With Britain’s AAA downgrade – Labour cannot follow Osborne in pushing for cuts


by Sunny Hundal    
9:45 am - February 23rd 2013

      Share on Tumblr

In response to the downgrade of Britain’s credit rating by Moody’s, Osborne released a statement saying:

Tonight we have a stark reminder of the debt problems facing our country – and the clearest possible warning to anyone who thinks we can run away from dealing with those problems. Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it.

This is standard response to everything. But Moody’s cited three reasons for Britain’s downgrade:

1. The continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which Moody’s now expects will extend into the second half of the decade;

2. The challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation programme, which will now extend well into the next parliament;

3. And, as a consequence of the UK’s high and rising debt burden, a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016.

It will be interesting to watch Labour’s reaction to this too.

To his credit, Ed Balls last night said: “It would be a big mistake to get carried away with what Moody’s or any other credit rating agency says. Tonight’s verdict does not change the fact that the credit rating agencies have made major misjudgements over recent years, not least in giving top ratings to US sub-prime mortgages before the global financial crash.”

Labour is right to reject the supposed infallibility of the credit ratings agencies. Moody’s still want austerity despite pushing the cuts being responsible for stagnating the economy. But George Osborne staked his reputation on their support and he has to fall on that sword.

But there is a broader point here. Austerity didn’t work for Osborne in delivering economic growth, nor in reducing the deficit and nor in saving our AAA-rating. All these factors are inter-related of course but the point is the cuts have been a disaster for the UK economy.

Therefore, it makes no sense for Labour to go into an election in 2015 promising they would match (as some have hinted) George Osborne’s cuts to spending. Such a stance would fundamentally undermine what Labour has been saying for the past 2 and half years.

If George Osborne’s plans have “failed”, as Ed Balls said last night, it makes no sense to later endorse them. I doubt Labour will do this – I’m just pointing out the obvious in advance.

    Share on Tumblr   submit to reddit  


About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
· Other posts by


Story Filed Under: Blog ,Economy


Sorry, the comment form is closed at this time.


Reader comments


Didn’t the IMF recently issue some work which basically told Osbourne he was being a prat, but held slightly short of actually telling him to stop doing it? Add this and Osbourne’s response, and we see Krugman’s VSP syndrome at work. Evidence says what we are doing isn’t working. Clearly, do it harder!

Ideology, not economics. How short people’s memories are…

It depends what you mean by “it didn’t work” Sunny.

You must remember austerity is being pushed for ideological reasons. This is what the 1% and the right wing WANT. They don’t give a shit if the economy stays in recession for years if it means they can cut spending so they can cut taxes for the rich. High unemployment provides an opportunity to slash workers rights and pay, and push through more deregulation and privatisation.

The only part of the financial crisis that they were concerned about was defending the banking system. Hence why they have spend so much to bail it out, and written blank cheques to take on any future losses that may be hidden. Private debt has become public liability. Hence the madness of Greece. It’s not really a bailout of Greece, but a bailout of the banks via Greece.The 1 don’t want to see the idea that countries could just extend the middle finger to the banks and bond holders.

Osbourne spent the first 6 months in govt talking the British economy down so he could push his ideological policies through. If debt is all important you don’t cut taxes for the rich which is what he did. They don’t care about the wider economy. They are running govt for the benefit of their masters.

Sally does have a point there, the super rich see recessions differently to the rest of us. What happens in a recession is the already accumulated wealth stays in someone’s back pocket instead of been reinvested, worse the rate of wealth accumulation accelerates…

For the super rich that does have the pathological fringe benefit of reducing everyone else’s living standard. It is easier to see yourself as privileged if ordinary people can no longer afford holidays abroad, or to listen to music, be able to go out to a restaurant etc. If said super rich see an increase in homelessness and soup kitchens they must go deliriously happy!!

The fact that such behaviour is maladaptive to say the least is totally irrelevant to them, when they think all those accumulated zeroes in an offshore computer are the pinnacle of our civilisation…

Osborne pushed through government cuts which were idealogically driven, with no thought of whether they were economically pragmatic. For instance, ending the schools building programme that arch-Maoist Gove had such disdain for, also meant there was less funding going into construction work.

Osborne’s humiliation is as nothing to our collective loss. Quite right that Labour should not see this as schadenfreude.

http://sideshow.me.uk/annex/defeattherightin3minutes.htm

The ugly truth is that cheap-labor conservatives just don’t like working people. They don’t like “bottom up” prosperity, and the reason for it is very simple. lords have a harder time kicking them around. Once you understand this about the cheap-labor conservatives, the real motivation for their policies makes perfect sense. Remember, cheap-labor conservatives believe in social hierarchy and privilege, so the only prosperity they want is limited to them. They want to see absolutely nothing that benefits the guy – or more often the woman – who works for an hourly wage.

Cylux; that’s a nice rant, there :) Unlikely to produce much effect as an electoral strategy, mind.

