I demand better than this: Themes for the next manifesto

Part of the process by which the party’s Federal Policy Committee seeks approval for its General Election manifestos includes a series of papers to the Federal Conference which show the thinking in progress. This conference the paper is titled “Demand Better…” (available here), and I must say I demand a lot better than this.

As is the way, a motion to conference (F35) summarises the paper. It starts innocuously enough with some challenges the country faces:

Conference deplores the fact that:

a) Britain is a place where people too often struggle to achieve a decent quality of life for themselves and their families, where work and effort are often not rewarded and a rigged system allows wealthy people and companies to avoid paying their fair share.

b) Too much of people’s success in life is determined by the circumstances of their birth, rather than their hard work and skills.

c) Public services such as the NHS and schools are starved of resources to do a proper job.

d) People from diverse backgrounds often face unfair barriers to success.

e) Long-term challenges such as climate change or the impact of automation on employment are neglected while the machinery of government is consumed by Brexit.

This is all good as far as it goes, but

Conference believes that the Conservative Party has created and continues to promote these unfair divides while failing to lay the foundations for a successful future.

Erm. Facts a, b and d predate the Conservative Party. They are difficult problems to solve and it is fair to say that successive governments have manifestly failed to solve them.

Fact c is, still, a hangover from the crash of 2008 and now of Brexit. And the biggest threat to our economy on the horizon after Brexit is the Labour Party under Jeremy Corbyn.

Fact e can be fairly laid at the Conservative door, although it may be a hostage to fortune for us to complain about if we as a party seek to fight on against Brexit after others have let it go.

The FPC badly need to show some awareness of subtext because this reads like a project to sell out everything we stand for and cosy up to the Labour Party. The party wouldn’t stand for this even if Labour were led by moderates, but you can do the damage just with subtext.

Anyway, we offer, or rather “demand” a solution on all these points: more spending. The full paper even bleats on about austerity, which is just Labour code for saying the crash of 2008 is the fault of the coalition. And none of the extra spending is funded apart from the 1p on income tax for the NHS (which will cover about 1 year’s worth of cost pressures), so in order for this not to be a cynical offer we need to be clear what comes from borrowing, cuts elsewhere, other tax rises, or from the ‘proceeds of growth’.

And to spend the proceeds of growth, you do need growth. There’s some useful recognition of the role of investment in infrastructure, skills and so forth, but nothing, it seems on creating the conditions in which the private sector can thrive: a strong trading position, a stable and secure society, limiting the complexity and unnecessary burdens of regulation and taxation. Rather, the paper seems to take the view that a stronger (they say better) economy is something that can just be demanded.

Putting aside the foreign policy section, which can be summarised as ‘virtue signal for England and ignore all the new challenges in the world’, it is all ‘demand’ of this sort. It is citizen as supplicant to the state, and state largesse as the ultimate goal of politics. It is, in short, social democracy and not liberalism. There is nothing to empower the citizen or challenge the concentrations of power in society, no reform of public services, nothing difficult, nothing transformative, nothing liberal.

D minus. Go back and start again.

* Joe Otten was the candidate for Sheffield Heeley in June 2017 and Doncaster North in December 2019 and is a councillor in Sheffield.

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  • Agreed Joe. What’s more shocking is the complete absence of any bold statement of the party standing for civil liberties and free speech.

    I mean, I thought most of it was sensible stuff policy wise, but it was very ‘centrist party’ and you’d be hard pressed to discern sniff of liberalism in it.

  • James Baillie 21st Aug '18 - 12:07pm

    A Corbyn government would be economically very bad news indeed, but the isolationist, anti-trade, anti-investment, anti-standards modern Conservative party would be every bit as bad if not potentially worse, let’s not kid ourselves.

    Regarding austerity, it’s a fact that that on a lot of levels, public spending has gotten too low to support the level of services people need and expect: significant reform of wealth taxation coupled with a modest income tax increase will be needed to restore public spending to workable levels. That’s what the vast majority of people in the UK mean by “ending austerity”, and it’s a perfectly reasonable liberal response to an economy that has been lacking in investment and has ended up storing up significant long term costs as a result of reductions in front-line services. The motion seems entirely in line with Liberal Democrat policy in this regard, which even in the 2015 manifesto focused on the principle that austerity should progressively end and spending should be restored in line with rebuilding the economy.

    I have some sympathy with parts of this article nonetheless – F35 could talk much more strongly about breaking up concentrations of power via devolving powers, electoral reforms, and the break-up of private power concentrations too with much stronger competition legislation. It would also be nice to see a full subsection on improving criminal justice and civil liberties, so there are certainly things one could add. What’s already there, though, I think is perfectly standard run-of-the-mill Liberal Democrat policy and objectionable only really in the sense that it risks looking a tad bland.

  • “The full paper even bleats on about austerity, which is just Labour code for saying the crash of 2008 is the fault of the coalition”

    This is _exactly_ the kind of thing which makes me want to leave the party and vote for someone else.

    Because austerity was a _terrible_ approach, and the Conservative cuts of the last ten years have done hideous damage to the fabric of the country, leading to greater inequality, greater division, and feeding directly into Brexit:

    As well, of course, as being terrible economics, where each £1 cut cost us up to £1.70 in GDP.

    Note, also, the word “bleats” in there. Because it couldn’t be an actual complaint, and thus it should be talked down.

    I’m ashamed to be sharing a party with the kind of nonsense in this post.

  • Agree wholeheartedly with this Joe – it’s heartbreaking that a so called liberal party can have a themes motion debated at their conference that fails to mention freedom once.

  • “Bleating on about Austerity is not just Labour code for saying the crash of 2008 is the fault of the coalition” it should be a rejection of the austerity policies of the coalition. It should be a return to social liberal economic policies.

    We have had growth in the past and it hasn’t solved our problems. We have had the Tory failures of the 1980’s and early 1990’s and Blair’s Labour Party’s failures of the late 1990’s and 2000’s. And the failure of the Coalition. The result of all this failure is Brexit. Where a large section of the population no longer believe the economy works for them.

    We as liberals must create not only a fairer society, but a more equal society, a society which works for everyone and everyone has equal freedom and liberty.

  • Austerity was cutting essential services. However because of the time lag while the costs go down immediately the effects of it take time. Austerity gave us a rising crime rate, a failing judicial system and a collapsing prison system. It had similar adverse effects through out society. What Joe and his friends need to understand is “You get what you pay for”, don’t pay and you don’t get an educated society or even a very peaceful one.

  • And still the cuts to local authority budgets continue apace, whilst we have virtually exhausted the abilty to rationally privatise or contract out.

  • paul barker 21st Aug '18 - 1:43pm

    I see no evidence for anyone in Our Party wanting to “Cosy up” to Labour but theres a strong argument for putting out friendly feelers to anyone thinking of breaking away, iether by joining us or forming a New Party. Why ? Because that could transform British Politics in a few Months, if we & any EX-Labour forces could find a way to work together. Thats what happened with The Alliance with The SDP, we added 15% to the existing Liberal Polling in 3 Months.
    I think we could make a full Recovery on our own, certainly by 2022 but we arent going to do it in Time to make any difference to Brexit. A New Alliance could make that difference.
    I dont see Liberalism & Social Democracy as natural enemies but allies, Our Party contains both strands & we need both to confront our Countrys problems.

  • James Baillie 21st Aug '18 - 1:45pm

    “People complain about austerity are trying to convince us that public spending can be disconnected from the performance of the economy”

    This isn’t true, Joe, and if you haven’t realised that this isn’t true then you’ve not been talking to the rest of your own party enough. It’s not even a fully accurate synopsis of Labour’s arguments on this, let alone those of us within the Liberal Democrats who think that “fast cuts to balance the books” was a bad strategy.

    The argument, rather, is that in many areas public spending cuts have directly damaged public finances and/or the economy at large, leading to slower growth. Public spending is absolutely connected to economic performance – it’s just that not all of us believe the rather curious thesis on which austerity is based, namely that the connection is a simplistic inverse correlation. It clearly isn’t.

  • Mick Taylor 21st Aug '18 - 1:47pm

    Joe Otten has a bee in his bonnet about Labour, probably due to having to fight them all the time in Sheffield. Let’s look at Labour dispassionately. Could they actually be worse than the Tories? I’m not sure they could. OK they have policies that we might regard as foolish, but they also have some policies that we agree with and some we ought to agree with.
    I for one have no problem bringing the railways, the power industries and water back into public ownership. The current setup rewards shareholders and penalises customers.
    On Brexit Labour are little different from the Tories, though it is just possible that they might not pursue it once in office.
    Taxing the wealthy and stopping excesses in the city? What’s not to like?
    Of course the big problem with Labour – as it always has been – is centralisation and micromanagement of the economy, local government and the health service. This is where we really part company with them, because Lib Dems are decentralisers and power spreaders whilst Labour are not.
    Please Joe, if you are going to attack Labour – and I think there are clear grounds for doing so selectively – be specific and don’t stoop to broad generalisations.

  • David Becket 21st Aug '18 - 2:05pm

    This bland approach to policy will not lift the party into a better position in the polls, and it has been going on for years. It is time to limit the length of time a person can be a member of the FPC. We need new blood and a fresh approach, and we need it now!

  • nigel hunter 21st Aug '18 - 3:38pm

    FPC members should be there foe 5 years then re-elections. The World and country are changing rapidly. The FPC should mirror that change to stay relevant.
    Yes the Scandies and other countries are quite happy with their system. How did they sell the idea? That is were we should start.

  • Peter Martin 21st Aug '18 - 4:08pm

    @ Andrew,

    Yes Joe does say “The full paper even bleats on about austerity”.

    It’s pretty damning.

    It’s time to move on from who’s fault it was. I think we can all accept that the 2008 GFC wasn’t the Lib Dems fault! The real blame lies with the economics mainstream which for years beforehand was giving politicians everywhere the wrong advice about interest rates, the build up of private debt, deregulation, the introduction of the euro, high current account deficits, government budget deficits etc etc.

    In other words pretty much everything. They stuffed up big time! They couldn’t even learn afterwards from their mistakes. Many prescribed a dose of severe austerity to cure a crashed economy!

  • David Evershed 21st Aug '18 - 4:52pm

    I strongly agree with Joe Otten.

    Plus it’s worth pointing out that Lib Dems were in office from 2010-2015, not just the Conservatives. We should be proud of correcting government overspending.

