There’s no simple way out of this economic rut, for the left or right


1:52 pm - July 27th 2011

by Duncan Weldon    


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The economy is stuck -we’ve had nine months of near stagnation and the prospects for the next two years look grim.

In many ways we now seem to be bouncing along on at the bottom of the ‘L’.Even excluding ‘temporary factors’ (warm weather, cold weather, tsunamis and royal nuptials) the economy only managed 0.7% growth in the past nine months – a pathetic recovery.

As the NIESR have noted this is an historically weak recovery – the only real precedent being the 1930s.

The causes are varied – an over indebted consumer sector who are experiencing falling real wages, falling disposable income and lack confidence. Companies which are cash rich but reluctant to invest, banks which simply aren’t lending to productive businesses, weak export prospects with our major trading partners dealing with their own crisis.

The real austerity hasn’t yet been felt economically – sure the VAT rise has sucked some demand out of the economy and contributed to falling real wages and Osborne’s doom and gloom talk has depressed confidence, but the real impact in terms of public spending cuts is just being.

The regional picture looks even worse with what little growth there is concentrated in London and the South East.

So far the government has managed to stop the recovery dead in its tracks but made little impact on the deficit.

‘Expansionary fiscal contraction’ seems to be more contractionary than expansionary.

We can argue about the multipliers of government spending and how effective a second stimulus might or might not be, but what seems clear to me is that cuts in government spending will subtract from growth. Policy makers may or may not be able to spend their way out of recession – but they certainly can’t cut their way out of one.

The right has come out with its preferred growth agenda – dismissed in detail by the TUC’s Nicola Smith here – and it contains few surprises. Attacks on the minimum wage, the welfare system and calls for cuts in red tape and corporation tax – this isn’t their growth agenda, this is simply a repetition of their own long standing prejudices.

The core issues are how we get the corporate surplus down, the banks lending (to the right sort of business), investment increased and demand restored. Get this right and the deficit will start to come down.

Ed Balls proposals for a temporary VAT cut and small investment led stimulus funded by a bonus tax has much merit but isn’t enough to deal with the serious issues we face.

I’m less convinced by Cable’s calls for more QE (without radical reform) and don’t see the logic at all of Osborne’s reported desire to cut the 50p rate.

As I’ve argued before, what we need now is a ruthless focus on wages, employment and investment.

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments


Spot on.

2. Paul Newman

but they certainly can’t cut their way out of one.

Depends what you cut -A reallocation of resources from community cohesion awareness officer to people doing profitable work would help
And annuvver fing -Its a lot better than raising taxes obviously.Currently not only are we raising taxes but we are not cutting at all .We are slowing the rate of increase of spending from a level no-one believes could continue .Cutting better than raising taxes, agreed ?
A ” Focus on employment” will butter no parsnips, only Companies can create employment and if that employment is sustained only by throwing money around we must latter pay back we are better off not having it.
I agree with you there is no easy way.The real answer is rewarding work, rewarding enterprise, and cutting fat … Sadly, but unavoidably, a period of higher unemployment and double dippyness is another cost of the Labour splurge… When you are morbidly obese the diet is not a pleasure .It may well feel worse .
Btw Liberal Conspirators – Long term Duncan observers have tracked him backing slowly away from his “Throw money at it” Ballsite stance to a point where he is kind of admitting he was wrong ….
When as respected a commentator as Duncan is edging for the door for the sake of his future credibility be scared … could be you need a rhetorical Plan B .

How about raising taxes on the super rich? That should get things going again.

If cuts reduce the amount of debt, which is generally a deadweight on any economy, then they might work.

Also, if they reallocate resources from unproductive to productive (in right-wing terms effectively public versus private I suppose) then they could lead to economic growth.

Pul Newman

A reallocation of resources from community cohesion awareness officer to people doing profitable work would help

Er, ok.

What if there isn’t any “profitable work” (by which I think you mean Labour cost plus margin = chargeout rate to some customer or other). Unemployment at 2.5m would suggest a lack thereof.

If community cohesion officer keeps Housing Estates safe and spends their money in local economy, then that’s great and what we need.

Oh and the response of the Right to their current economic failure has been risible.