However bad the posted news about Britain’s economy, it can be absolutely guaranteed that Osborne will pop-up and utter the same mindless mantra that nothing will change his resolve to confront the budget deficit.

Recap Einstein’s definition of insanity: Doing the same thing over and over again and expecting different results.

Recap also that Osborne advised Cameron to appoint Andy Coulson as the Director of Government Communications.

Oh how I am hooting with laughter at all this talk of austerity being to do with “ideological” reasons. You couldn’t make it up. War is Peace, Freedom is Slavery, Ignorance is Strength.

Those that completely changed the make up of the UK economy, funding a massive debt bubble and huge, unsustainable expansion of the public sector (for PURELY ideological reasons – more votes for NewLab if your job depends on the government keeping the public spending dollars coming) are now hooting that trying to fix the leaky roof is for ideological reasons. The utter hypocrisy of those who pissed away billions on pointless jobs and projects now placing the blame on those who have the unenviable task of fixing things. I am neither Tory, nor Labour, but I am starting to understand how this cynical trick has been employed over and over again. The argument has been lost, fellows! The “invest” Brownenomics model has been shown as a fraud – where are the fruits of this “investment” – none, that’s what, other than more Labour voters clamouring for more public cash to save their worthless jobs, pensions and hides….and the only thing they are left with now is claiming that if only we had borrowed more, everything would be fine. A 10 year old child could work this out (if he/she wasn’t educated by a professional PS indoctrinator, dragging them out with classroom constructed “No Cuts” banners)

The other extremely amusing thing is the belief that the 1% and “the rich” want austerity, while on the other hand claiming the IMF have it right, by telling Georgey to spend more. Who on earth do you think the IMF work for?

I am not specifically anti-left, on many topics such as social issues I am decidedly left wing, but the whole “bankers dunnit”, no cuts, utter lie peddling of the left over this crises makes me sick, and is the reason I will never, ever vote Labour again. Deliberate policies, like the immigration policy, to garner more votes for their party. As long as we are in, and those Tory toffs are out, nothing else matters. Shame on you all.

Sally, you make me laugh you do with your rhetoric. The “people” who defended the banking system was the Labour government – your people. They were the ones who propped up the failing banks. Us right wingers would have preferred them to have failed rather than sucking up billions of pounds of government that could have been used more useful in keeping austerity at bay.

As to the rich wanting a recession, why would they want it. The rich want to make lots of money and if there is a recession then they aren’t making money.

Dissident, the rich don’t keep their loot under the mattress or in their back pocket. They put it in banks. Banks then invest that money as loans to businesses. The reason the banks aren’t actually giving out loans is because the Labour government required the banks to build up a fund to cover the next time they fail. So it’s not the rich’s fault – it’s Gordon Brown’s fault.

Oh how I am hooting with laughter at all this talk of austerity being to do with “ideological” reasons.

It’s a pretty widely held view; DeLong, Krugman, the IMF, Thoma, and very recently Simon Wren-Lewis have all persuasively made the point that austerity spending in this recession has been empirically counter-productive. The ideology in question is ‘less state’, on both sides of the Atlantic.

The symbolism of this matters more than anything. The entire economic strategy of the coalition was about retaining triple A – this was the stated goal. The attempts at moving the goalposts over the next few days are not going to detract from that, and this will do to the conservatives’ reputation what black wednesday did.

@8 – yeah, well, yr bitter anti-Labour rant might have some leverage, if Labour since the accession of Blair actually resembled the Labour party pre-Thatcher. Fact is, the Blair cabal gutted Labour of its solid social democratic principles in favour of the marketising snakeoil dripfed into their ears by the likes of KPMG, McKinsey, PWC etc etc (who incidentally now have the ear of Osborne and that whole corrupt gang).

So yeah, have a go at Labour for falling for Blair’s propaganda, and Miliband for not having the guts to repudiate the way the Blair/Brown regime fell for the whole neolib market pixie dust routine. Right, now can we come up with some roadmap for a way forward that makes sense?

8 @Dyslexic

You Kip if you want to.

Making this inept government not last another term is not dependent on winning you over to Labour. Thank you for this reminder.

In the mean time, we need to get wider recognition that excessive, poorly timed and chosen austerity measures has helped deliver this triple dip recession, that may need further austerity measures. A real vision for growth rather than burying cash through quantitive easing will be key.

SadButMad:

As to the rich wanting a recession, why would they want it. The rich want to make lots of money and if there is a recession then they aren’t making money.

Unfortunately, you’re empirically wrong on that one. Several points, starting from the basic principle of selling short (rich people make money on market movements in either direction), and moving on to corporate profits being up relative to pre-Great Recession. This is a demand shock, not a supply-side drama. Krugman, Wren-Lewis being the easiest sources, again.

The upper echelons are functionally unaffected by employment and benefit enormously from a ‘highly-competitive labour market’, i.e. very high unemployment working against wage stickiness.

