Why can’t we just spend more on benefits?


10:00 am - January 22nd 2013

by Don Paskini    


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Kate Green, Labour MP and former CEO of Child Poverty Action Group, has forgotten more about social security than I’ll ever know. Her defence of Labour’s spending on social security is well worth a read:

Prior to the recession, expenditure had remained pretty constant, falling slightly from 11% of GDP in 1997/08 to 10.9% in 2007/08. But, more importantly, we were spending more on Labour priorities – cutting child and pensioner poverty – and less on the costs of unemployment: spending on children had increased from 1.3 to 1.9% of GDP, spending on pensioners increased from 5.7 to 5.8% of GDP, while spending on working age benefits (including JSA and Working Tax Credit) decreased from 3.9 to 3.2%. As a result, over that period, child poverty fell by 500,000 and pensioner poverty by 200,000.

Sounds great, right? Spending less on working age benefits as a result of falling unemployment, and using the resources freed up in order to reduce poverty amongst children and pensioners. But there’s just something which troubles me about this argument.

What Kate didn’t mention was that reduced spending on working age benefits led to a rise in poverty amongst working age adults. Their rate of poverty increased throughout the decade that Labour was in power, reaching 20% in 2009/10, and they were likely to be in deeper poverty than other age groups. So not such a success.

Then I looked at the different policies which have been advocated by Labour and lefties in order to ‘cut the benefits bill’. I read the Resolution Foundation report on the living wage, a terrific piece of work about a fantastic policy. I found that the living wage would save up to £2bn in reduced social security payments – or ‘a tiny proportion of the overall welfare budget’ as we call that sum of money when referring to the similar amounts lost in fraud and error. In addition, far from the living wage replacing the need for benefits and tax credits, it relies on them – if benefits go down, the amount needed for the living wage goes up.

A jobs guarantee for long term unemployed people? It would reduce the amount spent on unemployment benefits, but it has a net cost to the taxpayer. Reducing housing benefit by building more homes involves the government borrowing tens of billions more, and may involve stuffing the mouths of buy to let landlords with gold. Increasing employment rates and productivity through universal childcare could be funded by equalising pension tax relief, but it still involves higher spending by the state.

For all our economic problems, we live in a country where we collectively have the means to ensure that everyone lives in a decent home, has the opportunity to work and earn enough to live on, where the costs of care are made more affordable for those that need them most, and where people unable to work are able to live with dignity. The policies which are currently being considered by Labour and the left have the potential to take a big stride towards creating this society.

In the long term, I am absolutely on board with the argument that such a society would enable everyone to contribute more and therefore be enormously more productive and better off. But in the short to medium term, getting from here to there involves spending more, not less, on social security.

It’s a tough argument, but I think we need to persuade people that creating this kind of society is something worth spending the money on, rather than competing with the government about who’s got the best ideas for cutting the benefits bill.

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About the author
Don Paskini is deputy-editor of LC. He also blogs at donpaskini. He is on twitter as @donpaskini
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Reader comments


You do realise how much the government is borrowing every year at the moment, and that this money needs to be repaid, right?

So…where is all this new money for your perfect society going to come from?

Agreed.

We keep hearing about how this is “the worst recession since World War II”.

But how did we deal with that post-war recession?

The Labour government of the day spent its way out of it, by establishing the NHS and a massive programme of nationalisation and state-funded reconstruction.

Hideously expensive – especially in terms of a nation in truly colossal debt. But the spending kickstarted our economy, and the increases in tax revenue ultimately brought our national debt crashing down.

And, even more importantly, our country became a better place to live – with free healthcare for all and the beginnings of a welfare state that helped those who needed it most.

We can actually see it happening in this graph

3. Chaise Guevara

@ 1 Tyler

“So…where is all this new money for your perfect society going to come from?”

We could scrap Trident and legalise most narcotics. Problem solved.

2

Unfortunately ‘the Labour government of the day’ is not the Labour party of today and the introduction of the welfare state was underpinned by policies which promoted full employment. We now have a significant percentage of benefits being paid to those in work and far greater unemployment levels which the existing welfare state was not designed to address. And that’s without adding our extended life expectancy and massive increases in the numbers claiming state pensions.

Another major difference between then and now is the increase of industrialized economies and further, the implementation of new labour-saving technologies. And, probably the most important, our collective consciousness has changed dramatically since the post-war period.

IMO, capitalist societies can no longer deliver anything but a very basic welfare system if that.

