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George Osborne finally admits he made a mistake on austerity


8:55 am - July 19th 2012

by Duncan Weldon    


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Yesterday the Government announced a £50bn plan for investment and exports. The Government will issue guarantees to large infrastructure projects to get them up and running, by assuming much of the risk of failure. In addition £5bn has been earmarked to provide funding for UK exports.

These are good and very much welcome steps.

A month ago Jonathan Portes argued that after the Chancellor’s mansion House speech he had implicitly accepted that he had made the wrong call on the stimulus vs immediate austerity debate and was backing away from it.

No doubt the Treasury will find a way of ensuring that whatever guarantees are offered have no direct, short-term impact on the measured fiscal aggregates. But from an economic point of view that is irrelevant. The economic difference between the government borrowing from the private sector to finance investment spending, and the government guaranteeing the borrrowing of another entity – with the government guarantee meaning that the lender has no more or less risk of non-repayment than if the money was lent direct to government – is marginal.

So the government has now conceded the intellectual and economic argument. Let us hope that they proceed to deliver the meaningful policy change that we have been calling for, however it is labelled.

It appears that he was right – faced with further downgrades from the IMF the government has accepted that we have a demand problem and is trying to do something to increase demand.

But whilst this plan is to be welcomed it has some pretty severe limitations.

First it is unlikely that any projects will actually get underway until mid 2013, whilst the economy needs stimulating now. There is no doubt that infrastructure spending is an extremely good way to stimulate the economy – the multipliers are high (so the government gets more ‘bang from the buck’) and there are important long-term benefits.

But there is also a case for immediate tax cuts which put money in people’s pockets (such as the last government’s VAT cut or President Obama’s payroll tax cut), the advantage of these are they both relieve some of the squeeze on living standards and immediately have an impact on demand.

What we really need now is both – infrastructure spending and efforts to put money in people’s pockets straight away (another option would be to bring forward one year’s benefits upgrading).

The government argues that it can only launch this programme because of its’ ‘hard won credibility’ reflected by low rates. But this is nonsense. Rates aren’t low because of excessive confidence in the Government, they are low because the markets are terrified by the lack of growth.

What we have here isn’t so much a U-turn as what could be termed a Z-turn. The Government have swerved sharply but are still heading in the same direction. Yesterday’s announcement was welcome but not enough.


A longer version is at TouchStone blog

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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


Question: If infrastructure spending is such a fantastic way to boost the economy, why is Southern Spain littered with brand-new, unused airports, empty motorways and trains nobody uses?

Just a thought.

After the chaos of 08, the (Labor) government in Australia decided to stimulate demand by doing several rounds of one-off cash handouts to everyone below a certain income (on the basis that lower income people on average tend to spend rather than squirrel money away).

Riding the coat-tails of Chinese manufacturing via export of raw materials was probably the single most significant factor in Australia’s avoidance of the recession, but the government’s direct injection of cash to people’s pockets to stimulate consumption probably helped too.

3. Chaise Guevara

@ 1 tangentreality

I don’t know about Spain, but if those things are not being used that implies there was no demand for them. Whereas most of our airports, motorways and train routes are oversubscribed. So it doesn’t sound like they’re comparable.

4. Luis Enrique

tangentreality

it’s never ideal to build things that aren’t needed, but all those Spanish White Elephants were built during the boom years, which means it’s more likely that rather than adding to total employment, public spending projects just caused resources to be reallocated from what they would otherwise be doing, and was probably inflationary etc.

It’s always better to find useful projects, but even similar projects during a recession have very different results. First, you are more likely to be adding to net employment and taking workers from unemployment [1], second in the middle a self-fulfilling prophecy recession where firms and households are retrenching because they expect demand to be low, then adding demand can help reverse that, and finally rather than overheating the economy you are going to be brining it back towards where it ought to be (the natural rate of output, if you accept such notions).

that said, even in the current climate we don’t want to go as far as this

[1] not necessarily directly, it could be that you hire workers that already have jobs, but the unemployed fill the jobs they vacated.

5. Margin4error

This is a good step from government – though a bit of an incomplete one.

The guarantee is a good move to get the 40 big projects in the NIP up and running. Industry has been pressing government to actually commit on this in a way that simply saying “we want these projects” just doesn’t work. Offering to guarantee loans is a much firmer commitment and that in itself should enable private companies to invest their own time and resource knowing that these projects are not going to be cancelled or radically changed at the whim of Parliament.

