The whole point of austerity is to curtail economic growth in the short term to ensure that the economy is healthier in the long term. I’m on the Right but I’m not stupid enough to think that austerity can magically create a recovery: it’s necessary to purge the economy of a distorted capital structure.

You mean like 17th century “doctors” bleeding patients to purge the ill humours, Richard?

‘The whole point of austerity is to curtail economic growth in the short term to ensure that the economy is healthier in the long term. ‘

Find me, please, the quotes from the current UK government from last year that say this explicitly.

Because my memory is that they actually said that increased confidence would mean that growth would be better than it would be from ‘false’ government spending.

hang on, Sunny…did you criticise Cameron for not signing up to the pact that was designed to cripple Greece?

The global elites and their puppet politicians have decreed that austerity and sacrifice for the little people and champagne for the rich this is not suprising. The little people must pay for the elites fuck ups.

Austerity leads to low growth which leads to mor3 austerity, which leads to lower growth, and then more austerity. It is a death star spiral of austerity.

How many people have to be sacrificed to the elites greed?

No doubt the response from the right will be to call for even more austerity, in the magical belief this will expand tax revenues.

I don’t know how the Euro-enthusiasts suddenly become the Right. This is, after all, precisely what LC has been calling for. Cameron is criticised elsewhere on LC for declining to be part of the group pushing this on Greece.

However the Right is not so stupid as to say austerity creates jobs. It does not. It will inevitably lead to a worsening of the economic situation. But in the long run, Greece will turn around. The bad debts will go – either paid off or through default. Taxes will come down. Economic activity will pick up on a firmer and sounder basis than before. It is not as if the Greeks have any choice. Because they refused to go austere when the costs would have been lower, they now have to do it when the costs are higher. Because no one will lend to them any more. If they cannot borrow, they cannot spend money they do not have. They simply have no choice. The only choice they do have is to do what the Right says they should – default and leave the Euro. But of course the Guardianista tendency does not want them to do that. Better they suffer than their holiday homes in Tuscany get a little less accessible.

You see,Osborne was right all along about us ending up like Greece

Reading the right-wing comments here it seems like crap macroeconomics and a poor memory have become requirements for membership. From Richard’s weird ‘austerity is necessary to purge the economy’, to SMFS’s “this is, after all, precisely what LC has been calling for” and confusion as to whether Greeks do or do not have a choice, the whole ideology seems to be coming apart. I did enjoy the idea that the right-wing never argued that austerity would encourage growth, that’s a lie that’s funny enough to keep.

@6. So Much For Subtlety: “The only choice they [Greeks] do have is to do what the Right says they should – default and leave the Euro. But of course the Guardianista tendency does not want them to do that. Better they suffer than their holiday homes in Tuscany get a little less accessible.”

This is not a right-left issue. Do they still exist? Greece should default now for its own benefit and for that of the rest of the EZ.

BTW:
1. Tuscany is in Italy
2. Guardianistas would find their holiday homes to be more accessible (ie cheaper) if Italy defaulted too

@1. Richard: “I’m on the Right but I’m not stupid enough to think that austerity can magically create a recovery: it’s necessary to purge the economy of a distorted capital structure.”

Previous government budgets suggest that the 2010 government (however it was composed) would be austere. Previous governments never saved anything. Keynesian economics require that you have a bit of money now and expect a bit more in the future; government spends those two pots on something that is useful. However, this government does not have a past pot of money and has zero prospects.

Get used to it.

Cameron isn’t signing up to Merkozy’s package because of the austerity they’re planning – that applies to Eurozone. He was criticised over EU summit for something else – leaving UK out of single market

8. Paul

Reading the right-wing comments here it seems like crap macroeconomics and a poor memory have become requirements for membership. …. I did enjoy the idea that the right-wing never argued that austerity would encourage growth, that’s a lie that’s funny enough to keep.

Austerity will, of course, in the long run promote growth. It just won’t do so today. No one will invest if they think they will face much higher taxes in the future. They will if they think taxes are going to go down. But if you think the microeconomics here are crap, by all means, explain what is wrong. I notice you do not. Indeed if people had ignored macroeconomics and stuck to micro, the EU would not be in this mess.

9. Charlieman

This is not a right-left issue. Do they still exist? Greece should default now for its own benefit and for that of the rest of the EZ.