    I also agree with Andy Briggs that any Lib Dem manifesto papers that fail to promote freedom are not liberal minded.

    The Labout Party is currently further away from individual and business freedom than the Conservative Party. But we should avoid comparisons with other parties and promote our own philosophy in a positive way.

  • Neil Sandison 21st Aug '18 - 5:24pm

    Having been through a few recessions with governments of different political hues all have put the brakes on at times of fiscal crisis .The only difference with the ongoing conservative government has been they have used austerity beyond the crisis and recovery point to achieve a new agenda with a clear objective of creating a smaller state sector. By 2015 we were right to part company from the conservatives and break from the coalition.The trouble is we got blamed for all the bad stuff they took credit for all the good stuff .History had repeated its self again with the Liberals the smaller number of members in a coalition not thanked for their efforts ,The public is beginning to realise how bad unfettered conservatism is ,Sadly Corbyn and his old style nationalisation politics much favoured in countries hell bent on crashing their economies is detering the more moderate voter from switching to the Liberal Demorats at the moment.

  • OnceALibDem 21st Aug '18 - 6:50pm

    “Agreed Joe. What’s more shocking is the complete absence of any bold statement of the party standing for civil liberties and free speech. ”

    Not particularly shocking. It’s not important to the party – certainly not to the leader – so why would they include it?

  • David Evans 21st Aug '18 - 7:20pm

    David Evershed – I note your comment “We should be proud of correcting government overspending.” but ask you in response, ‘Are you proud of the way we allowed it to be done, with most of the cost being put on the poor?’ and ask “How you consider that it marries up with “we seek to balance the three fundamental values of liberty, *equality*, and community” and also “no-one shall be enslaved by poverty”?

    As the old song goes “It ain’t what you do. It’s the way that you do it.”

  • Tony Hutson 21st Aug '18 - 7:39pm

    First of all let’s recognise that the people on FPC volunteer huge amounts of their time and energy to come up with these reports. It’s not fun or glamorous and someone has to do it, so let’s at least commend them for stepping up when the rest of us didn’t.
    That said, I’m afraid I agree with the general consensus that this is pretty un-inspiring stuff. We need bold policy statements for the next election, and they need to be distinctive, resonant and above all liberal. I don’t see any of that here.
    The good news is that if people here have specific ideas for improving it, you have the opportunity to do that. Our policymaking (unlike other parties’) is open to any member to input their ideas. As Joe says, it’s a process, and this is just the opening gambit. So if you want to make changes, go for it.

  • Peter Martin 21st Aug '18 - 7:42pm

    @ Dave Evershed,

    “We should be proud of correcting government overspending.”

    Why do you think the Govt was overspending?

  • Can I propose one policy that should be in the paper and will at least gain us one convert in the form of @Peter Martin and that is to abolish economists – “What all of them? Yes all of them!”

    I have been vocal in defending the coalition on LDV – the biggest spending and biggest borrowing Government of all time. So if you criticise the coalition for austerity – you have to also criticise the 1997-2010 Labour Government for it as well. Whoever you blame – remember Labour left us a note saying “there’s no money left” and as Alistair Darling outlined in the 2010 election they would have cut more.

    That though is somewhat ancient history – people have given the verdict. I have made the analogy before with New Coke – there were good reasons why they changed the taste. People thought it tasted better in blind tests. There were good reasons for the coalition government. Every mainstream party would have cut the deficit from £100 billion a year and arguably in the febrile atmosphere of the time we needed stable government and to stabilise government finances. But just as Coke went back to classic Coke, we need to go back to pre-coalition classic Lib Dems. This paper does this but not unfortunately in bold enough strokes.

    We need to do something big and symbolic to signal our change from the coalition years. In fact there is a lot in this that does that – but only in small detailed and very general ways. Blair had abolishing Clause 4 – Cameron had “hug a hoodie”. We should have free university tuition. We are borrowing for it already – let’s do it collectively and not at high interest rates.

    In general we should not be “equidistant” between Tories and Labour. In the 90s we successfully abandoned equidistance. I think we should signal we are closer to Labour – albeit critical of them and different from them. Just as we said we were closer to New Labour than the Tories in 97 – but were also critical of and different from Blair.

  • Here we go, with Councillor Otten wanting to cosy up with the Tories yet again. We’re told austerity was wonderful and by implication that Universal Credit is a boon for the poor and nothing whatsoever to do with soaring demand at food banks.

    I’m sorry but the lessons of 2010-15 just haven’t sunk in with Councillor Otten – despite the fact that his former mentor and MP squandered a 15,000 majority in a seat he had inherited – and the results in Sheffield Central and Sheffield Heeley definitely D minus.

    In the words of the old Pete Seeger song, ‘when will they ever learn?’ We’ve been left with an empty husk of a party with 8% which judging by the comments above is split down the middle. After 57 years as a party member I despair.

  • Tony Greaves 21st Aug '18 - 10:41pm

    I have not had time to find or read this yet but I have to say that the slogan DEMAND BETTER is the worst I can remember since ONE MORE HEAVE and that was just an Adrian Slade invention during the campaign!

    (1) It just asks for the response – “We will – there must be something better than you are putting forward!”)

    (2) It fails at the first hurdle the slogan should encapsulate what we stand for. If we cannot say so, the assumption is we do not know. (I am sadly coming to the view that that may be true, but at least we should make the effort).

    (3) I have no idea who thought up this meaningless rubbish but they should be politely invited to make way for someone who is up to it.

  • More of the same from Joe Otten…A list of the obvious in order to get to his usual closing theme…”And the biggest threat to our economy on the horizon after Brexit is the Labour Party under Jeremy Corbyn.”

    If memory serves he used almost the same words when a ‘moderate’ Milliband was leader of the Labour party.

  • I quite like “Putting People First” which I think ALDC came up with in the late 80s/early 90s. Bill Clinton also used “People First” in his first presidential election.


    It has to be said IMHO probably Blair and New Labour were best – firstly with New Labour but secondly with policy summations – such as “Tough on crime, tough on the causes of crime.” and “Education, education, education” as well as “New Labour, new Britain”.

    Actually Vince has done quite well with his characterisation of Gordon Brown going “From Stalin to Mr Bean” and “Exit from Brexit”.

  • Libertarians believe tax is theft, it would seem that many “classic liberals” appear to agree with them. The problem is by far the majority inside and outside the party see taxes (all be it as a necessary evil) as payment for a working society. The Orange Bookers tried to find the mythical voters who would vote for a small state and failed misrably. David Raw says the party is split down the middle, I disagree for a number of reasons. The Orange Bookers leaders have ceased to have influence, name me on who still carries that banner. Many have departed to pastures new and the pragmatists who may have once have tagged along with them know their policies are poltical poison. I expect going forward the Lib Dems to steal some Labour clothes, “A people’s railway” perhaps, but they should also steal the clothes the Tories have disguarded “More Police “, and a judicial system that works.

  • “I have not had time to find or read this yet but I have to say that the slogan DEMAND BETTER is the worst I can remember since ONE MORE HEAVE”

    Ah now Tony, have you forgotten the ‘we’re yellow, we’ve got courage’ debacle of 1996? Even mentioning that probably needs trigger warnings 🙂

  • Katharine Pindar 22nd Aug '18 - 12:07am

    I read ‘Demand Better’, policy paper 134, some time ago and found much to admire in it. The subsequent motion F35 seems to me a good summary in points 1 to 6 of major themes in our policies which would probably form the basis of a new Manifesto, as they are apparently meant to do. Other themes may yet be added, but these we read are substantial, apposite and attractive. So I don’t agree with Joe Otten’s withering assessment.

    However, I am disappointed with the first part of the motion, up to line 29, which seems to me to have been rather hastily thrown together, and should be amended. For example, ‘a rigged system’ in line 4 is rather easy unexplained knockabout, while the inclusion of ‘ill-health’ in the list of what people are apparently trapped by (line 22) leads to the obvious observation, can the Lib Dems even stop ill-health?!

    Additionally, I would like lines 17-19 to be omitted altogether. These condemn Conservative government failings, and as the comments above indicate, will only add to the in-party debate as to whether the Tories or Labour have done worse and whether the Coalition contributed. I suggest this is not the place for even mentioning the failings of the past or of the present policies of the other parties; this is a motion about what we believe needs doing and what we intend to do.

    If anyone reading thinks similarly and would like to submit amendments, please get in touch via the Facebook FCC Group or the Policy Discussion Group there to see if we can work together. David Raw: no cause for despair here, David, I think the paper and the motion provide a good basis to build on.

  • Peter Davies 22nd Aug '18 - 6:49am

    Not entirely more of the same. We are now only arguing over what is the second biggest threat to the economy.

  • Peter Martin 22nd Aug '18 - 9:18am

    “And to spend the proceeds of growth, you do need growth”

    OK but let’s think about this. If we go back to the late 70’s we had Tory politicians giving us the same message. ie Create growth and that solves all our problems. It sounded superficially plausible enough. So who would have imagined in 1979, the start of Thatcherism, that a future Britain with a GDP some 250% higher than they had would have the problems we do?

    We’ve probably got a GDP some 1000% higher than we had in the early 20th century but it doesn’t mean we can afford ten times more orchestras now than we had then. Because musicians have to be paid more. Similarly teachers, doctors and nurses have to be paid more. The number of teachers, doctors and nurses is determined by the number of people who want to follow those professions and the number of jobs we want to create to allow them to do that.

    This is not to say that we shouldn’t aim for some growth, but at the same time we need to think about what it means. We also need to think about how the proceeds are shared out. Baking a bigger cake doesn’t necessarily mean we’ll all end up with a bigger piece!

  • Sweeping Policy statements about the state of the nation, how badly other parties are doing and what we want are not easy to formulate even when confined to particular areas, such as Education, the Economy etc.. We have loads of work to do on getting short simple policy statements for the future; attempting to have one so wide ranging (and yet missing important issues out) is a mistake at this stage in our party’s development. It could turn out to be worse than a waste of time; it should at least be referred back.

  • Joe, if your comment of yesterday at 1.06 pm was addressed to my comment, then I think you have misunderstood my point. My point was that economic growth is not sufficient. There has been periods of economic growth since 1979 but they haven’t made everyone feel that they were benefiting unlike the economic growth after the Second World War until the oil crisis.