Hilariously predictable, but risible.

” As the NIESR have noted this is an historically weak recovery – the only real precedent being the 1930s. ”

Duncan, you really ought to stop sucking the lemons. What would happen if you excluded oil and gas production from the NIESR three-month moving average? One would find that far from an unprecedented recovery. This recovery is almost exactly following the early eighties recovery. Thankfully without the high unemployment. Have you changed your double dip recession forecast for this year? You need the next two quarters to be negative.

http://www.moneymovesmarkets.com/journal/2011/7/26/grossly-distorted-product-moderate-economic-recovery-remains.html

8. Leon Wolfson

@4 – There have been studies on this.

Below 90% of GNP, they have little effect. Above that, it’s a ~1% drag. However, these cuts are certainly costing us in the region of 2%, so even going above 90% is worthwhile if it gets the economy moving again.

Given our debt is owed over a reasonably long period, we’re not in the same situation as Greece, despite the government’s talking of our economic prospects down.

The people like Paul who want more of the same, ignoring the fact it’s what stalled the economy, are digging themselves into a hole which hopefully will swallow their ideology whole.

@7 – I can fiddle the figures by including and excluding industries to get any result I want as well. But that’s of strictly limited value in the real world.

It is not fiddling figures to get any desired result. Excluding distortionary factors is what reasonable people do when they are making comparisons. Why do you think volatile things are excluded when the Bank and others are looking at core inflation trends? Have you never heard of terms like seasonally adjusted data? Excluding oil and gas allows an insight into what pattern of recovery the economy is following and it matches the early eighties recovery. Therefore, future increases in output will most likely continue to follow that trend.

10. gastro george

@8 “I can fiddle the figures by including and excluding industries to get any result I want as well. But that’s of strictly limited value in the real world.”

Quite. LVMH is booming, so we must be heading for a recovery. Or maybe it’s more symptomatic that the rich are doing pretty well and splashing their cash. It’s a shame that trickle-down doesn’t work in real life.

11. Leon Wolfson

@9 – Of course it’s fiddling the data. Oil and gas production follows longer-term trends, and ignoring that is much like ignoring any major sector of the economy.

These things don’t stand in isolation. Because of the money from oil and gas in the 80’s, other areas of the economy benefited, for example.

I’m not exactly inexperienced at selecting the correct data to get the desired result, but in games being able to do that is a skill (picking the working elements of gameplay!), and not a fraud.

Leon @8,

That’s simply government debt. A major drag is also personal debt.

I’d also point out there are studies that suggest that there is no multiplier in a complex economy from government spending – so cutting it will not have a major effect if it frees up money. The problem at the moment is that spending (and debt) are so high that if you want to cut them, you still can’t free up money.

My guess is that when levels of debt reach a certain point, economic activity will pick up again – there will be less exposure to default and therefore more willingness to lend and also more people with income to spend. As government debt affects this equation through requiring taxation to pay for it, it is a relevant consideration.

Conservatives are just vandals.

Their only talent is destruction.

14. Leon Wolfson

@12 – Well yes, that’s the thing isn’t it. Many of the government cuts are simply transferring the costs directly to poorer people, who have lowest disposable income in the first place. Any actual “savings” for the economy are people cutting down on basics.

They’re also relying on personal debt to get spending moving, which is counter-productive

Also, slashing spending to the bone ends up with people spending far more on replacing services with less efficient replacements, yes. Take America’s healthcare system as a prime example of that.

15. Richard W

@ 11. Leon Wolfson

It has nothing to do with money from North Sea oil. Stripping out production to see the trend in output makes perfect sense. Maybe you would like to provide us with your forecast for the quarter when output will decline and the economy goes into recession, since you believe the economy has ‘ stalled. ‘

“Attacks on the minimum wage, the welfare system and calls for cuts in red tape and corporation tax – this isn’t their growth agenda, this is simply a repetition of their own long standing prejudices.”

Unless you can show that these policies will not lead to growth then you’re just wibbling. Indeed it’s fairly obvious that they would be helpful for the economy, that you may not want to pursue them for other reasons does not justify such a bald dismissal.