@ 2 Dave

“But the spending kickstarted our economy”

Erm, no. Reconstruction after the war kickstarted our economy, along with almost every other world economy.

“welfare state that helped those who needed it most”

Yes, in those days it was as intended – a social safety net – not as it is now thanks to Labour’s massive expansion of the state.

@ 3 Chaise

Not going to get into an argument about Nukes or Drugs. Neither of which would solve the deficit anyway…

@ 4 Steve B

Completely agree with your last 2 paragraphs…just interested to know when the left – which relies on a top down welfare state – will realise it can’t afford it any more.

4. steveb

” …the introduction of the welfare state was underpinned by policies which promoted full employment”

Which promoted full male employment would be more accurate. The contemporary employment level which is more relevant that the unemployment rate is significantly higher than the era of so-called full employment. Most females were excluded from the labour market when physical strength was more important. When females joined en masse the labour market of a more service oriented economy they out-competed the males. Capitalism did not put Joe Bloggs out of a job, Janice Bloggs did.

7. Chaise Guevara

@ 5 Tyler

“Not going to get into an argument about Nukes or Drugs. Neither of which would solve the deficit anyway…”

They’d generate more than enough money for this, though. And I’m not convinced they wouldn’t solve the deficit (not that it matters, as they’re both policies worth pursuing for their own sake).

8. Chaise Guevara

@ 6 Richard W

“Capitalism did not put Joe Bloggs out of a job, Janice Bloggs did.”

Shh! If you go around saying that sort of thing, LC will publish articles making false accusations against you! http://liberalconspiracy.org/2011/04/01/why-david-willetts-isnt-using-his-two-brains-when-blaming-feminism/

The Labour government of the day spent its way out of it

The Labour government of the day massively cut spending, to the extent that in 1948 the UK was running a budget surplus.

“The Labour government of the day massively cut spending, to the extent that in 1948 the UK was running a budget surplus.”

Indeed, but look how they did it. 1945 – spending on welfare + health was £418m, 1951 – spending was £1.2bn, despite overall spend falling by £700m. A historical example of increasing spend on social security in times of austerity.

@ 7 Chaise

Persuing those policies for their own aske is a valid enough point, but they wouldn’t nearly close the deficit. Again though, I think we could spend all year debating these points…..

@ 10 donpaskini

The 1945-1951 comparison is a truly terrible one to make, as it includes the transtion from wartime to peacetime economy. Defence spending over those years went from 5153bn (74% of GDP!) to 1457bn….so of course there would be a lot more money to spend on other items – and GDP growth was boosted as world wide reconstruction was in full swing.

Let alone the fact that the welfare state to a great extent was provided directly by the wartime command economy (jobs and healthcare all part of defence spending for a huge part of the labour force).

You also totally ignore inflation in those numbers as well…..

Indeed, but look how they did it. 1945 – spending on welfare + health was £418m, 1951 – spending was £1.2bn, despite overall spend falling by £700m. A historical example of increasing spend on social security in times of austerity.

From a pretty low base though – in 1945 75% of all public spending was spent on defence. By 1951 the UK was spending 22% of total public spending on health and welfare (which then included pensions). We’re now spending 54% of total public spending on health welfare and pensions.

“so of course there would be a lot more money to spend on other items”

That’s not self-evident at all. Are you really claiming that you’d have supported massive new spending on entitlement programmes at a time when public debt/GDP was over 200%?

“We’re now spending 54% of total public spending on health welfare and pensions.”

oh indeed. I’m not saying that the policy solutions of 1945-51 are identical to the ones of today. Interesting to note, though, that there’s not much room to reduce that if, like the PM, you are committed to rising spending on pensions through a triple lock and no cuts in the NHS budget.

6

Agreed that full employment meant male employment, however, most jobs paid a family wage. For better or worse (dependant on your politics) most working-class women with families have to work to attain the relative income levels of the immediate post-war family, and this is more often topped-up with tax-credits.

Janice Bloggs was not responsible for the rise in the service industries or indeed the decrease of male wages, she was the symptom not the cause. Although I would say that the underpinning ideology of the welfare state was also flawed in relation to the roll/status of women, which has probably had some impact.

5

FWIW, the extention of the welfare state under new Labour did anything but help the people that it (welfare state) was intended to assist.

14 – agreed. And the Single Welfare Payment system will probably increase costs in the short term too. That’s why everything that can be squeezed, is being aqueezed.

@ 13 donpaskini

Don’t get it do you.

WWII had just ended. Much of that massive spending was on the war effort, and could easily be cut.