Of course it is a Left-Right issue. Just not one that 100% of either the Left or the Right agrees about. The Left has traditionally believed Britain would be much better off if someone else ruled us – the French traditionally going all the way back to the Revolution. The Soviets for a large chunk of the past 100 years. A desire for the EU to rule Britain is just an up-dated form of this self loathing.

Greece should default for its own benefit. But it does look like an end to the European project. At least a rolling back of the plan. Which the Left tends not to want – even though the only people benefiting from this stupidity are German and French banks (and their creditors) and European apparatchiks.

1. Tuscany is in Italy

You don’t say.

2. Guardianistas would find their holiday homes to be more accessible (ie cheaper) if Italy defaulted too

Less accessible if they had to get a visa to go there. Less valuable if their millions of Euros investment turned into billions of Lira.

10. Charlieman

Keynesian economics require that you have a bit of money now and expect a bit more in the future; government spends those two pots on something that is useful. However, this government does not have a past pot of money and has zero prospects. Get used to it.

One of the things Brown should never ever be forgiven for is that he knew this. He said that it was necessary to save up in good times for the down turns in the future. He said he was doing it. He had surpluses to save. He spent them. He pissed away all that money on a useless bid to stay in office and we are all suffering for it now. Not as badly as Greece, but still, not as lucky as Canada or Australia who did have sensible governments that paid down their debt.

@12. So Much For Subtlety: “Less accessible if they had to get a visa to go there.”

On first thought, I regarded that statement as hysterical. The second one is that open borders will end when the current Euro collapses; walking across the border with a suitcase of currency will end.

13. Charlieman

On first thought, I regarded that statement as hysterical. The second one is that open borders will end when the current Euro collapses; walking across the border with a suitcase of currency will end.

Why hysterical? I used to work with a man who lived in Nice. He flew back and forth all the time. I would hate to think what his Greenhouse gas output would be. But that was only possible because of free movement of people and cheap airlines. The Europeans are already wavering on free movement of peoples with some countries reimposing border controls. If the currency collapses and we go into a profound recession/depression do you think that Roma are going to be allowed to mob tourists at the Gard du Nord indefinitely?

Although I do think a *lot* more people will be crossing borders with suitcases full of money. Anyone with any money in Russia for instance. Much of Eastern Europe won’t be far behind. The Swiss must be besides themselves with glee.

@ Richard

“The whole point of austerity is to curtail economic growth in the short term”

@ SMFS

“However the Right is not so stupid as to say austerity creates jobs.”

Whatever happened to ‘Expansionary Fiscal Contraction’? The Right have spent the past two years telling us that austerity will *not* curtail growth, but on the contrary will promote growth (and create jobs) by enabling the private sector to expand as state spending is rolled back.

@ SMFS

“No one will invest if they think they will face much higher taxes in the future.”

And presumably they will continue to think that until a corner has been turned, and taxes appear likely to fall as the economy grows. So private sector investment will not be forthcoming until the economy has begun to recover. Yet the economy will *not* begin to recover without investment of some sort. That leaves us two options, so far as I can see: 1 – accept the ‘death spiral’, or 2 – encourage non-private sector investment. That would be government spending, then.

15. G.O.

Whatever happened to ‘Expansionary Fiscal Contraction’? The Right have spent the past two years telling us that austerity will *not* curtail growth, but on the contrary will promote growth (and create jobs) by enabling the private sector to expand as state spending is rolled back.

I have never heard anyone use that expression in my life. It is true that in normal times tax cuts do cause economic growth. Perhaps some of Baby Dave’s Spin Doctors came up with it – but I think most of the Right would object to Dave being classified as being on the Right.

And presumably they will continue to think that until a corner has been turned, and taxes appear likely to fall as the economy grows. So private sector investment will not be forthcoming until the economy has begun to recover. Yet the economy will *not* begin to recover without investment of some sort. That leaves us two options, so far as I can see: 1 – accept the ‘death spiral’, or 2 – encourage non-private sector investment. That would be government spending, then.

Taxes never fall. They only fall when governments are forced by bad economic times to cut back. And not even then. If the economy grows there is no need to deliver pain to the government’s clients but rather more cash to spend on more of their friends. I would find it hard to think of the last time anyone cut spending in a time of economic growth.

Private sector investment *is* the economy recovering. The two are the same. That will not happen until someone finds something someone wants to buy. Either a new product, or a new market – or enough poison will have been purged from the economy that what is left is trusted. However assuring people that taxes will be lower in the future will help.

