything but a “deficit denier” – as can be readily established from many previous postings.

The central issue is NOT about whether to rein back the budget deficit of about 11% of Britain’s GDP but about how quickly that is done so as to avert the likelihood of another recession downstream.

What matters is how quickly net exports plus business investment and consumer spending increase to fill in the gap left in total demand after the cuts in public spending are applied.

“You decide what you need for yourself, jojo.
I’ll make my own decisions.”

Yes, and there in lies the problem. The whole ecconomy depends on the cjcjcjcjc’s of this world getting their money out.

And knowing cjcjcjc as I do, I can tell you we are all doomed.

“deficit denier” is just another ludicrous right wing term, like ‘sound science’ or ‘family values’ or ‘common sense’. meaningless drivel

I quote this news report from the Mail as recently as 16 August:

“The Treasury watchdog has warned that he is ‘not confident’ that the country can avoid a double-dip recession.

“Sir Alan Budd, who is standing down as boss of the new Office of Budget Responsibility, stoked new fears about the fragility of the economic recovery, admitting that growth could dry up.

“His sobering assessment of the state of the economy overshadowed a much more upbeat outlook outlined today by Deputy Prime Minister Nick Clegg.”
http://www.dailymail.co.uk/news/article-1303473/Alan-Budd-Im-confident-wont-double-dip-recession.html#ixzz0yl5KDNRN

@47: “Even Keynes acknowledged this – his theory was based on a closed system and running counter cyclical fiscal policy. If we run extra stimulus in the UK, to boost spending, it won’t be the UK which gains most of the benefits….”

Don’t be silly. I suggested @45 that quantitative easing to finance the Crossrail project, to ease traffic congestion in London, would be a good example of keynesian functional finance for a public works programme as a counter-recessionary measure. There would be an import content, of course, but that would be relatively small compared with a general boost to public spending.

Btw James Meade was awarded a Nobel prize in 1977 for extending keynesian macroeconomic theory to open economies. Most modern macroeconomic texts with a keynesian flavour include an international dimension: Krugman + Obstfeld: International Economics, is all about the economics of the international dimension. The standard post-grad macro text is: Obstfeld + Rogoff: Foundations of International Macroeconomics.

For those inclined to complain about another London project, the fact is that the London and South East regions are positive net fiscal contributors to the national exchequer while other regions are net recipients of exchequer funds.

@52 Bob B

A public investment project such as croossrail would in theory act as a counter-recessionary/demand creating measure. What it also does is front load spending and growth at the cost of additional debt and lower future growth.

There is also the the question of the “simple shopper”, or governement to most, being the right people to enact such works, given governments track records for efficiency and public procurement. Is tax/debt best spent by the government, and does it give the best growth multiplier. Most research suggests not, in the long term.

Lastly, money would still flow offshore on any public work. Foreign companies acting as contractors, to the machinery needed (almost all produced offshore) to the most basic level of foreign labourers sending money home. It all adds up, and the net effect is that any GDP multiplier effect of government spending is decreased, and could even be less than one to the local economy.

As an aside, Krugman, Stiglitz and a few others of note seem to be less economists and more politicians. Their only answer to a crisis born of excess debt and leverage, is more more debt. Stimulus doesn’t seem to be working anywhere. Obama has effected more stimulus last night, and the markets are betting on another $1tr or so, and the net effect is people are yet again downgrading US prospects.


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