Planeshift:

I agree with your primary point (Osbourne’s own rationalisation for idiocy is now undermined, though not enough to reflect the catastrophe that his policies have represented for normal people). But I disagree with the politics; in the early 1990s the Tories faced a very different press corps and a very different tribal landscape than the Coalition does. I do not believe Osbourne will take anything even close to the density of fire that Lamont took.

A trivial but amusing note; in the famous picture of Lamont on the steps announcing the 15% interest rate, the young turk standing behind him looking preoccupied is David Cameron; so he at least should bloody know better.

@14 Naden

the young turk standing behind him

this picture:

http://blogs.telegraph.co.uk/news/files/2011/04/lamont12.jpg

there is scope to make the link Cameron and Osborne make a mess of it Again.

I am amused that Dislecsick actually sees new Labour as ‘left wing’. That government indulged in things like PFI schemes and kept a gazillion tax loopholes open for the rich. Public money went into private coffers, from there into offshore tax havens – ditto bailing out the banks etc. new Labour are just as much patsies of the super rich as the Tories!

By maintaining Tory policies of keeping the real workforce weak, through neoLib ideology of steadily worse pay & conditions for the majority, the only possible way left for capitalism to work was through inflating a debt bubble to astronomical heights. Hence a debt mountain in Britain, Europe and America etc. & who controls that debt by the way? Ah yes, the super rich!

Reinvestment in the worlds economy has also fallen worldwide, in parallel with the rise of neoliberal ideology, so propaganda about the super rich reinvesting acumulated wealth is just that – propaganda. That is making itself felt through a slowdown even in basic scientific advancements, let alone a civilisation wide infrastructure that is crumbling before our very eyes (with the temporary exception of PFI schemes and glittering skyscrapers for financiers)

It would be nice to see which jobs were ‘useless’ – outside of Littlejohn World, because you see an equal amount of ‘useless box ticking’ type roles in companies, especially in senior and middle management.

David: different one on the same day was in my mind, but yes.

9. You make the stupid and idiotic mistake of believing New Labour was left wing. They were not. They continued the deregulation started by Thatcher. (And that was not enough for Osborne and Cameron in opposition who said before the crash New labour did not go far enough. A point that the tory right wing has now air brushed out of history.)

It of course should also be pointed out the original mega bailouts were done by that well known left wing radical GW Bush in the US, and continued by arch centerist Obama ( who just happens to have raised huge campaign funds from wall street. And Osbourne could not wait to find £7 billion to bail out the Irish banking sector.(which was really bailing out his mates in the UK who were heavily invested) no austerity for bankers.

This was the inevitable consequence of Thatcher/Reagan self regulation and so called free markets. But as always conservatism must never be seen to fail, so the solution is always more conservatism. Deregulation and more austerity has the added bonus that the rich don’t have to sacrifice. Sacrifice is for the little people. We are watching classic crises capitalism.

There is no need to pay off the deficit in 5 years. It is a completely arbitrary time period pulled straight out of Osbornes arse. What is needed now is demand. Osbourne has made the situation worse for no other reason than he wants to do this anyway so he can cut taxes for the rich, and then start another round of cuts. Austerity, will lead to ever more austerity. It is a death spiral of doom. Except for the 1%s

I think some good points have been raised in this article but I take a different stance. Labour has been pushing for cuts but not the same scale and pace. 12% cuts in the policing budget, £5bn cuts to the MoD, £6bn cuts to the Department for Transport and Labour is more than likely to stick to Tory spending plans after the next election. Osborne has not lost Britain it’s AAA rating because of spending cuts, he has lost the AAA rating because he started cutting too soon at a time when the economy was very weak. It is because he has no plan for growth that the economy is where it is. Labour can still stick to Tory spending plans after 2015, but do radical things within such tight spending constraints.

” As to the rich wanting a recession, why would they want it. The rich want to make lots of money and if there is a recession then they aren’t making money.”

Recessions provide opportunities for those with the money to exploit them What do you think the banks did with all the bail out money? They went out and bought shares at rock bottom prices and made a killing.

Also recessions provide the chance to push govts into more deregulation, and curbing of worker rights and pay. (Much easier to do when people are fearful of their jobs) The rich make their money in many ways. Not just from booms.

@18 Sally – Thank you for branding my views stupid and idiotic, ad homming is always a surefire way to show you’re a little unsure of the validity of your own argument. I actually take your point though that in the pre 80′s paradigm, yes, New Labour are not left wing. By modern standards I guess that would make the pre 80′s left the extreme left wing today, and I am not a big fan of extremism at either end of the spectrum. The awful mistake of free markets and less regulation delivered the greatest period of economic growth and prosperity (not to mention the increase in living standards made by technical innovations) of the 20th century. Perhaps if we had stuck to the industrial unrest of the 70s then we would be in fantastic shape today. It’s sad, as I started out a marxist selling SWP papers, that the economic argument was won by Friedman without question many years ago, as the tennants and principles behind socialism are actually extremely valid and pleasantly altruistic.

