The autumn statement was reminiscent of the 1961 Sid James film ‘Carry on Regardless’. Austerity policy is not working, and the claim that it will work is constantly pushed to the far future. What’s wrong? There is nothing wrong with the real supply side economy. But there are two crucial things wrong with the financial economy, meaning that we have a crisis of demand, not of supply. These are:
1. Disposable income has grown significantly less than GDP
2. Financial orthodoxy insists on balancing government accounts
Between 2001 and 2007 when the crisis hit, GDP grew by 19.5% but disposable income by only 11.5% (ONS data in constant 2009 prices). This represents a demand gap of 4.5% of GDP. This was also true over a longer period from 1993 to 2007 when GDP grew by 58% and disposable income by 48%.
To enable consumer expenditure to also grow by 19.5%, the income gap was funded by increased household borrowing which left households and banks over-leveraged, causing some banks to fail and others to need refinancing. This familiar story is shown in the following graphs. Since 2007 it’s been a crisis which won’t go away.
How can disposable income grow more slowly than GDP? At a recent Festival of Economics in Bristol, three different answers were put forward. The Guardian’s Larry Elliot claimed that wage depression resulted from lack of union power. The Sunday Times’ David Smith claimed that it was due to increased tax to fund increased government expenditure. Paul Gregg, professor at Bath university, fingered the gap between productivity and real wages as the root cause, which he and Stephen Machin have explored in their recent Resolution Foundation paper.
What should be done about this income gap? Put simply, we can either increase income up to GDP, or reduce GDP down to income, as in current austerity policy. Would stronger trade unions resolve the problem? If productivity is an important driver, then the reduction in the income component of GDP is inevitable, and requires a more radical solution.
Such a more radical solution is available, i.e.:
1. Fund the income gap by a citizen income. My rough calculation of the amount of citizen income which would have been needed to fund the income gap each year is:
2. Do not count this as deficit spending added to cumulating government debt, but simply write it off each year.
3. Distribute it on smartcards with the value expiring at the end of the year to encourage the income to be spent.
4. Target lower income groups.
Here we come to the second thing wrong with the financial economy, the old chestnut that governments must balance their books. Households and businesses have to, so why not governments? The seemingly obvious nature of this dominant view doesn’t make it correct. A thought experiment of a totally automated economy soon shows a case in which the whole of GDP consumption would be deficit financed, and moreover that the deficit would be entirely written off each year. The inevitability of deficit in this thought experiment concurs with current real practical experience that, in fact, some deficit is here to stay unless we either drastically cut our economy, or implement a radical solution.
* Geoff Crocker is a professional economist whose book A Managerial Philosophy of Technology is published by Palgrave Macmillan.