    While you see the glass as half full with regard to the Coalition I see the glass more than half empty, because the economic policies of the Coalition nearly caused a double dip recession. At the time it was reported that we had a double dip recession. A record number of people in work is no achievement unless you also have a record number of people not unemployed and not working part time when they want to work full time. What it meant was the population of the UK was the largest it had ever been.

  • David Evershed 22nd Aug '18 - 12:30pm

    There is a limit to the proportion of GDP that government spending can absorb on a sustainable basis.

    When the coalition took over in 2010, government spending had reached 45% of GDP, a peak outside time of war.

    Over the following five years the coalition managed GDP and government spending so that the ratio fell from 45% to 40%.

    Lib Dems should be proud of stopping government spending running out of control and an economic disaster.

    If we want to increase government spending we should not seek to increase the proportion of GDP utilised by government but seek to increase GDP, or more accurately GDP per head of population.

    The only way this can be done is to improve productivity. All those Lib Dems who want to raise government spending should first seek to put forward ways to improve the country’s poor productivity record over the last decade.

    Increased productivity leads to higher GDP per head which allows increased government spending.

  • David Evershed 22nd Aug ’18 – 12:30pm…………………Lib Dems should be proud of stopping government spending running out of control and an economic disaster…………

    Considering that the Conservative party’s raison d’etre is “minimal” government spending I’d be interested to learn in which areas LibDems stopped their ‘spending running out of control’.

    I agree that we enthusiastically supported cuts in spending on the poor, disabled, social care and the 33% cut in local government funding between 2010-15 but I thought the current LibDem mantra was about how we ‘stopped the Tory excessive cuts’ rather than how we ‘stopped the Tory excessive spending’.

    Still, I learn something new every day.

  • Katharine Pindar 22nd Aug '18 - 4:43pm

    This discussion doesn’t seem to be getting any nearer to pinpointing the themes we want for the next Manifesto, despite Joe’s headline.

  • Sue Sutherland 22nd Aug '18 - 4:53pm

    I read the paper and the motion expecting to be horrified and/or depressed and as a consequence I was delightfully surprised. I’ll be glad to see the back of austerity and welcome a green economy with higher productivity. I don’t understand comments about not criticising the Tories. They are in power at the moment so of course we need to criticise them in our manifesto.

  • “The full paper even bleats on about austerity, which is just Labour code for saying the crash of 2008 is the fault of the coalition.”

    This is a Nobel prize-winning distortion of reality. How could a crash in 2008 be blamed on a coalition which was formed in 2010? The answer it, is can’t be – and it never was!

    Labour did not invent the Big Lie about the crash. It was the Tories – Osborne, with support from Clegg – who did that.

    The Big Lie was that the crash was caused by Gordon Brown overspending. Actually, the crash began in the US, and was caused by a collapse in the US housing market. Gordon Brown’s spending record, however imperfect, was absolutely nothing to do with the crash. Never mind. Successful propaganda does not need to make a nodding acquaintance with the truth. Cameron and Osborne repeated ad nauseam the untruth that Gordon Brown had caused the crash. That false propaganda defeated Brown in 2010, and again defeated Miliband in 2015. Clegg backed them up.

    Now we see Joe Otten cleverly turning this lie from the past on its head. He insinuates that it was the victims of the lie (Labour) who created the lie about the crash, and that the”Labour lie” was the diametric opposite of the actual lie that was successfully propagated at the time by the Tories. Genius!

    If a propagandist can kid the public that Labour falsely blamed the 2010-2015 coalition for a crash that happened in 2008, what kidology is beyond them?

  • Peter Martin 23rd Aug '18 - 6:37am

    @ David Evershed

    “Increased productivity leads to higher GDP per head which allows increased government spending.”

    And the increased productivity just somehow happens? The extra GDP means that everyone earns more money, which means that they pay more taxes, which, in turn, means that when the Chancellor looks up the Government’s balance at the BoE there is more money in the account which he can release for general spending.

    It’s a simple idea. It parallels our own personal experience. I’m sure that many people are are totally convinced that this is how it all works for National Govt too. Except it doesn’t!

    Govt can neither have, nor not have, money in its account to spend in this way.

  • David Evans 23rd Aug '18 - 7:09am

    David Evershed, I note that you have returned with an extension of the reasoning behind your ‘We should be proud of correcting government overspending’ statement. However, you have not responded at all to the question asked by myself and others, ‘Are you proud of the way we allowed it to be done, with most of the cost being put on the poor?’

    The question really needs answering as otherwise it seems you are only interested in macro-economic policy, while the impact on the individual (particularly the poor individual) is of no interest to you. I hope that is not true.

  • Peter Martin 23rd Aug '18 - 7:32am

    @ Dave Evershed and others,

    On the theme that we need more productivity to be able to “afford” the NHS etc:

    Ever heard of the phrase ‘productivity puzzle’? Our supposedly best economists are finding their heads are hurting thinking about it! The only real puzzle, though, is why anyone should think there a ‘productivity puzzle’. We can’t assume that productivity will always increase.

    For example, if I’m in the business of producing something. I don’t care about productivity per se. I just want the manufacturing done as cheaply as possible. If I have to pay my workers a higher wage to get the work done I’m more inclined to introduce automation into the process, thereby increasing productivity, than if I have to pay low wages.

    So instead of thinking that higher productivity leads to higher wages, which is the mainstream view, why not think laterally, for a change, and consider the possibility that it could be the other way around?


  • Katherine – you can amend the motion but the paper will remain unchanged.

  • Peter Hirst 23rd Aug '18 - 2:43pm

    Yes, it’s better to blame both other Parties unless it is clear that one is responsible. Otherwise the electorate just switches support. We must not give it the opportunity to jump from one to the other.

  • David Evershed 23rd Aug '18 - 5:13pm

    Reply to David Evans.

    Government overspending results in increased taxation on rich and poor alike. Coalition control of government spending allowed the increase in personal allowances which reduced taxation on those with lower income.

    I am proud of the Lib Dem contribution to getting control of government spending and increasing the personal allowance.

  • Katharine Pindar 24th Aug '18 - 12:19am

    Well, we’ve got a real Downpour of Davids on this thread, mostly seeming intent on telling Joe what he Oughten’td to have written! A plague on both their houses, Tory AND Labour, say I. agreeing with Peter Hirst above that it’s better to blame both parties, and, Sue, not to give undue publicity to one when outlining our own future Manifesto.

    OnceALibDem, I think there are a lot of good things in the paper. The motion, which I don’t suppose I’ll have any chance to propose amending, is anyway a start in producing a basis for the next Manifesto, and seems suitable summary material for the last debate in Brighton.

  • nigel hunter 24th Aug '18 - 12:03pm

    Joe,everything you say etc should be recorded and then 6 months later when Labour opens their mouth you can point out the events to rub their faces in it!

  • Joe,

    The Coalition, as you admit, cut funding to your local Labour council. You are suggesting that Labour ought to have said: (a) the Coalition Government is not to be held responsible for its own actions, (b) the financial Crash of 2008 is 100% to blame, and (c) what’s more, even though the Labour Party did not cause the Crash and in fact made a better fist of recovering from it than its successors did, neverthless we in the Labour Party happily shoulder all the blame for the Crash.

    “Were Labour being honest they would have said where they would find the money – what their saving plans were. On average, every pound saved by the coalition, Labour were planning to save 6 months later..”

    So, in your first line, Labour were being dishonest by not revealing their savings plans: in your second line, you happily tell us that Labour had revealed their savings plans. This is briliant stuff Joe, but I don’t think advanced sophistry wins votes these days.

  • Peter Martin 24th Aug '18 - 12:26pm

    @ Joe Otten,

    “……effectively that it was my fault that there was less money to spend, when in fact there was less money to spend because of the events of 2008. If there had been more for local government there would have been less…… ”

    I don’t know if it’s a forlorn hope but you might want to learn how the economy actually works. The Govt never has “less money to spend” as you and I might. If there had been “more for local government” there wouldn’t “have been less” for everything else.

    Because the government’s income, unlike yours and mine, is highly dependent on its spending. It spends money into the economy and it collects some of it back in taxes. It can’t collect back more than it has created in the first place so it’s always in debt and nearly always in deficit.

    The more it spends the more comes back. But that isn’t really the right way to look at it. It should be spending more when everyone else is spending less and vice versa. This usually means it should be spending more when its income is less and less when its income is more.

    In other words precisely the opposite of what you are arguing for.

  • Peter Martin 24th Aug '18 - 1:22pm

    @ Katharine,

    “A plague on both their houses, Tory AND Labour, say I………”

    It’s this yah-boo attitude to one’s political opponents that gets most ordinary people offside with politicians and their most zealous of supporters. Outside the political bubble, in the real world, most people of different opinions get along just fine. We might vote for different parties, be on different sides of the Brexit debate, support different football teams, but we don’t dismiss everyone else as idiots. We know that most people can be right part of the time and wrong part of the time.

    Anyone who was reliably and consistently wrong about everything would possess a very useful ability! They’d be sought out for their advice! To do the exact opposite of course.

    So a more sensible approach would be to take every suggestion, policy proposal etc on its merits. No matter where they come from. Just go along with the good ones and reject the bad ones.

    What’s hard about that?

  • Julian Tisi 24th Aug '18 - 1:28pm

    I completely agree with Joe Otten. While both Labour and Tories have gone out to their extremes we’ve responded not by giving a positive liberal vision, with which we can attack both of them, but by selling ourselves as some sort of watered down nicer/anti-Brexit Labour party. No thanks. As Joe and others have said – I demand better.

  • Peter Martin,

    Yes it is a forlorn hope for the simple reason it is based on a limited and partial understanding of the economy. It is real resources that that are the sources of wealth production – land, infrastructure, skills, the ability to innovate and the capacity for international trade. Money is the medium of exchange not the source of wealth – neither saving or spending it produces wealth of itself.

    The UK in the post-war period has been prone to high inflation and slow-growth weighed down by bouts of excessive unemployment, under-investment, poor infrastructure and hence low productivity. When global recessions hit the UK tends to be first-in and last-out. Inflation averaged 12% in the 1970s and 6% in the 80s.

    Making the Bank of England independent in 1997 was a step towards introducing macroeconomic stability and inflation was kept low after 1997 helped on by low world-wide inflation, not least because China and emerging nations were flooding western consumer markets with cheaper goods.