Currently, I enjoy a personal taxation rate including purchase taxes etc of over 50% of my income. I guess to be truly left wing that would rise to 75%? 100%? Just because the apparatus of service delivery was changed to private partnerships doesn’t change the fact that we have in reality not moved as far to the right as you are letting on. I agree that the current system of what I term corporatism is the worst of all worlds, private profit without competition. This was the folly of new Labour, trying to keep everyone happy – pandering and humouring the less economically literate and misguided by trying to socialise capitalism, while anyone with an understanding of the real world knows that this is the road to failure. China did reasonably well you may have noticed, since Mr friedman visited and introduced free market reforms – or was it the previous work of the “old left” that just took too long to come to fruition and MF reforms piggy backed this? Quite a success story I would say, and it has eerily coincided with moderating the doctrine based centrally planned economics and the embracing of free markets.

Now, the one point raised a few times on this thread really winds me up (but I will not resort to calling it stupid or idiotic as I don’t believe it is, just misunderstood), is the thinking that capitalism is a system per say which is guided and nurtured, and developed. Capitalism is the natural world, the free market is the free actions of individuals – that’s the whole point! Just because some of you are hell bent to shaping and moulding society in your own interests or to satisfy your own beliefs and egos, don’t assume that believers in capitalism are similarly into this level of control freakery. Let it be is the motto for a free market, it doesn’t look for ways to do anything as it isn’t a system with a goal, it’s a reflection of the aggregates of everyone’s productive endevours. What we currently have is a mixed economy, not a truly free market based one, so the current system does have planning and goals, but these do not originate with libertarian free market thinking.

From Krugman’s blog today……….

” So, people want me to comment on the Moody’s downgrade of Britain. No real news there. As a guide to the future, ratings agency judgments are literally worse than useless; remember, US bond yields actually fell after the 2011 S&P downgrade. Still, it’s kind of a poke in the eye for Cameron/Osborne, who are subjecting their country to pointless austerity because confidence!

But they won’t change course; basically, they can’t, for careerist reasons. And that’s the story of a lot of what’s going on now.

Ralph Waldo Emerson understood this. The original version of his famous quote — I had forgotten this — reads:

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.

I don’t know about the divines bit, but the little statesmen thing is completely accurate. Suppose George Osborne were to admit that austerity isn’t working. What, then, would be left of his claim to be qualified to do, well, anything? He has to stick it out until something turns up,no matter how many lives it destroys.”

” Capitalism is the natural world, the free market is the free actions of individuals”

No such thing as the free market. It’s a myth. First, you need a currency. Someone has to issue that currency, and someone has to set interest rates. You can have a central govt bank do it, or let private banks do it. Either way your have just taken a huge axe to your so called free market. (Fixing of libor rates?)

Then you need some laws, even basic property laws. Someone has to make those laws, and someone has to interpret them. And someone has to judge when they have been broken, and someone has to decide what the penalty should be when they are broken. And someone has to carry out that penalty. There are various ways of doing this, Democracy, Dictatorship, Monarchy. Whatever. Your so called free market is on life support now.

Then you need to raise taxes to pay for the above, and whatever else you want. By now your so called free market is ready for the grave.

Nobody needs the credit rating agencies to tell them about the economic prospects of an advanced sovereign. All the information is already out there in published statistics. Fund managers have usually worked it out for themselves well before CRA react.

However, that does not mean a downgrade does not matter. The no growth economy is an indictment of the policies of the government. No growth economy means the government can’t produce a credible plan for when the public finances will be back on a sustainable trajectory. What you are spending this year or next year do not so much matter if you can credibly show that the trajectory will see public debt as a ratio of national income falling. Mr Osborne put the triple A in-play and at risk in 2011, when he pushed the fiscal consolidation beyond this parliament. A Chancellor can’t credibly promise what another parliament will do.

Although the government will attempt to play down the significance this is toxic politics. Both sides of the coalition became hostages to fortune when they cited retaining the triple A as a metric to judge the government. Only inexperienced buffoons create a rod for their own back by being judged from a metric over which they had no control. The correct thing to have done would have been no comment on ratings. The ratings issue is just another demonstration that Mr Osborne does not really know what he is doing. I see the issue as similar to him in 2008 breaking the UK front bench convention on never commenting on the sterling exchange rate.

Any Chancellor over the last 30 years would have paid with his job for the loss of prestige in being downgraded. What does it say about Mr Cameron when sacking a grossly incompetent Chancellor is not a serious prospect? What does it say about Mr Osborne when he does not see it as a resigning issue? In the grand scheme of things it does not really have any economic impact. Sure, there may be heightened exchange rate volatility for a few days. But over a longer timescale nothing will happen that would not have happened anyway. What it says about the UK government incompetence is more pertinent.

At least the Treasury handled the downgrade well and for once did not leak the information that they get 12 hours before anyone else. The French government did leak the information when they were downgraded. The U.S. government had an infantile hissy fit when they were downgraded. The UK Treasury engaged in stoic stiff upper lippism. Bizarrely, just about the only day this week when rumours were not circulating about an imminent downgrade was the day it actually happened.