Post-war reconstruction heralded excellent GDP growth.

The 200% debt/GDP ratio was huge, but it also
consisted of extemely low interest rate war loans.

You are arguing for more public spending when public spending is at it’s highest as a % of GDP as during the two world wars, and a brief period in the 70s.

You also have *no* idea where it can be funded.

You’ll also notice that health spending has increased from 2% to 8% of GDP since 1948, welfare from about 5% to 7.5%, and yoou totally ignore the massive liabilities from the public pension system, which didn’t exist in 1948 but now consumes about 8% of GDP.

Please, please tell me where you are going to get the money for an even bigger increase in state provision which doesn’t include make believe answers, or answers sure to damage GDP growth. Please also tell me why an even bigger state is a good idea, or if it will even work at all given the example we have at the moment of France, whose 55% of GDP state spending and super high tax rates are turning into a disaster.

“Please also tell me why an even bigger state is a good idea”

Just to start with (I may return to this later) one key lesson from the financial crisis is that “countries with relatively un-segmented labour markets and strong welfare systems [Germany, the Nordics, and to some extent the UK] have fared better than those with highly segmented labour markets and weak welfare provisions [Southern Europe].”

http://notthetreasuryview.blogspot.co.uk/2013/01/european-labour-markets-five-key.html

We can borrow at very low interest rates at present, and the money needed can come from higher earners.

15. steveb

” Agreed that full employment meant male employment, however, most jobs paid a family wage. ”

Depends what you mean by a family wage. Sure a male breadwinner could support an average family on his wage alone. However, in consumption terms it did not buy very much. A basic car was out of the financial reach of most of those average families. They had to rent TVs because they could not afford to buy. Now people throw TVs away rather than even bother repairing them. How many computers, smartphones or foreign holidays could that single breadwinner purchase? A male breadwinner could afford to support an average family today if their contemporary consumption was the same as 1950s consumption. In these things it is in terms of consumption that one must think. In real terms he could buy more house from his wage, but it is the policies that successive governments have followed that has made housing expensive.

” For better or worse (dependant on your politics) most working-class women with families have to work to attain the relative income levels of the immediate post-war family, and this is more often topped-up with tax-credits.”

Consumption, Steveb. Considering in that era a bottle of whisky was considered a luxury item, the post-war family income was not buying much. A minimum wage worker can now afford a bottle from 2 hours work.

” Janice Bloggs was not responsible for the rise in the service industries or indeed the decrease of male wages, she was the symptom not the cause. ”

Of course Janice is not to blame and that is not what I am suggesting. However, she is better adapted to the new economy and she is out-competing male labour at the intermediate level. There is no doubt in my mind that technological and globalisation change has devalued a category of physical male labour. Someone like a fork lift driver has seen no real wage increase in thirty years. Whereas male IT workers in the same period have enjoyed huge increases. There is no crisis in wages because female wages have increased as male wages stagnated. The crisis is in certain male wages. See this as it relates to the US and the same charts and issues would apply to the UK and all over the western world. Male labour has been devalued.

“Still “men’s work” as it was once understood–low skill, relatively well-paid physical labor (good factory jobs, in a nutshell)–is clearly the victim of the deep structural change in the economy. For the past several decades, the combination of technology and globalization has not only reduced the number and share of high-wage, low-skill production jobs that were once the province of male breadwinners. On top of this, the rate of return to these physically-skilled jobs has declined. Post-industrialism has dealt this kind of work–and the men who do it– a very serious blow, one from which it will be very difficult to recover.”
http://www.theatlantic.com/business/archive/2011/06/the-great-male-stagnation/240160/

@ 18 donpaskini

*Facepalm*

Your solutions are to borrow even more, not considering that of course we have to pay it back and interest rates can go up (and by inference, when you say “interest rates are very low at the moment” you don’t understand what happens if they go up – not least because we have too much debt), or to soak the rich by taxing them more. Both your options are likely to destroy growth not create it.

You also conflate countries with “strong welfare systems” with good growth, when in fact it’s the fact that these countries high highly liberalised labour laws and at least partly privatised social provision that makes these countries economies economies flexible enough to weather the storm. You also forget that most of these countries are not trapped in the Euro.

@ donpaskini

Tell me another thing – what happens if we do indeed massively increase state spending, yet it doesn’t work? We don’t see any more growth and the deficit jsut keeps getting bigger?

What’s your plan then? *More* state spending on welfare? More borrowing? More taxes?