    In NZ and Australia – economies as open to external influences as ours – the exchange rate is taken into account in setting interest rates, whereas the UK renounced exchange-rate targeting when we left the ERM. This has made our manufacturing industry increasingly less competitive and seen wholesale offshoring of production.

    Economists like Oliver Blanchard and Ken Rogoff believe that interest rate decisions should reflect concerns about asset prices – particularly when UK house price inflation was so high. This is where I think governments – both Conservative and Labour – have failed the public.

    Get the basic rights – match current spending with taxation outside of periods of recovery from recession; borrow to maintain a high level of investment in housing, infrastructure and skills development and increase investment spend when private-sector re-investment of profits slow; operate monetary policy to maintain stability of the currency and support sustainable economic growth measured in terms of nominal GDP; incentivise research and development and make effective use of Land Value Tax to tackle inequality.

    Get the basic rights and we will be much better positioned to handle the economic storms that will continue to come our way in a world of globalised trade and free flowing international capital.

  • Peter Martin 24th Aug '18 - 2:07pm

    @ JoeB,

    We disagree on questions such as BoE independence and the level of desirability of a LVT. I can live with that. But I don’t think we disagree that Govt creates the money, spends it into the economy and that’s where money comes from. It doesn’t come from taxpayers unless they are into the counterfeiting business and have an illegal printing press in their basement!

    That’s all I’m asking Joe to accept. Just the obvious really.

  • Peter,

    the BofE has what is termed ‘operational independence’ i.e. subject to parliamentary oversight the Chancellor of the Exchequer sets the inflation target that the bank is charged with reaching. This target is symmetrical i.e. a target conducive to growth. Inflation significantly below target is as unacceptable as inflation significantly above target.
    Full independence of ‘goal independence’ would give the bank the right to define price stability and set the inflation target. This is not the case in the UK and hence the government, in setting a symmetrical target, retains a high degree of control over monetary policy.

    Money is spent into the economy by government, but it has licensed banks to create money in the private sector and it is this system of uncontrolled money creation (via both clearing banks and the shadow banking system) that generates credit fuelled consumer booms and the runaway house price inflation that so often leads to damaging economic downturns when the bubble bursts.

  • Peter Martin 24th Aug '18 - 6:10pm

    @ JoeB,

    “…. but it has licensed banks to create money in the private sector”

    This is a largely misunderstood concept. Minsky once said that “anyone can create money. The problem is getting it accepted”

    We have something called the Bristol Pound and we have casino chips and we electronic tokens issued by banks. They are all essentially the same thing. They don’t necessarily change anything in the economy because every new asset created has to be balanced against the liability too. So it all nets to zero.

    This is not to say lending by banks doesn’t have an effect. Borrowers are almost always spenders so the increased spending obviously does have a macroeconomic effect if lots of people are doing the same thing at the same time. Then if everyone who’s borrowed has to repay at similar times we get the phenomenon of debt deflation taking hold.

  • Peter Martin 24th Aug '18 - 6:31pm

    @ Joe B,

    “Money is the medium of exchange not the source of wealth – neither saving or spending it produces wealth of itself.”

    Not directly. But if everyone isn’t spending enough we have recession or depression. If everyone is spending too much we can have too much inflation. Both will naturally adversely affect the wealth creation process.

    So Govt’s job is to balance the economy by doing the opposite of what everyone else is doing. When everyone else is spending more they should be spending less and/or taxing more to discourage that overspending. And vice versa of course.

  • Peter,

    Bank lending is typically secured against assets. The lending is hedged against default e.g banks lend mortgages if people can raise a deposit and meet lending criteria to make sure the mortgage is affordable.
    However, when house prices rise and there is economic growth, both lenders and borrowers become more willing to take on greater risks. Banks relax deposit requirements and are willing to lend bigger multiples of income. Lending becomes more leveraged. The greater lending itself causes asset prices to rise and this increases confidence even further.
    Rather than safe secured lending, we see a growth of speculative lending and even ‘Ponzi borrowing’. This means banks and financial institutions lend money in the hope that asset prices keep rising to enable repayment. However, the loans of a Ponzi nature are unsustainable in the long term.
    The asset bubble and speculative lending is based on the unreasonable expectation that asset prices keep rising beyond their real value. When asset prices stop rising, borrowers and lenders realise their position has left them short – they don’t have enough cash to meet their repayments. Everyone tries to liquidate their assets to meet their borrowing requirements. This leads to a loss of confidence and credit crunch i.e. the point where the financial system moves from stability to instability. It is that point where over-indebted borrowers start to sell off their assets to meet other repayment demands. This causes a fall in asset prices and loss of confidence. It can cause financial institutions to become illiquid. It may cause a run on the banks as people seek to withdraw their money. The Minksy moment comes when lending and debt levels have built up to unsustainable levels and can lead to a balance sheet recession as it did in 2008 when it was coupled with global imbalances.

    The government’s job is to regulate the Financial sector to to prevent speculative and Ponzi lending by requiring banks to maintain adequate liquidity and capital levels and maintaining prudent requirements for mortgage lending, as well as a willingness to act on asset price inflation. House price inflation should have been acted upon in 2003-2004, when mortgage lending and house prices became unsustainable. It took a few more years for the financial bubble to burst in 2007-08 with devastating consequences. That was ‘The Minksy Moment’.

  • Peter Martin 24th Aug '18 - 7:25pm

    @ Joe,

    You and I might think this sort of stuff interesting but others tend to get bored with it all very quickly. I’d say they shouldn’t but they do! Maybe LDV could provide a little corner for this type of technical discussion?

  • Katharine Pindar 25th Aug '18 - 12:28am

    Hear hear to your latest suggestion, Peter, and full marks there for your self-awareness, since some eyes, including mine, do regrettably tend to glaze over on seeing the prolonged and frequent economic debates between you and Joe. However, I do take issue with you for your unusually pretentious and sententious comment at 1.22: I suggest that you know perfectly well that ‘a plague on both their houses’ is a light-hearted comment, not ruling out serious consideration of both parties’ perceived failings, but summarising that at this moment one doesn’t care for either of them.

  • Joe Otten, do you remember what our economic policies were for the 2010 general election?

    “To boost the economy and create jobs for those who need them, we will begin our term of office with a one-year economic stimulus and job creation package.”

    “We must ensure the timing is right. If spending is cut too soon, it would undermine the much-needed recovery and cost jobs. We will base the timing of cuts on an objective assessment of economic conditions, not political dogma. Our working assumption is that the economy will be in a stable enough condition to bear cuts from the beginning of 2011–12.”

    If we had done that there would have been no reported double dip recession (April 2012 https://www.bbc.co.uk/news/business-17836624). Instead we went along with the Conservative economic policy, which was the wrong thing to do in 2010, 2011 and 2012. So Labour had the correct policies – not to cut the budget deficit as fast as we did.

    Please Joe Bourke, tell me when we had excessive unemployment. I bet it wasn’t between 1946 and 1979. And why was that I hope you ask; it was because the government tried to run the economy to ensure everyone who wanted a job had one. What is wrong with that? Why would you want to run an economy to control inflation and accept that unemployment is the price worth paying for it? Why would you find an unemployment rate of over 9% acceptable for much of the 1980’s and even some of the 1990’s?

  • Peter Martin 25th Aug '18 - 7:01am

    @ Michael BG,

    I’d agree that your policy was better than the Tories’ but it was still self inconsistent.

    “We will base the timing of cuts on an objective assessment of economic conditions, not political dogma. Our working assumption is that the economy will be in a stable enough condition to bear cuts from the beginning of 2011–12”

    Your ‘working assumption’ was probably way too optimistic given the shock to the system created by the 2008 crash. But even if you’d been right about that, and you had stabilised the economy what would have been the point of then imposing cuts?

    Your policy was along the lines of a 18th century doctor who might well have argued that really sick patients shouldn’t be bled. It was far better to get them a little better first before doing that.

    @ Katharine,

    Sorry if I came over too pretentious. I’d be happy to vote for a Lib Dem like yourself so I didn’t mean to be too critical. The point I was trying to make was that all parties have good and bad ideas. Probably the left has more good ideas but their bad ones are to think that capitalism, or what would become state capitalism, will work fine if they just nationalise everything and tax the rich. It probably won’t.

    The right, and you have a few in your party too, like Joe Otten, tend to be more pro capitalist. Except they tend to not have no real idea of how it all works. They think, for example, that money comes from the taxpayer when it obviously doesn’t.

    So there is scope for a centre party who is prepared to ‘tell it like it is’. The big and obvious problem is that Lib Dems are far too fond of the disaster known as the European Union. The EU is run by their version of our Tories. If they don’t understand how a single economy should be run, what hope have they when 27 are tied
    together, and 19 of them use the same currency?

  • Katharine Pindar 25th Aug '18 - 9:17am

    Peter, thank you for the gracious reply to me. And I think you make some good points there, interestingly developing Michael BG’s telling response to Joe Otten.

    But if you yourself have a blind spot, you will not be surprised to know that I think it is in relation to the Eurozone. I like the way that Macron’s urgency for economic integration is being toned down by Merkel to what sounds like more reasonable proposed development. And it surely isn’t all gloom and doom: for instance, Greece is out of the severe recovery imposed on it now, and Portugal’s economy is apparently doing well under its centre-left government.

    On the political front, there is more co-operation developing on tackling the problem of migrant flows, and so surely some stemming of the tide towards populism and its authoritarian leadership. The EU does develop and reform itself to some extent, though with 27 nations having a say (so no dictatorship of either Council
    of Ministers or Commission), change has to be slow.

  • Michael BG,

    “tell me when we had excessive unemployment. I bet it wasn’t between 1946 and 1979.”

    “We used to think you could spend your way out of recession and increase employment by boosting government spending. I tell you, in all candour, that that option no longer exists. And in so far as it ever did exist, it only worked on each occasion… by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step…” Jim Callaghan, at the 1976 Labour Party conference.

    Nationalisation of industry and fiscal stimulus is ineffective in an open economy without the kind of price, wages , exchange and capital controls that can be imposed in wartime or in a soviet style command economy. Neither the Heath, Wilson or Callaghan governments were able to impose these kind of controls in a modern economy with free movement of capital.

    High employment and living standards are the outcome of a successful economy. To be successful an economy needs to be internationally competitive. An hours worth of British labour needs to be as productive in producing goods ad services of value as an hours worth of American or German labour and the value created needs to be fairly distributed between labour and the capital investment and public services that make labour more productive. This is how living standards are improved from generation to generation.