First UK downgrading since 1978. Those terrible times, winter of discontent, Thatcher, Callaghan, blah blah blah…

The OP is right in its assessment of Moody’s, but politically this proves that utter otiosity of everything claimed by Cameron and his jolly good chaps. Sally is right, their policy is pure ideology, a politically inspired attack on those they consider inferior in the defence of Money.

Cameron probably doesn’t even realise this himself.

@ Dislecksick

As neoliberal policies started to bite from the 1980′s onwards, economic growth started to fall and unemployment rise throughout the western world.

http://unctad.org/en/PublicationsLibrary/tdr2012_en.pdf

What makes a functioning capitalist economy, more people impoverished through regressive pay and taxes? Sorry, but throughout the west, what people can afford has been subsidised through a credit bubble. Without that credit bubble we would have seen 100 customers turned into 50 – on average – for every single company over the past 30 years. That would have made a 30 year recession, wouldn’t it?

The majority of us have seen our earnings reduced by 50% in real terms. In short the economic growth you are citing as proof that neoliberalism works is a mirage. Yet over the last year, when the words economy has either flatlined or contracted, the super rich have accumulated even more money from us.

http://mobile.bloomberg.com/news/2013-01-01/billionaires-worth-1-9-trillion-seek-advantage-in-2013.html

I would welcome you debunking that as left wing ideology

“Capitalism is the natural world”

Not really, and you really need to make touch with the natural world if you think so. I think you are mistaking Darwin’s blind watchmaker, with Smith’s invisible hand, or perhaps you are asserting there is no such thing as morality?

As Sally says, what you are describing is a theoretical concept. The natural world is not a concept, for all that Osborne would like it to become so.

The natural world has not seen fit to speculate on the value and accumulation of money.

Bartering is not observed outside Homo sapiens

EO Wilson has written extensively on altruism as an evolutionary tactic.

The natural propensity towards monopolies and securing power is very unusual in natural systems, and tend to be unstable in the medium / long term (e.g Eucalyptus Forests, Yew Woodlands, Gorse scrub).

The plentiful availablility of energy does not drive innovation or activity

Many behaviours within species develop which have a bearing onthe natural world but have no market comparison. For example, deer avoiding flood plains as they are more vulnerable to predation.

Too many capitalists and indeed economists forget that ALL of their actions exists within the constraints of natural systems, and not the environment is one special aspect of the economy.

Now lets get back to the point that matters I am beginning to think you are intentionally moving off topic:
how do we ensure that the mess that Osborne is making sticks to him. Because then Britain can begin to move on.

Osborne is actually following orders of the governments billionaire bribe masters. He will be replaced by another patsy within minutes, maybe his replacement is already there, waiting in the wings!

For been a good boy he’ll of course get a cushy directorship in some soon to be mismanaged company :)

29. margin4error

The question to ask Osborne is this: “The markets are saying the cuts have failed to retain confidence in the economy, and are calling for more to be done to stimulate growth. So why has the Chancellor stopped caring listening to the markets and caring about our AAA status now that they don’t just want him to slash public services?”

The reason this is the question Labour needs to ask is three fold.

1 – the reason for the coalition is to maintain market confidence. That is the Lib Dem excuse for taking up those well paid ministerial jobs with the nice cars and horny interns.

2 – it draws attention to the possibility that he is doing this out of ideology, not out of what is best for the country or right for the markets/economy

3 – it allows Labour to emphasise its own focus on the pragmatic need to restore economic and market confidence. It isn’t saying “we won’t cut anything” which sounds unbelievable and loses them credibility. But it does allow them to suggest a different plan for resolving the crisis that may hurt people less and that is founded in the pragmatic, not the idealistic or opportunistic.

Some interesting and thought provoking points guys, especially the fact that a free market still needs a banking system. The point I am getting at is there isn’t necessarily an ideological “final destination” behind the overall theory, be that equality, equalisation of wages etc. I probably have got it slightly wrong to infer it’s just the natural state of things, of course it’s an economic system. However, there isn’t IMO as much as an agenda as with the alternatives, and this agenda with socialism, communism etc worries the hell out of me, as I am not fully convinced we cam find the right system of governance to ensure that agenda is a purely altruistic one, and it may be hijacked by those with less than honest intentions, as evidenced by every single manifestation of Marxism and Socialism in the world to date. In the words of Friedman “Where do we find these angels who will run our societies for us?” If the left could convince me of that, I might come back, but the people I encountered in the SWP and the Labour ministers I witness on TV and in the media do not appear to be these angels, but rather partisan tribe members with their own power and influence as their main objective

If the left could convince me of that, I might come back, but the people I encountered in the SWP and the Labour ministers I witness on TV and in the media do not appear to be these angels, but rather partisan tribe members with their own power and influence as their main objective

Ah, I think I see your problem. For some reason you expect Labour to be of ‘the left’. They haven’t been since 1994, when they became the centre-right, socially conservative, economically neo-liberal New Labour.