That’s the other thing you never consider. If your plan fails then the UK is quickly bankrupt. It’s an economic Hail Mary pass.

1. Who says the borrowing has to be repaid?

21. “It’s an economic Hail Mary pass.”

Unfortunately, austerity is more so.

An experiment which is failing.

Totally.

22 – The people lending the money perhaps?

22. More likely it will be rolled over.

26. gastro george

Is Tyler peddling his debt hysteria again?

More pie-in-the-sky nonsense idiocy from Don Paskini.

Hate preacher and layabout Anjem Coudary gets £25,000 tax free in benefits per year, the equivlanet of £32,000 pa gross. I and many others get nothing in the way of benefits and are on well under half off that figure – nd we actually work to support ourselves. He gets to live rent free in a £320,000 home. Nice ‘work’, if you can get it.

If the state can’t pull its finger out and deal with obvious parasites like Chodary, why should it be trusted with giving out even more of our money, adn why should we give a crap about supposedly hard-working public servants who are lazy, wasteful and incompetent? It is like the EU responding to criticism of its waste and corruption by demanding a budget increase.

19

Increased consumption has been mainly facilitated by new technology and credit, laterly working benefits such as tax-credits and housing benefits have enabled families to continue to consume. And IMHO, it’s working benefits which have been the proverbial straw.

Agree with your final paragraph but would add that it’s the aforementioned benefits which have also devalued wages.

29. gastro george

@Tyler

“Tell me another thing – what happens if we do indeed massively reduce state spending, yet it doesn’t work? We don’t see any more growth and the deficit jsut keeps getting bigger?

What’s your plan then? *More* cuts on welfare? More borrowing? More taxes?

That’s the other thing you never consider. If your plan fails then the UK is quickly stuffed. It’s an economic Hail Mary pass.”

FTFY.

30. Renie Anjeh

The problem is that more spending on cash transfers in our welfare state is becoming unsustainable and unaffordable. Spending will have to be cut, we should just have different spending priorities to the Coalition. You rightly mention the Nordic welfare model, but their idea of a cradle to grave welfare state is not one of just ‘spending more’. In Britain, about 30% of what the state spends on families goes towards tax credits. In Norway, it is 0% but instead they have a strong universal childcare system. What we really need is a fundemental rethink about the welfare state, based on real spending priorities and what we actually need. We also need to reinstil the reinstall the contributory principle, rather than this impression that spending more money is the only way to tackle welfare because not only is it not true but the public do not recognise it too.

The economy is not going to be significantly improved either by tax cuts at the top or by increasing welfare spending. The main driver of the economy is neither the extremely rich nor the state sector; it is small business, which employs just over half of the workforce. We got out of the early 90s recession due to a massive growth in small business start ups. That aided the economy in terms of liquidity, diversity, and development. It was good for all of us. Then came the banking boom on top, which was a false extension of a real recovery, and was just individuals (and the state) crazily borrowing and spending money rather than earning it.

Whoever is in government, they need to encourage and enable small businesses. People say there is money around for investment from government funding and tender schemes, but the criteria for those almost invariably favours only larger businesses. Small ones can’t get a look in. The economy will not be pulled out this stagnancy by either the bankers or the welfare state – though public work schemes could do some good.

Cutting the taxes of the rich does not really help, because they can’t spend (don’t even need to spend) a high enough amount as a result to help boost the economy. Actually raising those high taxes will not unduly inconvenience the rich, but it won’t especially help pull the country out of the mire if it just goes into more welfare spending. It won’t do anything to promote actually growing the economy in terms of business.

Tories and Labourites alike share the same basic non-understanding of the economy as an organism. You can’t just cut a bit off here and it there and expect it to grow.

32. Man on the Clapham Omnibus

‘we live in a country where we collectively have the means to ensure that everyone lives in a decent home, has the opportunity to work and earn enough to live on, where the costs of care are made more affordable for those that need them most, and where people unable to work are able to live with dignity’

Except for the 3 Trillion required for unfunded pension entitlements. When are people like you (and her) going to get real. There is no trickle down,we are liviung on borrowed time(and money) and there is a demographic shitstorm heading our way. Why are there poor people ? because the seriously rich have fettered it all away.
Now put away your Labour party claptrap and stop being a naughty boy. Were fucked-get over it!

@Richard

“22 – The people lending the money perhaps?”

While BenM’s point may appear ludicrous at first glance, his point is actually quite right. The reason is that in “repaying” the last batch of debt, you can simply finance it with a new batch.