The simplest way is to bite the bullet and liquidate all the bad investments made during the boom that are still lurking around. That however would require a short-term recession.

@8

That analysis is pretty poor. They mix up countries with and without gold standards, place arbitrary boundaries and don’t really adjust for other factors. Both UK & U.S. had well over 200% after WW2 and did just fine.

An IMF estimate of 160% in the current situation is more realistic. I don’t usually support the IMF but it was a good report and introspectively seems like a reasonable figure.

To everybody on the left:

Please start campaigning for a land value tax. They are amazing.

That is all.

19. Leon Wolfson

@15 – Only if you’re treating extraction as somehow unreal income. They’re heavily linked, especially given industries like processing of extracts.

And I don’t “believe” the economy has stalled, the evidence is RIGHT THERE. If you’re right and there have yet been no cuts, then we’re doomed if Plan A continues… (as I said, since they have in fact already started, we’re only partly doomed! Oh, wait…)

@18 – Why would I campaign for a tax which will massively increase the already inflated rent values in this country? Until there are rent boards, I’ll oppose a LVT. A better idea is a hefty tax on unoccupied property and changing capital gains tax to at least the same, if not higher, than income taxation.

20. Gene Porter

Here’s a wild idea. There is a way out for the left. It is called socialism.

‘Why would I campaign for a tax which will massively increase the already inflated rent values in this country? Until there are rent boards, I’ll oppose a LVT. A better idea is a hefty tax on unoccupied property and changing capital gains tax to at least the same, if not higher, than income taxation.’

Land Taxes do not increase rent, because they cannot be passed on. They do not affect increase demand or decrease supply.

In fact, it actually lowers the price of land by reducing the amount of privately pocketed rent that can be capitalized into a sale price.

Expressed in mathematical terms, the price of land p equals the annual rent r divided by the interest rate i, or:

p = r / i

If there is a tax rate t on the price of land p, then p equals the rent divided by the sum of the interest rate and the offsetting tax rate, or:

p = r / (i + t)

for more detail, see here:

http://forum.prisonplanet.com/index.php?topic=160421.0

22. Leon Wolfson

@21 – Of course they’ll be passed on. LVT comes in, owner passes it on to Tenants. He didn’t pay council tax, and will view LVT in the same way.

And of course, since it’s taxing the owner rather than the occupiers, it’ll do away with the current council tax benefit, leaving it’s claimants – many of the poorest in society – considerably out of pocket.

It also strongly encouraged HMO’s and overcrowding – and housing the poor in tower blocks – and creates a peverse incentive to avoid anything which might trigger value reassessment, like building improvements requiring planning permission.

Is also typically proposed as revenue-positive (hence hitting many people harder than the tax it replaces) and in many forms taxes on “ideal usage”, unfairly penalising actual usage and as again in most proposals it charges on the “main usage”, will make properties above shops inordinately expensive to rent.

It also creates incentives, based on ideal usage, for councils to apply for planning permission usage changes for areas based on a desire to maximise maximise tax revenue, whereas today there is no such perverse incentive.

There’s also the little problem that without fantastically low valuations, very few farms would have a hope in heck of making a profit without radically hiking their prices, making them simply uncompetitive.

And, it would also screw over charities and the like currently enjoying peppercorn rates. Since the building will be taxed anyway, councils will be in a situation where getting rid of buildings currently used for social purposes is financially necessary.

And…I could go on for ages, but the major problem is and remains that it would jack rents heavily and do away with the appropriate compensation. And if you think this government would replace CTB with higher values for housing benefit as a result, I have some buckets of real river mud to sell you.

23. Leon Wolfson

Look –

I’m a Landlord. I pay £1000 a month in mortgage costs on a property. I charge four tenants £300 each for using the property. Council tax, which the tenants pay (and is of no concern to me, the Landlord), is £500 per year. I make a profit of £200 a year.

Now, council tax is abolished and replaced with LVT. As the owner, I am now levied, let’s be generous and say £400 a year. Suddenly, I’m losing £200 a year on that land! We can’t have that, so let’s restore the £200/year profit by charging the tenants £400 each, a 25% rise.