The long term problem remains however. This may help secure finance for building some big projects – which are long term projects and won’t impact on the economy for quite some time. (Ironic that, given this is partly about trying to foster a stimulus on the cheap). But it doesn’t answer how government plans to fund and manage long term maintenance of these projects. The Silvertown Tunnel for example (recently given status as being of national importance) will need building. But it will also need maintaining, upgrading and managing over decades.

PFI was deeply flawed – but without government sayiing a dicky bird on what their alternative is – and with a clear cut and unambiguous aversion to paying out from departmental capital budgets each year – a great many projects will stay on hold because of the uncertainty.

6. Margin4error

oh – and yep – as Chaise suggests – the fact that some infrastructure doesn’t work out does not mean infrastructure is not a route to growth.

The UK is ranked 28th in the world for standard of infrastructure. That’s a massive economic disadvantage in a globalised economy. Building the wrong infrastructure would be foolish. But not building the right infrastructure is far more stupid.

UKIP’s economic policy is to cut back government spending to, after inflation, where it was in 1997, stop subsidising windmills, let the electricity industry use as much nuclear and shale gas power as gthere is a market for, get rid of the most serious regulatory restrictions on wealth production and of the restrictive EU. This would get us to the 6% growth rate the rest of the non-EU world ia achieving.

Since this is what is called liberal economics I thought I would ask if there is anybody here who can give any reasons (not simply explaining that they don’t like it) why this would not work?

@Neil Craig

I’m curious to know where you think the 6% growth would actually come from? Particularly in the short-term. New nuclear projects are inherently long-term projects, which are slow to get started, and lack the incremental inputs/outputs of, say, wind power generation (i.e. capacity can be augmented gradually). The UK doesn’t yet have a large scale shale gas infrastructure (I hope it never does), not to mention it is an environmentally insane proposition.

Furthermore, cutting government spending at a time like this would only serve to remove even more demand from the system, and lead to further contraction in GDP, and potentially even deflation (which is the real nightmare scenario, not the mythical hyper-inflation threat that simply have not manifested itself).

The historical evidence from the last 80 years (globally, not just in the UK) has shown that depressions and recessions are typically ended by increases in government spending, not decreases… deficits can be dealt with once the economy is growing again and self-sustainable.

Growth almost always comes from improving technology which pur \Luddite politicians oppose. With the resy of the world economy growing at 6% it is obvious the demand exists if we are allowed to compete with countries not run by Luddites

Nuclear plants can be built in 3 years, or at least are being in China, so it is ridiculous to suggest they can’t. Shale gas could be on line faster as the US has shown. If industry knew their manufacturing costs were to fall in 3 years rather than rise they would be willing to invest now. You clearly do not want that but that is not what I asked – I asked if such liberal economics would work.

There is no reason to believe that cutting non-productive, or in many cases negatively productive work, by government, would reduce productivity.

You are right that “deficits can be dealt with once the economy is growing again and self-sustainable” which I suggest is a good reason for going for growth. The evidence from, among many others, Zimbabwe, is that printing money and hoping that this will magic up the goods doesn’t work & is not advocated by any competent politician.

50 years ago Singapore and Rhodesia had similar per capita GDPs – now Singapore is the world’s richest and Zimbabwe almost the poorest. If you have the most minute trace of evidence that, as you claim, this was achieved by Singapore printing money and banning technology and Zimbabwe running a restrictive money printing policy and not nationalising things I would be very interested in seeing it.

If not I am sure, if an honest liberal minded person you, and every single other such on this site, will acknowledge UKIP and I are absolutely correct.

10. gastro george

@Neil Craig

Because (neo-)liberal economics has been shown to be so successful in recent years?

@Neil Craig

>With the resy of the world economy growing at 6% it is obvious the demand exists

You’ve now said this more than once without citing any sources. If you look at the World Bank figures you’ll notice that the large majority of the world is not experiencing 6% growth or greater, and those that are, are almost exclusively either small, or emerging economies, which are not at all comparable to an advanced economy like our own.

> Nuclear plants can be built in 3 years, or at least are being in China, so it
> is ridiculous to suggest they can’t.

My point was that the economic benefits (which are debatable given the use of Government subsidies!) would be years away, whereas we need something that can start having an impact in the short-term too; people are unemployed now.

> If industry knew their manufacturing costs were to fall in 3 years…

How do you intend to guarantee that???

> There is no reason to believe that cutting non-productive… work, by
> government, would reduce productivity.