This may sound like you are simply delaying the inevitable, but it’s not actually the case. As long as a Government has access to debt markets (we aren’t Greece/Spain etc, we have our own currency), the only thing a Government has to do is meet its obligations with respect to interest payments. As long as debt growth does not outstrip GDP and inflation growth *in the long term*, this is not a problem, and you do not need to repay the principal.

@ BenM and AndyC

What you say is true in theory. In practice, as we saw over the Labour years for example, is that politicians are terrible at controlling spending. In times of growth when debt should be paid down in a countercyclical fashion, they instead run deficits. Then of course in bad times, they run bigger deficits.

Now that in itself is only a problem when debt metrics get to the point where the interest payments on the debt get so large you have to start issuing more debt to just cover them. Evenutally it leads to bankrputcy. I know someone will now say that because we can print our own currency that a default can never happen – and an explicit default can’t – but an implicit default can. That probably end in a much weaker currency and much higher interest rates, which would compound the problem even more, whilst the currency would in this case likely act as a brake on growth as inward investment dries up (people don’t invest money in a country if that currency is devaluing too quickly – they wait till the crisis is over).

So in short, not all of the money has to be repaid, but much of it does, and debt can only extend so much before investors start to worry about getting their money back. You can’t go on issuing debt forever.

@ Gastro

The thing about austerity and spending cuts is that it slows down spending and debt growth. So even if there isn’t any growth it (normally) doesn’t put an economy into the tailspin described above. It’s a far safer long term call for an economy. Extra spending *only* has a chance of success if there is *a lot* more growth than the debt you are racking up. Spending might work when you have small budget deficits and low debt/GDP but when you already have a roughly 10% budget deficit and 85% official debt/GDP (more like 200% inculding all liabilities) you really are taking a massive gamble. Japan is a great example where government stimulus after government stimulus has failed to achieve anything except create a mountain of debt.

In some ways, I’d love to see Labour take power again and go on another massive spending binge – which wouldn’t get us anywhere and probably bankrupt the country. Just to say “I told you so”. For my personal situation it’s not a problem, given I already live offshore, and can easily move my money into other currencies to avoid the destruction of wealth such a collapse would bring. It isn’t anywhere near as easy for the bulk of the population, especially the working and lower middle classes though, and the damage it would do to them would be catastrophic. For that reason alone I argue foor responsible economic and fiscal policy, and find it disgusting that Labour and their left-wing supporters actively campaign for a policy which is likely to hurt the people they purport to represent.

@Tyler

“Now that in itself is only a problem when debt metrics get to the point where the interest payments on the debt get so large you have to start issuing more debt to just cover them”

Based on this, we appear to be some considerable distance from that point:

http://en.wikipedia.org/wiki/File:UK_National_Debt_interest.png

Whilst the deficit spending during the most recent period of growth was a mistake, it is not true that this kind of behaviour is routine, if it was, this picture of the GDP/debt ratio would be very difficult to explain:

http://en.wikipedia.org/wiki/File:UK_GDP.png

36. gastro george

Tyler

“Extra spending *only* has a chance of success if there is *a lot* more growth than the debt you are racking up.”

Incorrect. I think it’s Jamie Galbraith that has done the maths on this and, even on your terms, you would only need growth to be greater than the interest rate. As rates are effectively set by the government/BoE, then the only problem would be to ensure enough growth.

“Japan is a great example where government stimulus after government stimulus has failed to achieve anything except create a mountain of debt.”

… with utterly no financial consequences for Japan. Interest rates are low. Foreign holdings of Japanese debt are rising.

@ 35 Gastro

No, growth has to be twice to three times the *long term* interest rate – roughly the 10y yield. There are various papers on this, as well as the debt/GDP dynamics effect on growth. Rogoff and Reinhardt, Richard Koo and Dylan Grice all good sources.

“As rates are effectively set by the government/BoE”

Just shows you know nothing about interst rates. Short term rates are set by the BoE. Long term rates are set by the market.

A great example of this is in Europe, where the ECB bsae rate is 0.75%, yet 10y yields are in a range of 1.56% for Germany, 5.09% for Spain out to 10.30% for Greece. These are all different precisely because investors demand higher returns on some bonds because they are less likely to get their money back. So suggesting people ignore the risk of this and will buy bonds regardless is total nonsense.

Governments effective financing rate is around the rate of the weighted average duration of their outstanding debt…the UK has lots of long term debt so it is just over the 10y yield, other European countries it’s shorter. In no case though do governments fund at the base interest rate set.