Notice that you are confusing total tax take with tax rates and tax incidence. Revenue may fall in a depression, but the tax rate may stay the same. Tax revenue rises in good times even if the rate remains the same.

The problem is that government spending is not an option for most Western countries. We could have done this before as we had some fiscal cushion to fall back on. Now we are skint or close to it. We have debt levels comparable to those after WW2 – and we spent it on welfare, creating a vast parasitic Army of voters with a sense of entitlement. We cannot borrow more because no one in their right mind would lend much more. Not at interest rates we can pay. So we can afford no more clever little Keynesian tricks. Not that they worked in Japan. We have no choice but to slash and burn. The sooner we start, the better off we will be.

The expression “Expansionary Fiscal Contraction” has been used more than once by Paul Staines, as he talks up the situation in Ireland.

You need to look at your counterfactuals Sunny. What would have happened if Greece had followed your advice and increased public spending by enough to cover both its increased interest payments and to provide a stimulus? It wouldn’t have been bailed out, and it would now almost certainly be insolvent – the state wouldn’t have the cash to pay public sector wages, benefits etc. Does that look like a good outcome to you?

He was criticised over EU summit for something else – leaving UK out of single market

No he wasn’t Sunny, because he explicitly didn’t “leave the UK out of the single market”, whatever the hell that’s supposed to mean.

The expression “Expansionary Fiscal Contraction” has been used more than once by Paul Staines, as he talks up the situation in Ireland.

Ireland grew by 1.9% in Q2 2011 and 1.6% in Q3 2011, figures that are up there with the best in Europe. It’ll probably all go smash over the Eurocrisies, but it’s hard to deny that Irish austerity has co-incided with strong economic growth.
http://www.tradingeconomics.com/ireland/gdp-growth

The big lie behind all of this is that all of Europe is insolvent.
There is only one solution for all of Europe including Greece . Default!

@ SMFS

“I have never heard anyone use that expression in my life”

Whether you’ve heard the expression used or not, Osborne has gambled everything on Expansionary Fiscal Contraction being a real phenomenon. If you don’t believe me, just look at the growth forecasts that accompanied his announcements of assorted spending cuts and tax rises in June and October last year. He was assuming that the economy would continue to grow at or above its trend rate even as government spending was rolled back, because he believed the private sector would take up the slack – e.g. he believed the private sector would create more jobs than were being lost in the public sector, not at some point in the future but *this year*.

“Taxes never fall. They only fall when governments are forced by bad economic times to cut back. And not even then.”

Worthy of Lewis Carroll himself. No idea what it means.

“assuring people that taxes will be lower in the future will help.”

Yes, this was all part of the big idea on ‘Expansionary Fiscal Contraction’: look tough on the defict now and people will have confidence that their taxes will be lower again in the future, and therefore go out and spend their money. Just one problem: it hasn’t worked.

“Notice that you are confusing total tax take with tax rates and tax incidence.”

Am I? Where?

“Revenue may fall in a depression, but the tax rate may stay the same. Tax revenue rises in good times even if the rate remains the same.”

You don’t say.

“We have debt levels comparable to those after WW2″

No we don’t. We have debt levels that are set to peak at less than a third of the levels we had after WW2 – 80% of GDP vs 250%.

“and we spent it on welfare”

Hooray for us. A triumph of humanity that makes me swell with pride.

“We cannot borrow more because no one in their right mind would lend much more.”

Ah, is *that* why everyone is queueing up to lend us money at historically low interest rates?

In any case, Osborne *is* borrowing more. The trouble is, it’s not planned borrowing undertaken for any purpose – e.g. to fund targeted tax cuts, to invest in infrastructure – but out-of-control, reactive, automatic borrowing to pay unemployment benefits and plug holes in tax revenues.

In any case, Osborne *is* borrowing more. The trouble is, it’s not planned borrowing undertaken for any purpose – e.g. to fund targeted tax cuts, to invest in infrastructure – but out-of-control, reactive, automatic borrowing to pay unemployment benefits and plug holes in tax revenues.

More than he’d hoped, but a lot less than he was. The UK budget deficit has fallen from 11.5% to 8.5% since the election.

automatic borrowing to pay unemployment benefits and plug holes in tax revenues.

Oh, and tax revenues are very substantially up this year compared to last year.