  • Peter Martin 25th Aug '18 - 7:56pm

    fiscal stimulus is ineffective in an open economy without the kind of price, wages, exchange and capital controls

    It worked perfectly well in Australia after the GFC. The Government simply handed out $900 cheques to income tax payers and told them to spend it. I know because I was there. As far as I remember there weren’t any price, wage, or capital controls imposed at the time.

    It’s not the way I would choose to stimulate an economy but it gives the lie to the neoliberal propaganda that fiscal measures don’t work!


  • Peter,

    but not so many did spend it. The survey data I have seen shows about 27% of the 2009 cash transfer payments were spent (some on overseas holidays and other imports), the rest was saved as used to pay down debts, as you would expect during a recession when people are concerned about security of employment. The earlier 2008 transfer payments to pensioners and low income households may have had more of an impact on consumer spending and demand from China for minerals and ores sustained the Australian economy for long periods.
    In the longer term, unemployment was 4% before the GFC and has been between 5% and 6% since with budget cutbacks put in place after the stimulus in an effort to reduce the government deficit.
    House Price inflation in Sydney and other cities has been as bad if not worse than that seen in the UK.

  • @ Peter Martin

    I agreed with the policy of boosting the economy to create more jobs for the first year, especially the implied idea that it was for everyone – full employment. I think you would agree that if full employment had been achieved in 2011 or 2012 the correct policy would then have been to cut spending on the economic stimulus and increase taxation to control inflation. Also the deficit would automatically have been reduced. In our 2010 manifesto the total amount of “cuts” was only £10.6 billion, which included £2.9 billion from a bank levy. There were other increases in taxes to pay for the increase in the personal allowance.

    What the Coalition actually did was cut the deficit by £64.6 billion a year by 2015 some of which must have been because the economy improved after 2012.

    @ Joe Bourke

    The Labour government managed to decrease unemployment from about 1977 onwards and it is likely that had they won a general election in 1978 they would have continued to do so and the UK could have avoided the 12% unemployment rate in 1984 and rates above 9% in the 1980s and the 1990s.

    However I note you didn’t answer my questions – when was there excessive unemployment? Why would you want an unemployment rate of over 9%? Why is unemployment a price worth paying to control inflation?

    The best way to improve productivity is by having full employment, so capital has to be invested to improve productivity. If a company can just employ more people then there is little reason for them to invest to make their existing labour force more productive.

  • Peter Martin 26th Aug '18 - 6:46am


    The problem of asset price inflation in Australian cities predates the ‘fiscal boost’ so it clearly is unrelated. Neither has Australia had a QE program. So it was nothing to do with that. Yes there are better ways than handing out cheques, but the rationale for fiscal stimulus is simple enough. To say it doesn’t work is simply wrong. Wrong. Wrong. Wrong. If the economy needs a boost then someone has to spend more. You can lower interest rates to encourage more borrowing and spending, you can lower taxes to encourage more spending or the Govt can do the spending directly. There aren’t any other options!

    @Michael BG,

    Yes of course spending needs to be cut and taxes need to rise if the economy is overheating. If that what the Lib Dems meant in 2010, which I very much doubt, then that’s what they should have said.

  • Michael BG,

    despite the rhetoric of “rolling back the state”, under Thatcher real-terms spending rose in every year of her premiership apart from two. Only in 1985-86 and 1989-90 did spending fall. On average, it increased by 1.1 per cent a year.

    While spending generally kept pace with inflation, it did fall dramatically as a share of GDP. When Thatcher entered office, total expenditure stood at 45.1%. It was briefly reduced – to 44.6% – in her first year before rising every year until 1982-83 when it peaked at 48.1%. Spending then fell in every remaining year, totalling just 39.2% in 1989-90 after the economy grew by an average of 4.7% between 1984 and 1988.

    Public spending then rose under John Major, largely as a result of the 1991-92 recession, peaking at 43.7% of GDP in 1992-93. When Blair and Brown took over in 1997, spending fell to a modern low of 34.5% by 2000-01 before rising in every subsequent year until it reached 47.7% in 2009-10 (the surge was largely a result of the recession, which saw spending rise by 3.2% compared with 2008-09)..
    The large majority of the fiscal consolidation under the coalition occurred through reducing spending as a proportion of national income, to just over 40 per cent by 2014–15.
    Fiscal stimulus has a role, as Keynes envisaged, as a short-term counter-recessionary tool. Economic growth (as measured in terms of GDP per capita) does not come from fiscal stimulus it comes from increasing the output of goods and services per labour hour. The price mechanism is a means of efficiently allocating resources in the economy. When there is demand for more of particular good or service prices will rise and generate increased increased supply. When there is oversupply prices will fall and supply with it.
    The government role is to provide a safety net for labour in the form of social security and job guarantees and to provide the public infrastructure and services needed for the economy to operate in a competitive International market.
    When the state seeks to sustain a consumer bubble or spending at historically high levels of GDP with increased government spending it invariably fails as Jim Callagahan pointed out in the 70’s.
    Fortunately, we have an experienced and able economist as leader of the Libdems and I do not see us repeating the mistakes of past Labour governments.

  • Peter Martin 26th Aug '18 - 4:07pm

    “Fiscal stimulus has a role, as Keynes envisaged, as a short-term counter-recessionary tool.”

    I’m not sure Keynes would ever have envisaged interest rates being as low as they are. So like it or not, Mr JoeB, when they are at what is sometimes known as the zero bound, which they are likely to be for the foreseeable future then fiscal control of the economy is the only club in your bag.

    So there’s no point in complaining that “fiscal stimulus is ineffective in an open economy ……”, or it’s supposed to be because someone thought it should be.

    There’ll be nowt else to choose the next time the crisis hits.

  • David Raw,

    wartime spending and especially unemployment benefits contributed a lot to higher government spending as a share of GDP in the 1980s, both of which actually constitute a fiscal stimulus.

    Keynesian economics is first and foremost about the socialisation of investment or ensuring that savings are reinvested in the productive economy.

    Peter Martin, I don’t doubt that fiscal stimulus will be the main option when the next recession hits. The public finances need to be under control when that comes.
    But that is the point – fiscal stimulus is a tool to counter the deflationary effects of recession or as Keynes put it – to revive ‘animal spirits’ not an effective tool for fine-tuning economic growth. Outside of periods of negative growth, automatic stabilisers (increased benefits payments and reduced tax tax take) are adequate to moderate fluctuations in consumer spending.

    Of far more importance to the working of the economy is the distribution of value created between labour, productive capital and rent-seeking appropriations in the finance and property sectors. Get that balance right and pubic services including health, education and welfare benefits can be adequately funded and investment in public housing, infrastructure and productive capacity maintained .

  • Peter Martin 26th Aug '18 - 6:41pm

    @ JoeB

    “The public finances need to be under control when that comes.”

    What does this mean? Presumably that the Govt’s deficit is with “acceptable” limits?

    We often hear calls that Government should decrease its deficit from conservatives and neoliberals, but increase its deficit from more progressive liberal and socialist inclined individuals.

    Both are problematic. The Government’s deficit has to equal everyone else’s (including our overseas trading partners) surplus. In other words the Government can only reduce its deficit if everyone else (net) saves less and can only increase its deficit if everyone else saves more.

    Of course, one way to make everyone save less is to make them poorer and this will ultimately happen if the Govt squeezes hard enough.

    But suppose the Govt wants wants to increase its own deficit. ie it wants everyone else to net save more. If Govt succeeds it isn’t creating any more spending in the economy. Its extra spending is matched by others’ extra saving.

    And supposing the Govt wants everyone else to save less. ie It wants to decrease its own deficit. The way to do that isn’t necessarily to tighten monetary and fiscal policy. That could make everyone else more cautious and want to save more.

    To summarise: Looser fiscal and monetary policies, to stimulate a flagging economy, don’t necessarily result in an increased Govt deficit. Conversely tighter monetary and fiscal policies, to control inflation, don’t necessarily result in a reduced Govt deficit. It’s not possible to have it under the kind of “control” you might like.

  • @ Peter Martin

    I expect you are right, that was not what was meant. I expect there was a compromise between knowing that the economy needed a stimulus because it was nowhere near full capacity and unemployment was rising and the political need to go along with everyone else and say there needs to be spending cuts. However planning to cut spending by only £7.7 billion a year would make little difference unlike the stupid £40.7 billion cut from the deficit by 2013.

    @ Joe Bourke

    The role of the government should be to maintain as near to full employment as possible. Economic growth clearly results from an economic stimulus. Keynesian theory makes this clear because of the multiplier. For every pound spent by the government the economy grows by more than one pound. The difficult bit is reducing the size of the stimulus by the correct amount as the private sector increases investment because it is having difficulty recruiting new workers and so has to increase the productivity of their existing workers.

    Again you have failed to answer my questions – when was there excessive unemployment? Why would you want an unemployment rate of over 9%? Why is unemployment a price worth paying to control inflation?

    From this graph (http://static4.uk.businessinsider.com/image/59721f5cefcab915128b4f9a-1998/screen%20shot%202017-07-21%20at%20163153.png) it seems clear that the government allowed unemployment to rise until 2012 just like the Thatcher government did in the 1980s and the Major government in the 1990s. It also shows that the Labour government was reducing unemployment in 1978 which continued until the Thatcher government policies destroyed it.

    Do you know that between 1960 and 2016 the average value of our exports was 24.22% and imports was 25.19% of GDP? (https://www.theglobaleconomy.com/United-Kingdom/Exports/)

  • Peter Martin 27th Aug '18 - 7:20am

    @ Michael BG,

    I don’t think you can say the cut of £40.7 billion to the deficit was “stupid” but not, though, for the same reasons as Joe Otten would give. Interest rates had been lowered and borrowing had started to accelerate after 2012/13. When this happens there is a monetary stimulus to the economy which increases tax revenues. ie there was an expansionary monetary policy. So as I was trying to explain in my last comment, an expansionary policy will often boost tax revenues.

    To understand Govts deficits you need to look at from a different angle. Yes they are the difference between what Govt spends and what it gets back. But its income is always highly dependent on its spending. So you can’t assume that if you cut spending you’ll cut the deficit. A Govt deficit is what everyone else wants to save and it’s much more informative to look at it that way.