“… with utterly no financial consequences for Japan. Interest rates are low. Foreign holdings of Japanese debt are rising.”

Where have you been living??? Japan is constantly in the financial news, as it has so much debt now that the bulk of new debt is issued simply to roll over and fund the interest payments on old debt. Government financing needs for this purpose alone are something like 60% of tax revenues. Foreign holdings are going up marginally, but most JGBs are held locally, so as local pension funds now are net sellers of JGBs (to fund retirement payments). The international buyers are far outweighed by domestic sellers. Japan is in a total mess because of 20 years of repeated government spending, which has achieved nothing.

Again, read Dylan Grice’s pieces (should be available of web/zerohedge) to get a good picture of just how bad the situation is there.

I forgot to add – growth has to be 2-3 times interest rates as the *tax revenues* accruning to government coffers only are 30-40% of that growth. You can’t use 100% of GDP growth to pay down debt.

39. gastro george

@Tyler

“Long term rates are set by the market.”

So what does QE do, then?

“A great example of this is in Europe, where the ECB bsae rate is 0.75%, yet 10y yields are in a range of 1.56% for Germany, 5.09% for Spain out to 10.30% for Greece.”

We’ve been through this before. You can’t compare the eurozone to monetarily sovereign countries.

“Where have you been living??? Japan is constantly in the financial news …”

I’m more interested in the numbers, you know, the evidence. Japanese rates are rock bottom. This is the judgement of your all-seeing all-knowing markets. Not just the judgement of domestic investors, as foreign holdings are at record levels. If Japan is a basket case, then how come your beloved “markets” don’t reflect that?

@ 38 Gastro

QE does depress rates, but again, can’t be done forever.

“You can’t compare the eurozone to monetarily sovereign countries.”

I was making the point that a country can’t control it’s interest rates – they are governed by the market. UK base rate is 0.5% and 10y yields are 2.02%…and the UK government funds at the 10y yield and not at 0.5%, the only bit they can control.

“I’m more interested in the numbers, you know, the evidence. Japanese rates are rock bottom. This is the judgement of your all-seeing all-knowing markets. Not just the judgement of domestic investors, as foreign holdings are at record levels. If Japan is a basket case, then how come your beloved “markets” don’t reflect that?”

JGB yields are indeed near all time lows. That is *nothing* to do with international investors, who make up under 5% of that market. It is to do with the BoJ QE programs and the massive repatriation of funds back to Japan – funds which need to be invested in something. You can see this in the *massive* strengthening of the Yen. Foreign holdings of JGBs are almost immaterial as a driver for that market.

However, have a look at Japan’s (5y) CDS – a good indicator of risk of default. Back in 2005 it traded at a couple of basis points…so yoou had to pay 0.02% per annum to insure against default. Today you pay 0.8%, and it has been as high as 1.4% recently. To put it into perspective South Africa, rated only a few levels above junk, trades at 1.56%.

People are seriously worried about Japan’s fiscal issues, and it is local demand keeping the bonds low – mostly because that money sits in massive Japanese pension funds and can’t go anywhere else.

You clearly haven’t bothered to read anything I’ve suggested, and clearly have little or no understanding of the markets or what drives them. For the lazy (that means yoou Gastro):

http://www.thegoldwatcher.com/wp-content/uploads/2012/03/dylan-grice-on-japan.pdf

or for the even lazier here is a summation of several piece’s from the Telegraph’s AEP:

http://www.telegraph.co.uk/finance/financialcrisis/9283417/Japans-fiscal-death-is-a-warning-to-the-West.html

Please read these. The sit down and think about advocating the UK do exactly the same thing. It wo’n’t end in disaster tomorrow, but long term it is sure to.

Im sorry but to say ‘because spending worked after WWII, it will work now’ is beyond wrong.

If you could appreciate that the country had been flattened and required physical rebuilding on a scale previously not seen, and that you had military hardware ready to be turned into salable goods, you would understand why that level of growth was achieved. This simply isn’t the case now. The welfare system that was in its infancy at the time was a tiny amount compared to the infrastucture investment, and spending by the Marshall Plan. Its hardly a useful suggestion, what do you want us to do, blow up all our buildings so that we can put people to work rebuilding them?

“The problem is that more spending on cash transfers in our welfare state is becoming unsustainable and unaffordable. Spending will have to be cut, we should just have different spending priorities to the Coalition.”