Tim J

“The UK budget deficit has fallen from 11.5% to 8.5% since the election.”

Sure. But most of that fall happened in 2010/11, because for the first six months of that year, the economy was growing. The pace of deficit reduction has slowed, not increased, as Osborne’s spending cuts and tax rises have kicked in. And the fall is set to be even smaller next year than this year.

“Oh, and tax revenues are very substantially up this year compared to last year.”

…so far. Let’s see where we are next April.

Osborne talked the economy down as soon as he came in. He then talked about 25% cuts in almost all state depts . He even asked every dept to look at 40% cuts. Thr right wing media swooned at such cuts. But most people terrified of losing thei jobs stopped spending.

Osborne has made things much worse.

@20.

““and we spent it on welfare”

Hooray for us. A triumph of humanity that makes me swell with pride.”

What absolutely offensive BS, especially to those of us who come from working-class backgrounds.

The 2000s weren’t the 1930s, not even the late 2000s or the 2010s are the 1930s – Gordon Brown didn’t borrow and spend on the welfare state to stop scrub-faced men in cloth caps and mufflers and their families from starving or freezing to death in the middle of a great depression. He didn’t do it to give some crumb of comfort to some modern equivalent of the Jarrow Marchers, or to shore up towns that had been thrown out of work en masse due to world events.

He did it in the middle of a bloody great boom (the time when left wingers and Keynesians used to tell us you’re meant to run surpluses) to create a client vote in the public sector, and more generally by making damn near everyone a welfare claimant in some manner. I can hardly call most of the claimants in my native East End, in flashy trainers and with the latest phones, in any way deprived. Perhaps a cut in benefits might mean they don’t get the latest model iPhone. O, the humanity!

There was no humanity to it, just naked cynicism and political opportunism. The fruits of the entitlement society are now biting the Tories on the bottom when exposed to the merest suggestion of austerity. Just as Brown planned. In that sense, the left wins, for now, until we go bust again.

@ 25

“What absolutely offensive BS, especially to those of us who come from working-class backgrounds.”

I come from a working-class background, and I’m not offended.

“The 2000s weren’t the 1930s, not even the late 2000s or the 2010s are the 1930s – Gordon Brown didn’t borrow and spend on the welfare state to…”

OK, we’re talking at cross purposes. When SMFS said “we spent it on welfare”, I assumed he was talking about the general, long-term increase in spending on welfare since the creation of the welfare state, not specifically about Gordon Brown’s spending in the mid-to-late 2000s.

“…stop scrub-faced men in cloth caps and mufflers and their families from starving or freezing to death in the middle of a great depression. He didn’t do it to give some crumb of comfort to some modern equivalent of the Jarrow Marchers, or to shore up towns that had been thrown out of work en masse due to world events.

He did it in the middle of a bloody great boom (the time when left wingers and Keynesians used to tell us you’re meant to run surpluses)”

…and I don’t mean to defend Brown’s decision to run a deficit from 2002 onwards, modest though it was (at around 2.5% of GDP). He should have spent less if possible and taxed more if not.

“and more generally by making damn near everyone a welfare claimant in some manner.”

This was hardly a Brown innovation. Damn near everyone has been making claims on the welfare state for decades, be that in the form of cash benefits (Child Benefit, the State Pension) or services (state schools, the NHS). And a good thing too. Brown’s great innovation was to balance universalism with targetting of benefits at those who need them – tax credits being the best example. Damn near everyone gets something, but those who have least get the most.

Brown’s great innovation was to balance universalism with targetting of benefits at those who need them – tax credits being the best example. Damn near everyone gets something, but those who have least get the most.

I always love the logic that everyone pays and gets back – which has to be less efficient than simply paying or getting as appropriate…

@25

He did it in the middle of a bloody great boom (the time when left wingers and Keynesians used to tell us you’re meant to run surpluses)

This would also be in the period when Friedmanite economics was pretty much hegemonic throughout most of the world, with both Blair and Brown having had to make overtures to the city pre-97 to reassure them that their economic policy wouldn’t be all that much different to Major’s Tories (In terms of letting the city have their cake and eat it). I’m pretty sure that had Brown announced in say 1999 that he was taking a Keynesian angle, against the firmly entrenched economic consensus of the day, that he’d have been strung up for being worse than Hitler.