  • Peter Martin 27th Aug '18 - 7:38am

    @ Michael BG,

    “Why is unemployment a price worth paying to control inflation?”

    I suppose the answer is that if inflation is allowed to get out of hand then the system will be torn apart by various conflicts. So, as things stand at the moment, we need to have a ‘pool of reserve labour’ to keep wages under ‘control’. It used to be thought that the NAIRU was about 5% but this dates back to the time when immigration was relatively much lower. Now we are finding this to be lower too.

    Also there is increasing recognition that underemployment is also a way of providing that same pool of reserve labour.

    I’m sure JoeB, and Vince Cable, know all about the NAIRU but its never going to be easy for Lib Dems, an essentially pro-capitalist party, to use this term or be totally candid about how the system actually works. It’s quite brutal.

  • Michael BG,

    with all due respect we do not have to rely on theory. We have decades of experience with various forms of Keynesian economics (not the actual program laid out by Keynes himself).

    Gordon Brown heeded the lessons of prior Labour failures in economic policy and crucially that structural unemployment could not be dealt with in the same way as cyclical unemployment. When he assumed the role of Chancellor in 1997 he held spending down (reducing it from 35.8% of GDP to 34% by 2000-01- the lowest level since the late 1950s). Previous Labour governments had spent more than they could afford in the first two years of office to honour election promises and were forced to retrench in the later period of office. By 1999 Labour had moved from deficit to surplus and debt was falling as a share of GDP. In the next four years debt was being repaid and the £22.5 billion proceeds from the auction of mobile phone licenses was used to help pay down the national debt.

    To tackle entrenched unemployment he introduced the new deal shortly after assuming office. Starting with young people – all 18-24 year olds who had been unemployed for six months or more were offered a range of options, all of which led to a qualification; a subsidised job with a private employer, full-time training or education, placement with a voluntary sector provider, or work on a specially created programme to undertake environmental improvements.

    The offer to youth unemployed was extended to the long-term unemployed and then to lone parents, partners of the jobless and to the disabled. The New Deal did not rely on borrowing but was launched on the back a windfall tax on the privatised utilities.

    This is how structural unemployment should be addressed – targeted programs encompassing job guarantees and funded by taxes on economic rents. Significant fiscal stimulus should only be employed in recessions.

    To Brown’s credit he understood that the UK (and likewise other countries) could not tackle the financial crisis on their own and only a co-ordinated global response would prevent another great depression. Even the G7 countries acting in concert would not deal with the problem. It required the G20 to simultaneously embark on a fiscal and monetary stimulus of sufficient magnitude to reboot world trade and reverse the deflationary spiral that had taken hold.

  • Re: the NHS – Brexit per se isn’t necessarily the cause of the problems, the government can continue to offer an open door policy to healthworkers from across the EU (and the world), the problem is the Conservatives incompetence in running Brexit and unwillingness to pay high enough rates to attract people in the world market.

    Also long term, this misunderstands what the EU is about. The EU does not exist to provide a cheap pool of labour to rich countries that underinvest in training essential workers; rather, the EU aims to reduce the economic differences between members – the effect of which would be to reduce people’s incentive to move.

    A Slovak survey found that the point at which Slovaks in the UK would be willing to return home would be if they could get a job paying 60% of what they can earn in the UK. That day will come regardless of whether or not Brexit goes ahead. We’re apparently already getting close to the “not worth it” point for East Europeans for some jobs like fruit picking, (which is a short term thing presumably unaffected by considerations of what the world will look like after the Brexit transition period).

    Training “native” (for want of a better word) people to do the jobs should be part of the long term plan, whether in or out.

    Other than that – the sell for the Lib Dems should be include the following:

    Administration of government services needs to balance the interests of users, workers and taxpayers. Labour is about the workers, the Tories are about the taxpayers and Lib Dems are about all three – leaving them the only ones who really care about the service users (whether that meants patients, schoolkids of whoever).

    The above seems to have been forgotten about in recent years with the chase for the 48% etc. but it’s why the party exists and why I used to be a member.

  • @JoeB

    The biggest problem with economics is that you can never do controlled experiments – just change one variable and there are a 100s if not 1000s of important macro-economic variables and then one side or another will claim history proves them right.

    Arguably the Labour party learnt the wrong lessons from history.

    I don’t think that any economist – including non-Keynesians disagrees with the multiplier effect outlined by @Michael BG.

    While programmes such as that undertaken by the Labour Government on youth unemployment are always welcome – probably the benign global economy at the time had a much larger effect.

    Brown unfortunately was obsessed by keeping the technical figures on borrowing down and unfortunately I think as virtually everyone concedes very expensive PFI deals were done as a result to keep it technically off the Governments’s books. it would have been far better if he had used some of that £22 billion from the sale of mobile phone spectrums directly into government building of hospitals etc. rather than PFI deals. If he had used it even on current day-to-day spending then the overall debt would be a whopping (not!) 1% lower and possibly lower as a percentage of GDP if GDP was higher due to the mulitiplier effect and there was still excess unemployment and capacity in the economy at the time.

    The NHS was not in a good state after 2.5 terms of the Labour government – if it was then Blair wouldn’t have by-passed Brown and announced a big increase in spending on it in the mid-2000s. Cancer survival rates are still among the lowest in the developed world partly as a result of the lack of spending in the first 2.5 terms of a Labour Government – although the Commonwealth fund has found they were increasing the fastest of the 11 countries it looked at.

  • Michael 1,

    it is certainly true that the economy is a black box. You may not know exactly why or by how much a particular policy impacts on variables like growth and unemployment but the more direct the measure the more confident you can be in attributing cause and effect.

    I think Gordon Brown left himself plenty of room for manoeuvre. The basic position he outlined was that genuine improvement in public services, reduction in unemployment and a stronger growth rate could only be built on a platform of sustainable levels of debt.

    The two rules he introduced – the ‘golden rule’ that over the course of the investment cycle, government would only borrow to invest and not to fund current expenditure and the sustainable investment rule that meant, in normal times outside of recession, national debt should never exceed 40% of national income served him well enough until the financial crisis of 2008.

    As Richard S notes in his comment, administration of government services needs to balance the interests of users, workers and taxpayers. Attempts to run the economy at too great a capacity stoke up unsustainable consumer booms and force mortgage rates to rise.
    A staged approach, first stability and prudence to keep interest rates low; second, tackling underinvestment in public services, and then a focus on other priorities is a decent guide.

    The coalition re-established stability and prudence. The focus now should be on tackling under-investment and gently reducing debt as % of GDP to keep debt service costs at sustainable levels. That provides the platform from which to address inequality and the increasing demands on the public purse of an ageing population.

  • @ Peter Martin

    Indeed I can call the £40.7 billion cut to the budget deficit between 2010 and 2013 stupid. Unemployment was still rising until 2012 and therefore removing spending from the economy was the wrong policy. Between 2013 and 2014 the deficit was only cut by £1.3 billion and unemployment fell by about 1.25%. This is why I am not calling the reduction in the deficit between 2013 and 2015 of £23.9 billion stupid because some of it must have resulted in more people being in work and fewer people being on benefits.

    The answer you gave to my question, “Why is unemployment a price worth paying to control inflation?”, while being one some people would make, I am surprised you didn’t add that while unemployment will rise if inflation is targeted other steps can be taken to reduce unemployment during these periods.

    @ Joe Bourke

    I don’t see the Labour government of 1997 to 2008 as a great success economically, unemployment was above 5% for most of the period. I understand why the wrong decision on public spending was made in the first two years after taking office – it was a political decision to keep to Conservative spending plans. At no point during this period did the UK economy reach full capacity.

    I don’t remember the “New Deal” the same way you do. I remember unemployed people forced onto programmes that led nowhere. I remember there being limits to the cost of what could be spent on each person for their training. I don’t remember it being tailored to the individual. I remember people being on the programme for some time, getting off it and then returning to it within a year. I hope that one day we will have a policy of offering everyone who is unemployed either a job guarantee or a training programme tailored to their needs which will ensure that they can be a productive worker for a long time. A truly liberal programme. Also I hope we will have regional policies that really work and can bring the unemployment rates down to the lowest rates.

  • David Raw,

    if you want to help people and bring about social reform you need to show that you have the wherewithal to develop and maintain a stable and growing economy.

    Gordon Brown and Alistair Darling understood this. Labour’s last budget in 2010 aimed to more than halve the deficit over four years and set out the following:

    “In response to the global economic downturn, the Government took comprehensive action to support the economy, and this as been successful in mitigating the impact of the downturn on businesses and individuals. However, significant uncertainty remains. Macroeconomic policy will continue to support the economy throughout this year; monetary policy is expected to continue to provide an ongoing and powerful stimulus. Setting a credible fiscal consolidation plan to ensure sustainable public finances is a key part of the Government’s macroeconomic strategy and is essential for economic stability and the long-term health of the economy. Sound public finances provide the conditions for growth, helping to maintain low long-term interest rates and giving businesses the confidence to plan and invest for the future. The Government’s consolidation path has been embedded in legislation through the Fiscal Responsibility Act.
    The Government’s fiscal policy objectives are: over the medium-term, to ensure sound public finances and that spending and taxation impact fairly within and between generations; and over the short-term, to support monetary policy and, in particular, to allow the automatic stabilisers to help smooth the path of the economy. The financial crisis and global downturn have had a profound and persistent impact on the public finances, resulting in a significant increase in Government borrowing and debt.

    For all George Osborne’s talk of eliminating the deficit in a single parliament what was actually delivered was remarkably close to the Darling plan and unemployment is at its lowest level since the 1970s.

    All of the three main parties campaigned on a platform of deficit reduction in 2010. The policy differences were to be found in the relative balance between tax rises and spending cuts, where spending cuts are made and the pace or timing of those cuts.

  • JoeB – as you say “All of the three main parties campaigned on a platform of deficit reduction in 2010. The policy differences were to be found in the relative balance between tax rises and spending cuts, where spending cuts are made and the pace or timing of those cuts.” and as David Raw says “increased child poverty, widened the gap between rich and poor, and one part of it broke a fair few promises……… and produced growth – in Food Banks.”

    We all know you can’t allow a deficit to go on rising indefinitely. All David Raw is saying is that the cuts were made in all the wrong places, and as for tax rises …

  • David Evans,

    I think the rise in food banks has more to do with unwarranted benefit sanctions, health assessments declaring people in ill health or disabled fit for work, the botched roll out of universal credit with long delays in payments and high withdrawal rates, and housing benefit not covering full rent payments rather than budget cuts per se.