32. So Much for Subtlety

It is probably about time someone pointed out that Cameron and Osborne have not yet tried austerity. They talk about it. The Left talks it up. But spending has not been cut. Spending has only not gone up as fast as it did under Brown. As Moody’s makes clear:

3. And, as a consequence of the UK’s high and rising debt burden, a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016.

High and rising debt. Which is crippling Britain’s chances of recovery. Now perhaps people here think that if Britain’s debt was even higher and rising even faster, suddenly British businessmen would assume the future was going to be better and they would start investing, but I doubt that any sane person would. We have not seen any signs of recovery because the government is not doing what it needs to do to make people feel optimistic. They see that high and rising debt and know if they work hard now, they will be paying even higher tax rates later.

33. margin4error

so much for subtlety

Thing is – the government is trying austerity. It is just that austerity isn’t cutting their spending as much as they hoped.

This is because they don’t understand the role of government in the economy.

See, unlike a company, a government has three big influences on the economy.

1 – setting and managing wider expectations. This government, to justify its cuts and to attack labour, has talked up crisis and extent of cuts, and thus set expectations for the economy low. This is seriously damaging to an economy and it had screwed up our GDP growth.

2 – Being part of the economy. Government is huge amounts of the economy. For example, reduce NHS spending by around 1% and you cut GDP by around 0.1%. So it produces a lot of the GDP that it wants to grow. And at the same time it makes its money from GDP (by taxing it in many varied ways). Austerity is thus slashing GDP. And right now the ratings agencies are getting annoyed that we are doing too much of that.

3 – protecting the economy. The day people start to starve is the day the economy ceases to exist in any meaningful sense because it is the day the fires start and revolution takes hold. Government thus has to ensure a certain socially acceptable minimum standard of living across its population, and when the economy suffers, the cost of doing that goes up. Austerity might mean cutting police numbers and cutting teacher numbers, but it also means raising the number of prospective homeless and unemployed – and government, for the sake of the economy, has to bail these people out. This costs a lot.

Until this government starts looking at its balance sheets like a government, instead of like a company – i and we will remain screwed.

High and rising debt. Which is crippling Britain’s chances of recovery.

And this is total nonsense. Read Krugman or any other empirically-minded economist; we are not Greece. Government debt at this point in the cycle is as cheap as it’ll be, interests are and have been for nearly four years locked against the Zero Lower Bound, and the bond vigilantes still haven’t appeared after four years. We hold debt in our own currency, and we’re unlikely to be able to cut our way out of a demand shock. If you’re going to tax your way out of one, you tax those with the most ability to pay; Osbourne raised VAT, which is a) regressive and b) by definition lowers demand by raising prices.

Tell anyone who’s currently unemployed that Osbourne hasn’t tried austerity; or anyone who is disabled, or who can read a bloody graph.

This is a demand-shock depression. We had two years of recovery, and as soon as Osbourne put out a budget the economy dived. The problem is not lack of supply or theoretical productive capacity, it’s a problem where the mass of people on the street don’t have, or can’t spend, enough money. Anything other than solid, structural stimulus in these conditions is ‘austere’; again, we’re not Greece, but we’re not where we would have been had the Tories lost the election, either.

You should remember well enough to know that I detest New Labour and am profoundly disappointed by Gordon Brown, but at least he was smart enough to lower regressive tax in a demand shock. Suggesting that Osbourne hasn’t damaged the recovery is simply counter-factual.

Addendum: further to that point, here’s Simon Wren-Lewis.

Vince Cable shrugs off rating downgrade -and rightly so! Credit rating agencies have lost their credibility a long time ago (Enron, Lehman, Greece, and more…).

May I direct you to my book “The Seven Deadly Sins of Capitalism” in which rating agencies’ (often dirty) job is of course addressed (more at http://www.mikeconomics.net).

37. gastro george

“Both sides of the coalition became hostages to fortune when they cited retaining the triple A as a metric to judge the government. Only inexperienced buffoons create a rod for their own back by being judged from a metric over which they had no control.”

The irony here is that Osborne has maybe been a bit too clever for his own good. What he does does have influence over is bond rates (through QE, etc.). So it would have been quite clever to base policy on a metric that he did have control over. Unfortunately he can’t control the inanities emerging from the ratings agencies.

38. margin4error

Mike

Why didn’t Vince shrug off concerns about the credit rating two years ago when it played a big part in justifying austerity and the formation of a coalition government?

He’s very good at being wise after the event is our Vince.

39. So Much for Subtlety

33. margin4error

Thing is – the government is trying austerity. It is just that austerity isn’t cutting their spending as much as they hoped.

No, the government is talking about austerity. They have not tried it. They don’t have the brains to do it properly or the courage to face the media wrath if they tried. So they are muddling through.

This is because they don’t understand the role of government in the economy.