Now, two of the people at the property were poor/students/whatever who didn’t previously pay council tax. Suddenly, their effective payments have just soared 25%!

In theory, this won’t happen because some landlord’s won’t do it. In practice, very very very few landlords will NOT jump the rent. Councils and the like with fixed-rent properties may start taking a massive loss on them, and seek to get rid of the social housing stock they’re now liable for LVT on!

“Now, two of the people at the property were poor/students/whatever who didn’t previously pay council tax. Suddenly, their effective payments have just soared 25%!”

And they go and rent somewhere less extortionate, forcing the land owner to realise that actually there is only a finite amount of money that can be charged to a rentor.

Both sides can make up straw men.

25. Duncan Weldon

Sorry for late response.

Paul @2 – I am less hopeful of the effects a major stimulus at a time when other governments are cutting. If we had another co-ordinated global stimulus that’d be different – but seems unlikely.

Richard @7 – still feel a double dip is more likely than not.

26. Luis Enrique

Duncan,

have you read Chris Giles laying into Ed Balls over his VAT cut idea? (well, a bit)

@8 Leon

‘However, these cuts are certainly costing us in the region of 2%,’

Some evidence for this please!

16 Falco

Unless you can show that these policies will not lead to growth then you’re just wibbling. Indeed it’s fairly obvious that they would be helpful for the economy, that you may not want to pursue them for other reasons does not justify such a bald dismissal.

Sorry, you haven’t proven they they’d help the economy.

And experience of the last thirty years suggests that supply side nonsense is, in fact, just nonsense.

29. gastro george

@16

Re the minimum wage, studies showed that the effect on employment was minimal. In fact you could argue that raising the minimum wage is a good thing for the economy as it will go to people who will actually spend the extra money (because they are poor, they need to) which will benefit other businesses.

@ BenM

You clearly don’t understand.

Taxpayers have to pay for the community cohesion officer. That money comes from the *private* sector.

If by some small miracle he manages to add value more than his costs then its a position worth having…if, as many suspect, that many jobs created under labour don’t achieve that, then they should be cut as they are a drain on the economy.

@ 8 Leon

You are correct about the studies, but also debt/GDP is much harder to bring down once it hits that 90% level….so it’s not a direct substitution. It’s 1% lower LONG TERM growth for 2% short term growth….in the end its better to have better long term growth.

@ 18 Cahal

Comparing war debt to general fiscal profligacy is pretty stupid.

LVTs have lots of real world problems. Not least because it does actually depress the value of land which a lot of asset backed credit is based on. So it certainly doesn’t slove your growth problem. It also tends to be a tax which dwindles over time as it forces prices lower, not higher.

I think in an ideal world starting from scratch it could work, but in real world terms it would do a lot more harm than good.

http://www.zerohedge.com/news/thousand-pictures-worth-one-word-worthless

Just a bit of semi-serious fun for those (cough….Blanchflower) who think endless money printing is a solution for this crisis.

LW@23: If the supply of land is totally inelastic then any attempt to fix the price above its equilibrium value will result in excess supply/deficient demand–right? Diagrams >>> anecdotes.

34. gastro george

@Tyler

“Taxpayers have to pay for the community cohesion officer. That money comes from the *private* sector.”

The government pays for the community cohesion officer, on our behalf. Governments, in most years, create more money (spending) than they destroy (taxation). As long as that gap reflects the new contribution of the productive capacity of the country, then that’s all fine and dandy and non-inflationary. If that money is spent on public goods, then that’s called civilisation.

Don’t forget that the community cohesion officer pays taxes as well.

“http://www.zerohedge.com/news/thousand-pictures-worth-one-word-worthless:

History has a message for us: No fiat currency has lasted forever. Eventually, they all fail.”

Does this actually mean anything? I mean, we’re all dead in the end. Does that mean you advocate mass suicide?

35. Leon Wolfson

@24 – Yes, they can go north to a cheaper town, abandoning their job or course.

Thanks for that, that IS the Tory solution after all.

You’re trying to tell me that Landlords will not pass on a major costs increase, and one which was formerly born by the tenants, except those *formerly* immune to the charges (very poor and students), who are now having those costs heaped upon them. I don’t believe you for a moment.