    Another issue worth thinking about is the proliferation of jobs at minimum wage subsidised by tax credits rather than putting a floor under wages through the use of job guarantees to maintain full employment levels and a universal basic income not subject to sanctions or withdrawal.

    The proportion of taxes paid by the highest earners has increased since the financial crisis and remained fairly stable in recent years https://fullfact.org/economy/what-do-wealthiest-pay-tax/. It is, however, wealth taxes, particularly Land Value Tax, that we need to look to as a means of addressing inequality at its root.

  • Peter Martin 28th Aug '18 - 8:34am

    @ Michael BG,

    “Unemployment was still rising until 2012 and therefore removing spending from the economy was the wrong policy”

    Ok but the point is that an increased deficit is a sign of increased savings , which by definition, isn’t more spending.

    Say the Government spends £100 (or £100 billion) into the economy with an average tax rate per transaction of 20%.

    On the first transaction: 20% or £20 will come back in taxes, if its all spent, none will come back if none of it is.

    On the second transaction: Of the £80 that’s left £16 will go back to govt if its all spent…

    You can go on like this until it’s all gone back in taxes or it is saved.The point is that some of the £100 will end up being saved, and so will add to the deficit, but in which case it won’t have any further stimulatory effect on the economy, and some of it will be spent and respent, in which case it will have an effect but doesn’t end up adding to the deficit.

    The higher the tax rate, and the less money spent by Govt, the fewer transactions and so the more contractionary the fiscal policy.

  • Peter Martin 28th Aug '18 - 8:52am

    @ David Raw,

    “We all know you can’t allow a deficit to go on rising indefinitely”

    Do we? If Govt gives me a tax rebate of £100 and I then buy some Premium bonds with the money then the Govts deficit has risen by £100. Period as the Americans like to say.

    On the other hand if I go off and buy 4 or 5 bottles of whisky the Govt will get most of that back in taxes on the first transaction. It will almost certainly get more back later when some of the remaining money ends up in the pay packets of supermarket staff etc.

    So, if I were lucky enough to get a tax rebate, should I buy Premium Bonds with the money and increase the Govt’s debt and deficit or be more patriotic and buy the whisky?

  • The more comments I read on this thread the more I despair over this party.

    I find it hard to believe that “The coalition was a success” card is still being played and, when the loss of almost 50 MPs. 9/10 MEPs and 100’s hard working local councillors is raised, the ‘martyr ace’ of “we sacrificed party to save the nation” is laid.

    We certainly benefited those whose salaries have risen by over 10% and those who can walk away from government contracts leaving the tax-payer to pick up the tab, etc. However, the JAMs (and those below) have seen things get a lot worse, councils have seen government funding slashed, the NHS/social/mental care in the worst state I can remember, legal aid is a joke, employment protection is at an all time low and the only growth appears to be in child poverty, food banks and homelessness.

    What makes Joe Otten’s ( and others’) contributions so galling is that, even as the social fabric of the nation unravels before their eyes, Labour, be it led by Milliband or Corbyn, is their main target!

    I read the calls for new slogans and rule changes with the same incredulity that those hearing the band on the Titanic must have felt as they watched the lifeboats leave without them.

  • Peter Martin 28th Aug '18 - 9:07am

    My last comment should have been directed to David Evans, not David Raw!

    Sorry about that!

  • David Raw,

    you don’t have to be a genius to figure out you can’t borrow your way to prosperity. It is investment in improving productivity levels that increases real living standards not increased borrowing to meet current expenditures or inflate nominal GDP that is subsequently eroded by inflation/currency depreciation. Or maybe you do have to be genius, as I believe it was Einstein who is attributed with saying “the definition of insanity is doing the same thing over and over and expecting a different result.

    Excessive executive pay is prevalent where monopolies exist particularly in the finance sector. At the core of the financial crisis was toxic mortgage debt based on inflated residential and commercial land values. It doesn’t matter if interest rates go down, land prices just go up to maintain the same absolute level of profits from lending and take an ever increasing proportion of disposable income from the productive economy to sustain highly inflated remuneration and dividend levels.

    Land Value Tax seeks to capture these economic rents for the public benefit without distorting any productive economic activity. There is currently an 8% corporation tax surcharge on banking profits. This should be extended to capture excess returns on lending for land purchases for the public benefit. The same principle should apply to excess returns in other monopolies in the digital economy and elsewhere.

    Most of the lower paid have benefitted from tax relief under the coalition, although I recognise much of this benefit has been offset by benefit changes, There is a particular problem with the lowest income decile that does not benefit from increased personal allowance and is impacted disproportionally by indirect taxes. It is a key reason why I would support a non-means tested universal basic income (funded by LVT) as a foundation underpinning the means-tested the welfare system.

  • Peter Martin 28th Aug '18 - 1:48pm

    @ JoeB,

    “you don’t have to be a genius to figure out you can’t borrow your way to prosperity.”

    Sometimes you sound quite radical, such as when your’re in favour of Mexican Revolutionary slogans aimed at dispossessing the evil Rentier class. Other times you say things, like this, which are right out of the Tory playbook.

    If you were slightly more towards the ‘genius’ end of the spectrum you’d understand that everything has to sum to zero. Therefore if we want positive numbers in a bank accounts then someone else, which can only be Govt, has to assume the liability and so hold the negative ones.

    In an accounting system a liability, or the holding of negative numbers, is considered to be a debt. We usually think of a debt as being the result of borrowing. It’s not really like that, for a currency issuer, as I’m sure you know, deep down!

    So can you be a bit more like Emiliano Zapata and bit less like Margaret Hilda Thatcher, please Joe? 🙂

  • Peter Martin 28th Aug '18 - 7:37pm

    @ JoeB

    Are you saying that S always equals I ?

  • Peter Martin 28th Aug '18 - 8:10pm

    ……’cos I don’t think it has to !!

  • Peter,

    it depends on your definitions. If you define savings as aggregate income less consumption and investment to include inventories then yes, actual savings in aggregate will be equal to actual total investment.

    Private domestic saving less government deficit plus foreign investment domestically (capital inflows from abroad) must equal private physical investment. In other words, investment and government deficits must be financed by some combination of private domestic savings and foreign savings (foreign capital inflows).

    This accounting identity only holds true because investment here is defined as including inventory accumulation and public investment. Should consumers decide to save more, and spend less, the fall in demand would lead to an increase in business inventories. The change in inventories brings savings and investment into balance without any intention by business to increase investment. And also the identity holds true because savings are defined to include private sector savings less net government consumption i.e current account deficits.

    This does not imply that an increase in savings must lead directly to an increase in investment. Indeed, business may respond to increased inventories by decreasing both output and intended investment. Likewise, this reduction in output by business will reduce incomes, forcing an unintended reduction in savings. Even if the end result of this process is ultimately a lower level of investment, it will nonetheless remain true at any given point in time that the savings-investment identity holds.

  • Peter,

    it depends on your definitions. If you define savings as aggregate income less consumption and investment to include inventories then yes, actual savings in aggregate will be equal to actual total investment.

    Private domestic saving plus foreign investment domestically (capital inflows from abroad) must equal physical investment (private and public) and the governments current account deficit. In other words, private investment and government deficits must be financed by some combination of private domestic savings and foreign savings (foreign capital inflows).

    This accounting identity only holds true because investment here is defined as including inventory accumulation. Should consumers decide to save more, and spend less, the fall in demand would lead to an increase in business inventories. The change in inventories brings savings and investment into balance without any intention by business to increase investment. And also the identity holds true because net savings are defined to include private sector savings less net government consumption i.e current account deficits.

    This does not imply that an increase in savings must lead directly to an increase in investment. Indeed, business may respond to increased inventories by decreasing both output and intended investment. Likewise, this reduction in output by business will reduce incomes, forcing an unintended reduction in savings. Even if the end result of this process is ultimately a lower level of investment, it will nonetheless remain true at any given point in time that the savings-investment identity holds.

  • Peter Martin 29th Aug '18 - 6:48am

    “……. it will nonetheless remain true at any given point in time that the savings-investment identity holds.”

    This is probably where you are going wrong. There’s no reason to think this at all.

    Savings are normally thought of purely domestic. But, equally, if Germany wants to run a trade surplus against us they are going to end up with more ££ than they can spend. So what are they going to do with them? They’ll save at least some of them by buying gilts. So how does the purchase of those gilts automatically end up as investment? Just the same as if I buy some Premium Bonds.

    Yes, it all could end up as investment if the Government makes sure it is invested. But if it is trying to ‘balance its budget’ by contracting the economy, that likely won’t happen. And how does the Government know about any savings that are held as cash? It doesn’t really have to if it proceeds on the principle that if it overdoes its spending, whether that be ‘investment’ in building bridges and roads etc, or ‘investment’ in the education of children, it will cause too much inflation and that’s the time to back off.

  • Bill le Breton 29th Aug '18 - 11:36am

    Thanks to Jennie Rigg ( @miss_s_b ) I recently read this: http://blogs.lse.ac.uk/politicsandpolicy/state-failure-brexit/

    It identifies and explains the division in our Party. A vote on this motion and/or any subsequent amendments will give an indication of where the new centre of gravity is among us following the expansion of the membership since 2015. And any future vote on changes to membership/supporters structure and any future vote on the next leader will provide a significant indication of where it will stand for next ten years or more.

    Whereas the Party pre-2007 probably were sympathetic to the views of Abby Innes in the above article, the Party of 2020 is most unlikely to be.

    The sooner we know the better.

  • Peter Martin 29th Aug '18 - 4:13pm

    @Joe B,

    Yes, definitions are important but it’s even more important to understand what everything means in case anything has been mis-defined.

    If you play around with the National Accounting identities you can easily arrive at:

    (Google this if you need to check)

    (G-T) = (S-I) + (M-X)

    So if S=I why bother having (S-I) included? You’d just say that the government deficit was equal to the trade deficit, which it clearly isn’t.

    But the Government deficit (Govt net spending) does equal the sum of the trade deficit (the overseas sector’s net surplus) and the domestic net surplus.

    In other words the Government’s deficit has to equal everyone else’s net surplus or everyone else’s net saving. Which is what I’ve often said.