I mean do you actually think lefties were happy during those 13 years that Brown was using PFI as a way to hide debt off-balance sheet, given that the end result was privatisation by the back door, shitter service, shoddier buildings, and massive debt for future generations to pick up?

@ Watchman

“I always love the logic that everyone pays and gets back – which has to be less efficient than simply paying or getting as appropriate…”

One argument against just ‘paying or getting as appropriate’ is that it undermines social solidarity by neatly delineating ‘contributors’ from ‘spongers’.

But there’s a more pragmatic point to be made, which is that having a tax system complex enough to take things like partners’ earnings and dependent children into account, plus a non-overlapping benefits system complex enough to respond to changes in earnings and circumstances in a way that doesn’t disincentivise work, is not obviously a simpler or more efficient option than having the overlapping systems we have now. Yes, the benefits/tax credits system has to be fairly complex, but the tax system can be fairly simple.

@28. Cylux: “I’m pretty sure that had Brown announced in say 1999 that he was taking a Keynesian angle, against the firmly entrenched economic consensus of the day, that he’d have been strung up for being worse than Hitler.”

My recollection is that Brown told us that he wasn’t going to piss the money away. And as a Keynesian, he should have been spending less than he took in from taxes. Not too much of a surplus, of course; government surplus almost always means that low income tax payers do not receive the benefit of their earnings.

“I mean do you actually think lefties were happy during those 13 years that Brown was using PFI as a way to hide debt off-balance sheet, given that the end result was privatisation by the back door, shitter service, shoddier buildings, and massive debt for future generations to pick up?”

A written constitution (acknowledging that UK practices are recorded, hence our ability to use them) does not appeal to me. But a law that prohibits PFI transactions is superficially attractive. I’ll think about it when there is a realistic anti-PFI proposition.

@30

My recollection is that Brown told us that he wasn’t going to piss the money away.

Hasn’t every Chancellor? Prior to doing just that.

@31. Cylux: “Hasn’t every Chancellor? Prior to doing just that.”

Gordon Brown knew it all. If you asked him to explain the difference between perspicacity and perspicuity he would know it, consider it and tell you the answer 14 days after you asked the question.

The great difficulty of governments actually running a surplus and paying down debt in good times are the perennial whiners.

The screams of ‘ won’t someone think about the children ‘ would have been the reaction from Guardian columnists to Brown surpluses. Don’t repay debt, spend the money on the children.

Won’t someone think about public transport users.

Won’t someone think about the motorist.

Won’t someone think about cyclists.

Won’t someone think about the homeless.

Won’t someone think about the students.

Won’t someone think about the elderly.

Give the public sector a wage rise.

Increase benefits.

Why not reduce taxes if the government are running such a surplus. AKA the Bush the Younger/Greenspan plan hmm.

Those would all be typical responses to UK government surpluses. Almost no one including the right would be calling for repayment of debt. The right would say that the government was raising too much in tax.

Along comes a recession and we say, oh shit where did that deficit come from. Umm, let’s blame, er, the bankers. Yeah, they caused the deficit.

Although I believe fiscal stimulus outside of infrastructure spending is almost entirely useless at combating a recession. Some level of deficit is inevitable under almost any likely system as the automatic stabilisers kick in and tax revenues fall. Therefore, to deficit spend is the easy part and is necessary. However, we will not allow the government to repay debt and REDUCE the government share of the economy during the good times.

SMFS

Expansionary fiscal contraction is supposed to be a BRIEF, albeit painful, exercise to clear the economy of malinvestment and allow the private sector to grow. There is nothing brief about what is going on in Greece, because – as we have discussed before – it is not possible to restore competitiveness while shackled to a foreign currency at far too high a rate. The time it would take to restore competitiveness through internal devaluation alone, and the cost in human misery, are simply unacceptable and I am personally appalled that both the EU and the IMF apparently think this is a reasonable course of action.

One of the problems with reforming an economy where tax evasion is a way of life is that structural reform – which of course includes stamping down on tax evasion – in effect imposes a higher tax burden on the private sector, because it will actually have to pay its taxes. As you correctly point out, no-one will invest if they expect higher taxes in future. Therefore private sector investment in Greece will decline, not increase, for the foreseeable future.

The last time an entire generation was sacrificed to liquidationist economic policies was America in the Great Depression. We are seeing the same thing again in Greece. It is horrible, it is unnecessary and it is wrong. The young people of Greece are not responsible for the overspending of past governments, or the profligate lending of German banks to finance that overspending – but they are paying the price for that with their lives.