But what, specifically, would you cut? You favour universal childcare, so that’s an extra £7bn, a jobs guarantee, an extra £1bn, ‘recognising the contributory principle’ (i.e. increasing benefits for those who have paid in), cost £200-500m for National Salary Insurance. That’s even without any measures to tackle the housing crisis, social care etc.

So how would you reduce spending on income transfers by £10bn+, above and beyond existing government plans? Would you cut tax credits as your comment suggests? Remove housing benefit for the under 25s? Freeze out of work benefits for five years? Something else?

And on the public opinion point, opinion shifts pretty quickly once you move from abstract rhetoric to concrete proposals.

43. Gallbladder

4: “capitalist societies can no longer deliver anything but a very basic welfare system if that.”

As compared to post World War II, say, 1948? Get real. I mean really, really, get real.

The level of services, the amount of cash transfers, the number of diversity coordinators and heads of children’s services. The kind of things that the public health care system can do (how many heart replacement operations did you do in 1948? And how many children died of diseases easily curable by modern medicine? Think of the Chiiiildren!). And the purchasing power of those cash transfers for basic commodities (how big part of an unemployed person’s income is spent on food). How big problem was *obesity* among the poorest in 1948?

Yes, you may still find some undernourished people even today, and certainly there are always people who need more help, but is quite ridiculous to even suggest that things were somehow better post WWII. Or 1973, for that matter.

@Tyler (and gastro george)

“I forgot to add – growth has to be 2-3 times interest rates…”

In the context of the discussion preceding it, I think that needs some clarification, because it has the potential to be quite misleading with regards to the rate of economic growth required to service the debt; I imagine many people will interpret that as 2-3x a long-run rate of 4%, say.

I crunched the numbers on this one, based on the current structure of the UK debt pile, and it is true that GDP growth needs to outpace interest rates by a factor of about 2.1, however, that’s 2.1x interest rates after inflation (and yes, I have factored in the ~£300 billion in index-linked gilts), which makes a big difference.

I performed the calculation for a number of different scenarios, using different inflation targets and national debt at its current levels (31 December 2012), and with an additional £250 billion of debt for deficit purposes. Revenue was assumed to be at 2012 relative levels.

Based on current debt, the required rate of GDP growth required to service the debt is:

@2% inflation: 4.3%
@3% inflation: 2.7%
@4% inflation: 1.0%

And based on the £250 billion additional debt:

@2% inflation: 5.1%
@3% inflation: 3.5%
@4% inflation: 1.9%

So on that basis, even if the Government felt it had to inflate away some of the debt burden, it’s clear that hyper-inflation scenarios are not necessary.

43

‘but is quite ridiculous to even suggest that things were somehow better Post WW11′

You are either strawmanning or you haven’t read my post, if it is the latter I will summarize my argument:-

1) The immediate post-war conditions were totally different to the present eg internationally, demographically, and the economic base’

2) The welfare state has also morphed into something that it wasn’t designed to be

No-one is denying the social good which the welfare state delivered, but because of the aforementioned changes, capitalist systems can no longer sustain anything like the scope of Beveridge’s original plan never mind the expansion into sustaining the living standards of working people by subsidizing wages.

@ Andy C

Your numbers are in the right ballpark, and highlight the problem well.

Even with the government inflating away some of that debt, we still need growth of between 3.5% and 5.1% given inflation is hovering between 2% and 3%, just to service the debt.

The problem is, that long term trend growth is around 2%.

So either growth needs to be a lot higher – well above the long term trend for a sustained period (very unlikely), inflation needs to be a lot higher (makes people poorer in real terms), taxes need to be raised (already high and reduce growth) or we need to cut spending (which is roughly 50% of GDP currently).

@Tyler

“Even with the government inflating away some of that debt, we still need growth of between 3.5% and 5.1% given inflation is hovering between 2% and 3%, just to service the debt.”

At current inflation levels that’s true (assuming the latter debt scenario), but once we’re out of the liquidity trap the Government could increase inflation to say 4% (higher if you want to get things done in a shorter timeframe) at a stroke. The benefits of a hike in inflation to this level outweigh the negatives; we aren’t talking double-digit inflation here, and I would suggest that most people already feel poorer by virtue of current Government policy.

Also, as an aside, I would argue 2.5% is a more reasonable growth trend for the UK, and it is worth acknowledging the role that the recession itself has had in the level of spending as a proportion of GDP, so some of that can be fixed purely by a return to growth.