Oh God. That I doubt. There was a time the government could fiddle at the margins in a downturn and then claim victory no matter what they did because the economy would improve – with America reliably driving the world economy. But America is in trouble and we are far too close to bankruptcy to make that possible.

1 – setting and managing wider expectations. This government, to justify its cuts and to attack labour, has talked up crisis and extent of cuts, and thus set expectations for the economy low. This is seriously damaging to an economy and it had screwed up our GDP growth.

Uh huh. It is all the Tories’ fault for being honest. This is bollocks. Everyone knows we are in trouble. Moody’s did not downgrade us because of what Osborne said. The truth is out there no matter what the prats in Whitehall have to say.

2 – Being part of the economy. Government is huge amounts of the economy. For example, reduce NHS spending by around 1% and you cut GDP by around 0.1%. So it produces a lot of the GDP that it wants to grow. And at the same time it makes its money from GDP (by taxing it in many varied ways). Austerity is thus slashing GDP. And right now the ratings agencies are getting annoyed that we are doing too much of that.

Theoretically. Up to a point. However money is not wasted. If the government spends less, then other people spend more. Counter-cyclical spending may work, but we are beyond a point where we can do that. Brown spent all the cash and left us in a massive hole. At that point, every time the government borrows a few more billions everyone knows that future taxes are only going to go up and so demand in the real economy is going to go down. There can be no improvement in outlook – even assuming that this sort of Keynesian policy works – until people can be sure that the future is going to be better. And ever higher future tax rates is not a way to convince people of that.

3 – protecting the economy. The day people start to starve is the day the economy ceases to exist in any meaningful sense because it is the day the fires start and revolution takes hold.

I don’t notice anyone in Britain starving. We may have revolution one day but that will only produce hunger and nothing else. Still, Spain shows what people will suffer if the Left demands it. The EU is a Leftist cause and so they are not raising a peep even though they are suffering worse austerity than anything any Thatcherite could inflict on them. Maybe our Left will be sensible too?

Austerity might mean cutting police numbers and cutting teacher numbers, but it also means raising the number of prospective homeless and unemployed – and government, for the sake of the economy, has to bail these people out. This costs a lot.

We are nowhere near that point. At this moment, austerity means fewer Lesbian Bereavement Officers. You only have to go to the Guardian to see the flood of non-jobs in the grievance industry has not slowed one little bit. Austerity ought to mean cutting pointless paperwork and getting rid of people we really don’t need. The British state has massively expanded, the number of policemen and teachers has not. We could go back to 1950s levels of spending without reducing any significant numbers of policemen.

34. Chris Naden

And this is total nonsense. Read Krugman or any other empirically-minded economist; we are not Greece.

Yet. Krugman has long since given up real economics for cheap political grandstanding. To call him empirically minded is absurd these days.

Government debt at this point in the cycle is as cheap as it’ll be, interests are and have been for nearly four years locked against the Zero Lower Bound, and the bond vigilantes still haven’t appeared after four years.

Because the economy is flat lining. Which is great. Until the economy picks up and then we will be faced with paying real interest rates. This is Japan’s problem – cheap debt looks attractive but now the government cannot afford a recovery. We will be paying those debts back not at present rates but at future rates. Which will be higher one hopes. Japan has followed your ideas. It has lost a decade and a half with no signs of recovery and the cliff edging ever closer.

We hold debt in our own currency, and we’re unlikely to be able to cut our way out of a demand shock. If you’re going to tax your way out of one, you tax those with the most ability to pay; Osbourne raised VAT, which is a) regressive and b) by definition lowers demand by raising prices.

We hold debt in our currency to some extent and only for now. Until people realise we want to doing a lemming dive off the cliff a la Greece. The only way to recover is to cut our way out. It is unlikely Keynesianism has ever worked. We cannot tax our way out either. We have to restore faith in the long term future of the British economy – cut, cut and cut some more. VAT is better at this point than income tax rises, but both are stupid.

Tell anyone who’s currently unemployed that Osbourne hasn’t tried austerity; or anyone who is disabled, or who can read a bloody graph.

Everyone who is currently unemployed looks safe and warm on welfare to me. I am happy to tell them because it is true. We have not yet reduced spending. We have just slowed the unsustainable growth in spending.

The problem is not lack of supply or theoretical productive capacity, it’s a problem where the mass of people on the street don’t have, or can’t spend, enough money.

Actually it is worse than that because they see their children and grandchildren won’t have any money either as they will be paying off Brown’s debt. So they are holding on to their cash. Sensibly. Recovery starts with a belief things are going to improve.

Anything other than solid, structural stimulus in these conditions is ‘austere’; again, we’re not Greece, but we’re not where we would have been had the Tories lost the election, either.

Sure, if they had lost we would be five minutes from Greece instead of ten. Actually that is unfair. I would guess that Treasury is in charge and Osborne is doing what they recommend just as Balls would have. Nice way to redefine the language. Increased spending is now austerity is it? Brilliant. We are not Greece yet. We will be soon at this rate.