A LVT needs a LOT of other work to be done alongside it, and it won’t be less complex to do those than the system it’s replacing, even if it itself is relatively simple. It won’t be cost-positive, for instance, if it’s not to hurt many of the poorest in society.

@27 – It’s a very conservative estimate, yes, I was making a point, not being accurate. There are plenty of blogs which have done figures on the actual, higher, value involved.

@31 – Except I’d point out Japan’s lost decade as an example of what can happen if you let fear of debt dominate…it’s now a distinct possibility here.

OMG, why can’t people grasp that LVTs CANNOT BE PASSED ON.

‘You’re trying to tell me that Landlords will not pass on a major costs increase, and one which was formerly born by the tenants, except those *formerly* immune to the charges (very poor and students), who are now having those costs heaped upon them. I don’t believe you for a moment.’

Land Tax is effectively paid whether or not it exists. With an LVT, it goes to the government and is used for social spending. Without, it goes into private hands. The supply of land is fixed, which means the tax leaves the market price unchanged, so landlords cannot pass it on. There is 0 dead weight loss.

Also, if land taxes could be passed on, they wouldn’t be opposed so vehemently by landlords. It pushes prices down – the higher the tax, the lower the price. Yes, it is counter intuitive, but arguments from personal incredulity are not arguments. Your anecdotes go against every single bit of economic theory and all the empirical evidence.

http://en.wikipedia.org/wiki/Land_value_tax

‘A LVT needs a LOT of other work to be done alongside it, and it won’t be less complex to do those than the system it’s replacing, even if it itself is relatively simple. It won’t be cost-positive, for instance, if it’s not to hurt many of the poorest in society.’

Incorrect. Land Values are already assessed by the government. LVT would be easy to implement, probably easier than any other tax.

‘LVTs have lots of real world problems. Not least because it does actually depress the value of land which a lot of asset backed credit is based on. So it certainly doesn’t slove your growth problem. It also tends to be a tax which dwindles over time as it forces prices lower, not higher. ‘

Yes, and having economies based on asset prices is awful. Depressing land prices is a positive, not a negative. And it does increase growth because it encourages productive use of land, not to mention it opens up room for tax cuts on labour and capital.

37. Leon Wolfson

@36 – Because it’s an outright LIE.

My example shows very clearly what happens. LVT takes a cost which was previously a tax on the tenants, and puts it onto the landlord. He raises his prices, putting things back where they were. End of story.

Only if landlords were, in the most part, willing to take large LOSSES from the properties they rented out would this be otherwise. And while you may be naive enough to think they will…

You dismiss LVT as something “already assessed”, when this is not true. SOME assessment of land values goes on, but not in every area or in enough detail. There would be more work needed, and you didn’t address the issue of the effective abolition of council tax benefit which it causes, and the higher costs on students, and the poorest and disabled in society.

Moreover, a LVT is not guaranteed in any way to go on “social spending”. More, if it leads to tax cuts elsewhere, it’s because it will have increased rental values for those not home-owners disproportionally, this of course being massively regressive – people need to live somewhere!

I’m sorry but you have no idea what you are talking about. Please do some research on land taxes before making assertions based on intuition and using anecdotes.

Land supply = fixed. If landlord tries to increase price it will be brought back down to the original market price.

@35 Leon

I have googled but have been unable to find these blogs. I am curious about this as I find it difficult to believe that the small scale of the deficit reduction plans (Government spending is still increasing) results in a 2% reduction in GDP. I would be grateful if you could provide a link.


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  1. Liberal Conspiracy

    There's no simple way out of this economic rut, for the left or right http://bit.ly/r6tRan

  2. Stephe Meloy

    There's no simple way out of this economic rut, for the left or right http://bit.ly/r6tRan

  3. John West

    There's no simple way out of this economic rut, for the left or right http://bit.ly/r6tRan

  4. John West

    There's no simple way out of this economic rut, for the left or right http://bit.ly/r6tRan

  5. Diane Lawrence

    There’s no simple way out of this economic rut, for the left or right | Liberal Conspiracy http://t.co/YMa5I6v via @libcon





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