48. Gallbladder

45: “capitalist systems can no longer sustain anything like the scope of Beveridge’s original plan never mind the expansion into sustaining the living standards of working people by subsidizing wages”

The Beveridge plan was done, what 70 years ago? It’s not that much newer than Marx’s theory, and likewise, with both plans, the realities of practical implementation meet the grand theory.

And what was the Beveridge plan? Get rid of Squalor, Ignorance, Want, Idleness, Disease? I think that’s been done in all of Western Europe, or at least all the money in the world needed to do that has been expended, and more.

But there are trade-offs. Beveridge hardly had in mind creating a culture of welfare dependency. He did not want means-tested benefits, he wanted lower effective marginal taxes than today. He wanted flat rate taxes and flat rate benefits for everyone. Nowadays that is hardly very progressive. In fact, Beveridge would be an evil reactionary these days.

It’s not that the capitalist system couldn’t support Beveridge’s plan. It’s that the welfare state has gone far, far away from Beveridge plan, into some looney land which indeed financially unsustainable.

@ Andy C

What you say is again correct. Inflation could be left to rise to 4%, which is not catastrophic (though it would hurt pensioners badly, and the UK pension system is badly underfunded. Creating a Japanese style pensions timebomb might not be ideal).

Growth at 2.5% is possible, but as I say trend growth is 2% ish. So I wouldn’t bet on long-term, uninterrupted growth above trend.

You fail to mention one important problem though, in your high growth/high inflation plan.

Interest rates, specifically the rate at which the government funds itself (roughly the 10y bond yield) will certainly not stay static around the 2% level if both inflation and growth power ahead. If they go back to pre-crisis yields of about 4%, which is not a terrible approximation if you are also talking about pre-crisis growth levels and higher inflation levels, then the extra money you need for debt financing annually will work out to be just under 2% of GDP…

So either you have to grow *even faster* to keep up, or the interest costs have to displace other spending.

So ultimately this particular catch 22 gets you back to the same sort of situation…..that cuts are almost inevitable in the real world, rather than the lefty make-believe world.

48

It seems that we are in general agreement about the current welfare state but I would question your last paragraph:-

Beveridge didn’t envisage the significant increase in life expectency which costs dearly in pensions and health and social care.

Beveridge based his assessments on the ideological nuclear family and, within that, the roll of women, which didn’t accurately reflect the existing post-war demographic.

The growth of the mixed economy (nationalization) which has now been almost fully reversed. So both the welfare state, the economic base and the demographic are considerably different to the immediate post-war.

At the international level, there are now more industrialized countries, Japan is a notable example, but we are now seeing the rise of Asian and Chinese economies.

The idea that we can continue on the same path, never mind epanding the scope and increasing existing demand on the welfare state, within a capitalist economy, is nonsense.

@Tyler

“You fail to mention one important problem though… Interest rates, specifically the rate at which the government funds itself… %

This is incorrect, because my figures are not based on an assumption of a static 2% yield. I should stress that I did not simply perform a rough tally of index-linked gilts at ~£300 billion and the remainder as conventional gilts and treat all of this at the 2% level, as this would obviously be wrong, given that the majority of existing debt does not benefit from these low rates. I actually got the complete breakdown of debt and computed the actual cash flows for each every bond type. Once you perform all of the calculations, the effective average yield in my scenarios works out at 4.02%.

I applied the same constraint to the £250 billion additional debt to avoid being accused of short-termism.

@ Andy C

Have you treated bond yields as static though?

It is fairly immaterial at what yields bonds were issued, only where they are trading now….

@Tyler

“Have you treated bond yields as static though?”

No, the effective yield I quoted is not based on yield at issue, it’s based on the current cash flows, which conveniently (or unsurprisingly depending on your perspective) match neatly with long-run yield of 4%.

54. gastro george

@Tyler

“QE does depress rates, but again, can’t be done forever.”

I’m sure we’ve been round this before, but … why?

“JGB yields are indeed near all time lows. That is *nothing* to do with international investors, who make up under 5% of that market.”

Actually, up to 9% in December. So no loss of “confidence” there.

I really am interested in the reality of the numbers, rather than your theories.

Japan has had a deficit for many years, and have been downgraded. The result – no effect on their rates.

They’ve just announced increased deficit expenditure. The result – nothing.

The US had a mild stimulus and was downgraded. The result – nothing.

The point is, classical and neo-liberal theories are based on the all-seeing all-knowing agent – “the markets”. According to that theory “the markets” have decided that there is no risk in Japan, the US or here. Your problem is that you can’t say that the markets are both all-knowing – but aren’t in specific cases that don’t fit your world view.


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