@33. Richard W: “The great difficulty of governments actually running a surplus and paying down debt in good times are the perennial whiners.”

A proposal for the Chancellor’s speech: “I am keeping some of your money for awkward times that Granny warns us about.”

@SMFS

“No one will invest if they think they will face much higher taxes in the future.”

Whatever happened to ‘Expansionary Fiscal Contraction’? – “I have never heard anyone use that expression in my life.”

You’re either stupid or a troll.

This would also be in the period when Friedmanite economics was pretty much hegemonic throughout most of the world, with both Blair and Brown having had to make overtures to the city pre-97 to reassure them that their economic policy wouldn’t be all that much different to Major’s Tories (In terms of letting the city have their cake and eat it). I’m pretty sure that had Brown announced in say 1999 that he was taking a Keynesian angle, against the firmly entrenched economic consensus of the day, that he’d have been strung up for being worse than Hitler.

The difficulty with this line of argument is that Brown was running a Keynesian economic policy from 1997-2000 (or, more accurately, was continuing with Ken Clarke’s policy). That’s why, during those boom years, Britain ran either a very small deficit or a surplus. You can also argue that his response to the global slump of 2000-2001, of jacking up public spending to stimulate the economy, was also Keynesian. Where it falls down is that after that, public spending went up and up, regardless of the economic cycle. But then, of course, Gordon Brown abolished the economic cycle…

@37

To call New Labour’s economic policy Keynesian is a parody beyond words.

33. Richard W

You’re forgetting that Governments don’t need to pay down debt at all.

Generate sustained economic growth and debt v GDP % falls like magic (although it isn’t magic it’s just mathematics).

Besides Governments can’t run surpluses for long. The political ramifications have already been highlighted, but also government surpluses imply decreasing private savings. And the private sector can’t run down its savings indefinitely. A couple of years max before the need to rebuild.

Pretty much all they can do with a fiscal surplus is to pay down debt with it, BenM.

” Generate sustained economic growth and debt v GDP % falls like magic (although it isn’t magic it’s just mathematics). ”

Yes the ratio will fall through growth. Depends what the government spend on whether it will be sustainable. Government spending directed towards consumption rather than investment is not very sustainable. We managed the remarkable achievement of running a government deficit, a household deficit when the savings rate went negative and a current account deficit. That certainly was not sustainable and the household half of the private sector were certainly not increasing their savings on the back of the government deficit. The corporate half of the private sector did not use savings to increase investment, they were actually financing household consumption. The private savings of the household sector used to fund corporate investment and we got to the stage where corporates where financing households. Back to front and is not sustainable.

” Besides Governments can’t run surpluses for long. The political ramifications have already been highlighted, but also government surpluses imply decreasing private savings. And the private sector can’t run down its savings indefinitely. A couple of years max before the need to rebuild. ”

Well they can if the country has a current account surplus. A current account surplus is by definition an excess of savings over investment. No reason why the the three sectors of the economy, government, private and external can’t all be in surplus at the same time. Put in place policies to increase the UK savings rate and the current account will inevitably move into surplus.

Richard W

Put in place policies to increase the UK savings rate and the current account will inevitably move into surplus.

Fine, but you can’t do that right now or else you’ll cause an economic depression.

True. Our long run savings rate used to be about 15% of national income and it is currently around 5.5%, even that low rate is screwing the economy. That is an indication how much we came to rely on consumption. The government deficit is helping households to repair their savings rate and they will attempt to increase it in response to the government decreasing their deficit. Therefore, it is absolutely vital that corporates increase their investment.

42 Richard W

But corporates don’t want to increase their investment precisely because households are increasing their savings rate. In fact the corporate sector is also net saving. Attempting to cut the government deficit significantly is therefore economic suicide at the moment. As BenM said.

@39. BenM: “Generate sustained economic growth and debt v GDP % falls like magic (although it isn’t magic it’s just mathematics).”

Did that work during Japan’s Lost Decade? I do not wish to incite a detailed technical debate about what went wrong in Japan (because I would not understand it), just making the point that we cannot assume that economic growth will pay off debt in a decade or so.

“…but also government surpluses imply decreasing private savings. And the private sector can’t run down its savings indefinitely.”

Clarification, please. Do you mean that government surplus will suck up personal savings (eg by selling National Savings Bonds to citizens)? Or that government surplus reduces the value of private saving versus imported goods?