There is no political ‘master’ plan for reviving the UK economy whether it be the present government or one from an incoming Labour government. The reason, all our politicians just do not understand that only an economic strategy based upon three decades or more will succeed in this present century. But it has to be said where this ‘master’ plan has to be based on the creation on ‘new’ technological industries. For the present short term political expedience supported by all our parties will never make the breakthroughs that we need as a nation. Indeed we do not need political thinking but creative thinking as that is the only way that we can recapture any meaningful future for our people and our young now. Therefore Britain had better get used too a nation in decline with the political short-term mentality that all our political parties suffer from presently. This unlike the Chinese who started their long-term and not short-term strategy some 35 years ago in earnest. It is no wonder that China marches on and where Britain will be far poorer with its short-term mentality in another decades time and where China will have most probably become the no.1 economic power in the World. Indeed it is forecast that China with its long-term strategy (not its short-term strategy) will have an economy four times larger that that of USA by 2075. So we fools muddle on in this country with our short-term thinking whilst others take command of the economic high ground through long-term thinking. We really are fools I believe in Britain today and where all our politicians with this short-term mentality, are marching our nation towards the abyss, year-on-year. Common sense dictates this and nothing else.

Dr David Hill
World Innovation Foundation

@40 Well the problem with a 30-35 year plan is elections a few years into it followed by a new government that chucks said plan out the window.

“cheap debt looks attractive but now the government cannot afford a recovery. ”

Your argument is premised on the notion that a recovery would lead to interest repayments outpacing revenue growth. Is that even possible?

43. So Much for Subtlety

41. Cylux

Well the problem with a 30-35 year plan is elections a few years into it followed by a new government that chucks said plan out the window.

Which is the fatal flaw in Keynesian economics. Spending in downturns is all very well and good. If done on a small scale it might even help. But the debt has to be paid off in good times when spending needs to be cut. No one has managed to do that. Spending in bad times is met by spending in good times. All loading the grandchildren with more and more debt. Gordon Brown knew this. He said he wouldn’t do it. He spent all the surpluses anyway and left the economy ruined.

42. Jimmy

Your argument is premised on the notion that a recovery would lead to interest repayments outpacing revenue growth. Is that even possible?

Have you seen Japan’s debt? Japan presently pays about 1% interest on its debt. If that doubled to just 2%, the government’s interest payments would be something like 50% of the budget. Obviously that is not possible.

http://www.forbes.com/sites/stephenharner/2011/11/18/coming-to-grips-with-japans-government-debt/

You linked article is interesting but contains the following proposition: “A doubling of interest rates would double debt service costs to 50 percent of budget.” which appears to be the basis for you argument. That statement as a matter of mathematical logic would surely only be true if only interest were being repaid?

@margin4error: Point taken. The fact that I approve Vince Cable’s statement doesn’t mean I agree with him -and Lib Dems- sitting there. I wrote about that in due course (see comment on http://liberalconspiracy.org/2010/05/12/its-time-for-left-liberals-to-join-labour/).

On the subject of austerity, multipliers, and the IMF criticizing Osbourne, Krugman’s column today uses Italy and the Eurozone as the case-study but also links several of the important resources in the 6th, 7th and 8th paragraphs here.

Dissident, at 26:

“The majority of us have seen our earnings reduced by 50% in real terms”.

Can you substantiate this extraordinary statement?

Still chuckling at the idea of Krugman as an ‘empirically-minded economist’.

He’s a polemicist. Like Blanchflower, with better jokes.

RichardT:

Are you actually trying to claim his economic work is unsound? I think to support that you’ll need quite a detailed response. The man’s numbers are very hard to challenge; you may challenge his policy recommendations, which are certainly polemic, but you can’t really fault his graphs. Particularly not when those graphs and numbers are so widely reproduced by other independent work (read Wren-Lewis, Thoma, DeLong, and anyone else who’s been consistently right since 2009; compare to Mankiw and the class of genuine polemicists who’ve been consistently wrong for that long or longer.)

SMFS, btw: you’re making statements of belief with no grounding in evidence, here, but I do have to pick up this one:

VAT is better at this point than income tax rises, but both are stupid.

Er, that’s a pure statement of 1% ideology. We could raise income and financial taxes a very long way, in revenue terms, without in any way damaging the economy; those taxes are progressive, they take money currently being saved by very rich people and put it into the wider economy, stimulating demand.

VAT is regressive: raises prices, driving down demand. In a demand shock. Look at the graphs; the Brown VAT cut (and other policies) lead to a 2-year, slow, recovery. The Osbourne VAT hike (and other policies) killed that stone dead and pushed us into a double, now possibly triple, dip recession. And this is exactly what Krugman predicted, based on his work on Japan’s lost decade.


Reactions: Twitter, blogs
  1. Quote for the day. | liberal reflections

    [...] Hundal is watching for Labour’s [...]





Sorry, the comment form is closed at this time.