Actually there is, a quick glance around the world at the countries engaging in austerity measures and seeing negative GDP growth is a pretty good indication. Also, which Government spending do you think should be cut? And where would you employ the people made redundant by such cuts, given that the private sector has utterly failed to offset our current unemployment issues.

> which I suggest is a good reason for going for growth.

I also think going for growth is the right approach, my point is that cutting Government spending will harm that effort, not help it (it’s the principle of your spending is my income). A quick example of this can be found here:

http://krugman.blogs.nytimes.com/2012/06/03/1937-2/

(Note also that the US pulled itself out of the 1930s depression by massive Government spending, in this instance the war effort).

> The evidence from, among many others, Zimbabwe…

Zimbabwe… you’re comparing the UK to Zimbabwe?

>If you have the most minute trace of evidence that, as you claim,
> this was achieved by Singapore printing money and banning technology…

Ok, a couple of things, your point about “banning technology” is just ridiculous; at no point have I ever come close to mentioning the banning of technology. You seem to be acting as if nuclear power is technology, and wind power (for example) is not, and that only the private sector develops and invests in technology (and furthermore, that technology is the only solution… fixing our road network would immediately create jobs and yield long-term benefits); this is nonsense, a minor example would be, I don’t know, the world-wide web…. funded by taxpayer money (not just the UK’s of course).

It’s also interesting that you pick Singapore as your “printing money” example, given that they have a significantly higher GDP adjusted public debt than the UK (well over 100%) according to the CIA world factbook, and operate under a principal of borrowing to invest. Incidentally, I don’t consider Singapore’s national debt to be a huge problem, it’s perfectly manageable, as is ours; our post war debt as a percentage of GDP was over 3x what it is now. Furthermore, our interest rates on debt are currently so low, that it actually makes financial sense for us to borrow for infrastructure spending to boost growth, as by the time you factor in GDP growth from a recovery, plus inflation at say 3-4%, our interest rates wind up being negative, and our debt burden will actually fall! Continued low, or even negative growth will have the opposite effect.

I note andy that though you ask me questions you have declined to answer the ones i had asked you. I guess I will just have to take that as an acknowledgement that you can’t and that your previous assertions were bogus.

However I will answer you.

1 World growth calculation here. http://a-place-to-stand.blogspot.co.uk/2012/03/comparing-growth-here-and-across-world.html

With 4.8% world growth and the EU & TS each being 25% of the economy the non-EU world average is 6% & the Humanity Outwith the US & Euriope (HOUSE) average is 7%.

2 – The claim of “government subsidy” of nuclear is, of course, while representinmg the pinnacle of honesty to which the luddite movement aspire, a lie. In fact the subsidy is the other way round.

By definition if it will take 3 years for nuclear plants to be online they can be online in 3 years. Sorry you didn’t understand that.

3 – If the cost of electricity used in manufacturing 7 indeed almost everything in the economu falls the cost of manufaturing falls. Sorry this is too complicated for Luddites to comprehend.

4 – Cutting the regulators who tell us what we may not do or increase the cost of doing things along with a lot of quanjos would be a start. It is also something which liberals, by the definition of the word, support (though obviously fascists masquerading as liberals don’t).

5 – I note your claim to want growth as representing the highest standard of honesty to which you aspire and that in fact you are absolutely opposed to doing what would achieve it. Once agai, should there n]be any pseudoliberals here with a trace of honesty they will dissociate themselves from your lie.

6 – The UK pulled itself out of the depression in the early 1930s by not printing and spending which compares favopurably with the US achievement of still being in recession when the war started. If you actually had an example of such spending working, anywhere or at any time in the history of the world you would give it.

7 – Yes I compare how scientific laws work in Zimbabwe to ]Britain. If you have some evidence that the Law of gravity works diferently in Zimbabwe your criticism might not be that of a total ignoramus wiyh no trace of honesty.

“You seem to be acting as if nuclear power is technology”
Yup. Well spotted.

Still waiting for your evidence that the government of Singapore (also a foreign country on which we must disagree about the working of scientific laws) has been printing and spending its way out of inflation. I think you will find its debt ratio is influenced by them counting it honestly (ie not hiding PFIs and unfunded pensions).

Will you at last produce your evidence the printing, borrowing, anti-liberal state interference & general socialism practiced in such an unabashed manner by Zimbabwe has made them the world’s 2nd richest country, after North Korea?

@Neil Craig,

I won’t waste too much time dealing with your various ad-hominems and trolling, but I will note a few interesting things about the actual facts.