@40. Richard W: “A current account surplus is by definition an excess of savings over investment. No reason why the the three sectors of the economy, government, private and external can’t all be in surplus at the same time. Put in place policies to increase the UK savings rate and the current account will inevitably move into surplus.”

It took me a while to understand the truth in your statement that coexistence of surplus cannot exist.

If there is a private surplus, it means that some citizens have more than enough to feed themselves and little incentive to buy stuff. It is therefore necessary for service providers and goods manufacturers to create desirables to liberate savers from their money. Which is an exercise that requires money (private and external spending). Misers will always be with us, and some of us wish to pass a few bob onto family members, but few of us wish to go to the grave with a wallet that was completely unopened to the joys of life.

@44. Charlieman: “It took me a while to understand the truth in your statement that coexistence of surplus cannot exist.”

I intended the converse: It took me a while to understand the truth in your statement that coexistence of surplus can exist.

I was overly focused on the negative argument. Internally, I have used all of the words in the Father Ted lexicon to describe my mistake.

45 Charlieman

Having surpluses in both public and private sector at the same time forces the current account into surplus by cutting imports – essentially the demand for imports drops because of the propensity of the private sector to save and the lack of balancing deficit spending by government. Economically this sounds good but may not be: forcing the government budget into surplus by cutting spending when the private sector is net saving can cause depression.

Charlieman :”Did that work during Japan’s Lost Decade?”

Yes with a big BUT.

From the crash in 1989 to 1998 both public and private sector went up.

From 1998 to 2008 public sector debt contiuned to go up but this allowed the economy to keep ticking over while the private deleveraged.

From 1998 to 2008 private sector debt went down by twice the rate that public sector debt went up. Knocking off total debt by about 6% a year.

However public and private sector debt is still higher as a % of GDP than it was pre-crash. (although private sector debt by itself is down by about half since 1989)

In theory once private sector debt hit a low enough level they would have be able to keep the economy going without a public sector stimulus and then the total debt would have really came down.

You’re talking about a 30-40 year policy though. In Japan it was 10 years holding the line, 10 years reducing the debt levels built up holding that line, they then needed a further 10 to 20 years to return to the debt levels of the mid-70s. All that only works if nothing else went wrong in the meantime.

Hope all that makes sense.

These two charts illustrate precisely the difficulty that the UK faces in generating the net exports to allow us to reduce net debt. We often hear that the EZ is vital to the UK because X amount of our exports go there. One thing to note is that trade figures are not accurate through such things as the ‘ Rotterdam effect ‘ and ‘ Antwerp effect ‘. UK goods for export to say India that transit through Rotterdam are sometimes counted as a UK export to The Netherlands, rather than their final destination country. However, pointing out that the UK economy depends on Europe for a lot of our trade is not some kind of killer argument. All the argument is doing is drawing attention to how being oriented to slow growing European economies is bad for our economy. The difference can be seen here in how well Germany has done trading with China and developing Asia vis-a-vis the UK.

http://dannyquah.files.wordpress.com/2011/12/german_exports.png

http://dannyquah.files.wordpress.com/2011/12/uk_exports.png

Germany could sail through the downturn in U.S. trade and we were stuck. There is a huge world of opportunities out there beyond Western Europe.

” What the UK exports to the US remain double UK exports to Developing Asia, and four times UK exports to China. The UK has simply ended up with most of its exports to economies showing no significant demand growth.

Unpack the numbers further by breaking out the UK’s 50 largest trading partners in 2009: the UK had 56% of its exports go to the 10 slowest-growing economies in that group (growth measured 2000-2008). Across these 50, the correlation between exports and growth was -0.32: the UK systematically exported more to those trading partners growing slower. ”
http://dannyquah.wordpress.com/2011/12/13/clash-at-erc-the-uk-and-the-eurozone-in-the-shifting-global-economy/

Being oriented towards Europe is precisely the problem and is certainly not the solution.

Why UK businesses became too focused on Europe is not really the issue. Our trade needs to regain a global footprint in South America and Asia away from the retirement home of Western Europe. Monthly trade figures are notoriously volatile. However, an interesting thing happened in last months figures that will be worth watching as a development. China overtook the likes of Italy and Spain as a destination for UK exports. We still buy a lot more from them than we sell but our exports to there may be heading in the right direction.