I find it frankly hilarious that you cite your own blog post as evidence supporting your assertions, particularly when that article links to 2010 (and 2006???) data compared to the more recent data I note from the World Bank (seriously, how hard is it to type “world bank gdp” into Google?).

Furthermore, in your linked blog post, you quantify EU and US GDP relative to the rest of the world, and the figures don’t match the page you cite (I followed the link, and checked, you’re off by several percent).

> The claim of “government subsidy” of nuclear is, of course … a lie.

Wrong:

http://www.parliament.uk/business/committees/committees-a-z/commons-select/energy-and-climate-change-committee/news/emr-report-findings/

> If the cost of electricity used in manufacturing… falls…

See above report for reasons as to why that won’t happen with nuclear.

> Cutting the regulators…

Ah yes, because deregulation was a really cost-effective measure in the financial sector wasn’t it?

> I note your claim to want growth…

Seriously, read some Paul Krugman (I even linked to his blog in my last post), in particular “End this depression now” for a very clear, concise explanation of how Government spending during downturns achieves growth, and why Government austerity during downturns is pure stupidity.

> …If you actually had an example of such spending working, anywhere or
> at any time in the history of the world you would give it.

Um, see my last blog post, and as back up, read the book mentioned above.

> Yes I compare how scientific laws work in Zimbabwe to ]Britain

Hmmm, yes, there is no difference between economics and physical science. None at all. But in case it was lost on you, political stability in Britain and Zimbabwe look quite different over the last few decades, so comparing the two really is ridiculous. Though interestingly Zimbabwe’s GDP has more than doubled since 2008:

http://data.worldbank.org/indicator/NY.GDP.MKTP.CD

> “You seem to be acting as if nuclear power is technology”
> Yup. Well spotted.

Yeh nice, ignore the context. And you accuse others of dishonesty.

> Still waiting for your evidence that the government of Singapore…

It’s kind of difficult for you to suggest Singapore hasn’t used debt to bolster its growth given that they have debt in excess of their GDP:

https://www.cia.gov/library/publications/the-world-factbook/geos/sn.html

> Will you at last produce your evidence the printing…

Will you at last actually address the content of my argument rather than making up ridiculous strawmen?

1 – Your claim that nuclear is subsidised is, of course, a lie, indeed the subsidy runs the other way. That you can quote a politician with a record of wanting permanent recession, telling the lie does not make it any less a lie. If you have actual evidence of financial subsidy produce it. If not retract the lie.

2 – If 1 is a lie 2 is too.

3 – If you can name an industry that has grown faster than financial services please name it. Hint – I can but I suspect you can’t.

4 – If you oppose a policy which would greatly improve growth (despite bluster you have provided no evidence it wouldn’t) then, according to those of us who use the english language honestly, you are, by definition, opposing growth.

5 – So you STILL don’t have a single example of print & spend permanently ending recession anywhere at any time in history. You obviolusly know there are endless examples of the opposite.

6 – .Interestingly Zimbabwe stopped its massive money printing programme and rathe cut down the amount of state parasitism – the precise opposite of what you reccomend – just before their economy went onto growth. It appears your claim that economic laws don’t apply in African countries is, as expected, wrong.

7 – Singapore, according to your own link – “Singapore has a highly developed and successful free-market economy. It enjoys a remarkably open and corruption-free environment, stable prices, and a per capita GDP higher than that of most developed countries.”, growth ”
14.8% in 2010″ (granted that is 1 year but you have made it clear you prefer cherry picking single years to trends, in your attack on my point about HOUSE growth rates averaging 6%) & on its debt “consists largely of Singapore Government Securities (SGS) issued to assist the Central Provident Fund (CPF), which administers Singapore’s defined contribution pension fund” so more honest about including pension liabilities than our government – precisely as I said.

Still awaiting your evidence that Zimbabwe and North Korea which have followed the pseudoliberal policies advocated here are wealthier than Singapore which follows real economic liberalism.

>> Will you at last actually address the content of my
>> argument rather than making up ridiculous strawmen?

> Still awaiting your evidence that Zimbabwe and North Korea…

So that’s a “No” then. That’s good to know.

@NeilCraig
I haven’t read all of the posts but to address your original question. I’d say that in principle that should work quite well for a while, except it would very likely be a very unpleasant society to live in. Sure there would be less pollution ( thanks to nuclear power replacing fossil fuels), but socially it would be very harsh and probably quite dangerous in terms of susceptibility to social unrest and war in hard times.


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