  • @ Joe Bourke

    To think that growth and low unemployment can only happen with low levels of national debt is a conservative fallacy based on failed nineteenth century economic theory. What is true is that as the economy reaches full capacity governments should reduce their deficit to ensure the economy does not over heat.

    As the government can control interest rates, the size of the deficit or national debt should make little difference to its freedom of movement.

    The only thing I agree with you on is the need to ensure that the national debt is sustainable. And as the UK and its predecessors have not gone bankrupt since 1692 we should assume that the UK national debt can be higher than GDP (c. 1757 to 1859 and 1918 to 1961). https://www.ukpublicspending.co.uk/spending_chart_1692_2020UKp_XXc1li111tcn_G0t

    @ Peter Martin

    Your example is useful in showing that the government spending doesn’t equal savings.

    Injection £100 spent internally £72 spent on imports £8, saved £20
    Income £72 tax 14.20 saved 11.56 spent on imports 4.62 spent internally 41.62
    Income 41.62 tax 8.32 saved 6.66 spent on imports 2.66 spent internally 23.98
    Income 23.98 tax 4.80 saved 3.84 spent on imports 1.53 spent internally 13.81
    Income 13.81 tax 2.76 saved 2.21 spent on imports 0.84 spent internally 7.96
    Income 7.96 tax 1.59 saved 1.27 spent on imports 0.51 spent internally 4.59
    Income 4.59 tax 0.92 saved 0.73 spent on imports 0.29 spent internally 2.65

    The government spent £100 and received only £32.59 in taxes, £46.27 was saved and the economy grew by £263.96 and it is still not in equilibrium by £2.65. What should happen when it returns to equilibrium is that the extra government spending will equal the extra taxes, saved and spent on imports. (In this example they only equal £97.31 because it hasn’t reached equilibrium.)

    My point is that the government deficit only equals savings and imports when the economy has reached equilibrium. The problem is it never reaches equilibrium.

  • Richard Underhill 29th Aug '18 - 6:25pm

    Tony Greaves 21st Aug ’18 – 10:41pm “One more heave” was apparently a slogan for the second general election in 1974, rather old hat now, but the word “one” implies a limited timescale. Applied to the poll tax in the Ribble Valley bye-election it was successful and gave the Tory chairman an early bath.

  • Peter Martin 29th Aug '18 - 7:56pm

    @ JoeB,

    If the economy is overheating, then inflation is the likely outcome. Who’s saying any different? Also who’s saying the economy is overheating?

    I haven’t studied the details of the Turkish economy but I have noticed that economic conservatives have latched on to the country’s recent problems to try to prove a neoliberal point. It’s probably a similar story to Argentina which tried to borrow too much in a foreign currency and at the same time didn’t have a well functioning tax collection system. There was probably a fair bit of corruption involved too. Naturally if you don’t do things properly you’ll have problems. No-one is saying otherwise.

    Now what about this problem of capital flight? Say I’m an overseas holder of a large UK £ sterling account. What I my options? Well I can spend those ££ on Scotch whisky or jet engines or whatever else the UK makes these days. That would create jobs for the workers in Scotland or Derby. Or I can carry on saving them just as before. Or, I can swap them with someone else who might have a holding in dollars or euros. Then they too would have exactly the same two options. ie Save the pounds or spend the pounds.

    So what’s the problem? If we can’t make enough Scotch whisky or jet engines quickly enough then we can impose an export tax or just jack up the price a bit!

  • Peter Martin 29th Aug '18 - 11:18pm

    @ JoeB,

    This is just more obfuscation.

    Here is another reference for the same equations I used but without the terms you’ve introduced on distributed profits.

    If you are claiming Wikipedia has it wrong, how about correcting the entry, with a sensible explanation and verifiable references?


  • Peter,

    you can find a reference to the equality of savings to investment in any economics textbook https://www.freeeconhelp.com/2011/11/why-savings-equals-investment-si-and.html.
    GDP repreents the sum of the incomes earned through the production of goods and services. This is income from people in jobs and in self-employment + Profits of private sector businesses + Rent income from the ownership of land.

    Income (Y) = consumption (C) + saving (S), but also expenditure (Y) = consumption (C) + investment (I). So S=I by definition. But here investment includes inventories.

    Investment in economics has a different definition to its everday usage in the same way that savings does. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.

    Economists use the term ‘investment’ to describe all the activities that lead to capital investments within an economy. They call the financial investments ‘savings.’
    The three main ingredients inside the investment component of GDP are Business expenditures, New residential homes constructed and changes in business inventories.

    The difference between national (both public and private) savings and investment is equal to the balance of payments current account.

    That’s about all accounting identities will tell you. For interpretation you need to look at the changes in the relative stocks and flows between sectors and what is the likely cause of the trends.

  • Peter Martin 30th Aug '18 - 7:06am


    You can find lots of stuff in many mainstream economics text books that is complete nonsense. Like the “theory of loanable funds.” McLeay et al in a BoE paper on money creation and bank lending say:

    “Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.”

    Probably the idea that S = I follows if you believe that everyone puts their savings into the trust of the bank who then lend it back to investors at some mythical market rate.

    In any case you don’t need to know any economics to know that if S=I that S-I =0.

    Therefore, there’s no need to include the term (S-I) in any equation. So why does everyone, including yourself, leave it in?

    Maybe you can have a stab at answering that?

  • Peter,

    GDP is a measure of the value of all goods and services produced in given period. The expenditure equation for totalling of GDP adds together the four traditional expenditure categories – Household consumption (c), investment (I), government purchases (G), and net exports (M-X). These four expenditures give us GDP because as a group they buy up all the output produced.

    Investment expenditure in the group represents the production of new capital goods including buildings, factories and equipment. Investment (I) also contains changes in inventories, because any goods produced but not sold during a period have to go into firms inventories and are counted as investment in stock.

    How savings are defined is important. Total savings include household Income from wages, rents, interest and dividends less consumption and taxes; firms profits less amounts distributed as dividends to households; Government surplus or deficit and external surplus or deficit. These combine will be equal to investment expenditures.

    Keynes made a clear distinction between actual expenditures and planned expenditures. If people spend less money on goods and services than firms forecasted and produced for, firms inventories rise. This is also referred to as involuntary investment as firms cannot sell the inventory they produce. So actual S=actual I, but actual S may be lower or higher than planned I causing a lack of demand and a cutback in production in the economy.

  • Peter Martin 30th Aug '18 - 8:42pm

    The problem with Harvard professors is they need to toe the establishment line to get the job in the first place.

    For example if Feldstein had stated:

    “If a country imports more than it exports it must consume more than it produces. That’s not a rip-off; that’s arithmetic.”

    Which is at least just as true as the way he wrote it he’d probably be working at some obscure uni that no-one has ever heard of. The mainstream nearly always get things the wrong way around. So they’ll say the Government needs to borrow to fund its budget deficit in the same way as you or I might if we’re spending too much. But if there’s an influx of capital then the country needs to utilise that influx either by Govt or PS borrowing.

  • Joe Bourke, just because the OBR says the UK economy is at full capacity does not make it true. It is a guessament based on bad failed neo-liberal economic theory which believes full capacity is where unemployment is below 5%. Today we know this is not true; we don’t know what the level is. Also in the UK there are many who are doing some work but would like more. As we are a member of the EU it is likely that we can’t be at full capacity if there are economies within the EU which aren’t at full capacity as they have spare labour which can come to the UK.

    According to the latest figures (https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/regionallabourmarket/august2018) up to June 2018 the national rate of unemployment was 4% (not lower enough for my liking). The spread was 4.9% in London down to 2.9% in South West England. A national reduction of 0.5% should be achievable without increasing inflation with regional help targeted especially for the West Midlands (4.5%), the North East (4.3%) Wales (4.3%), Scotland (4.2%) and Yorkshire (4.2%) to reduce their rate by more than 0.5%.

    Our GDP in Q2 was £2,002 billion. I see no reason why £4 billion could not be spent by the government in the next year in the regions (excluding London) with the worse unemployment without increasing inflation. However, with a 4% national rate any increase in government spending has to be modest.

    The current European Central Bank rate is 0%, which makes the UK rate high enough even if it was still 0.5%.

    Peter Martin, my example is as complicated as needed. However, yours is an April Fools’ joke from 1977 – https://en.wikipedia.org/wiki/San_Serriffe.

    My example clearly shows how the multiplier works as well as showing that Savings do not have to equal the government deficit. What is true is
    (G-T) = (S-I) + (M-X) when the economy is in equilibrium.

  • Michael BG,

    in a 2004 study, Roberto Perotti estimated that the multiplier on government expenditures might range from as low as minus 2.3 to as high as 3.7, depending on the country and time period studied. Even within countries he found enormous variance. For the UK, for example, he found that the government expenditure multiplier declined from 0.1 in 1960-79 to minus 1.2 in 1980-2001.
    It is thought the significant decline in the expansionary power of government purchases in the UK may be explained by the fact that the pound was pegged to the US dollar until the early 1970s, but allowed to float freely thereafter. Moreover, international trade has played an increasing role in the UK’s economic activity, with the ratio of trade to GDP almost doubling since 1960.
    The textbook macroeconomic model for economies open to trade in goods and
    capital (the Mundell-Fleming model) predicts that fiscal policy has very different
    effects depending on a country’s monetary arrangements. The model predicts that in countries with flexible exchange rates, fiscal stimulus causes an exchange rate appreciation, which neutralises some of the stimulative effect by leading to lower exports and higher imports.
    While we can expect increases in government expenditures to cause substantial increases in GDP where the monetary authority pegs the value of its currency (a fixed exchange rate regime), their effects are much smaller or zero in countries with flexible exchange arrangements like the UK.
    The long-run fiscal multiplier ha been found to be large (approximately 1.5) in countries with fixed exchange rates; in contrast, in countries with flexible exchange arrangements, the long-run multiplier is essentially zero. The actions of the BofE in countering inflationary pressures from fiscal stimulus can further negate the impact and turn the multiplier negative.
    Fiscal stimulus works best in the slump conditions outlined by Keynes. Simple abstractions are useful for explaining the potential impact of a single variable Ceterus Paribus, but as Michael 1 commented earlier “you can never do controlled experiments – there are a 100s if not 1000s of important macro-economic variables” and all other things being equal is never a condition that applies in real life. We need policy based on our own actual experience and that of other counties around the world.

  • Peter Martin 31st Aug '18 - 9:19am

    @ JoeB,

    “The textbook macroeconomic model for economies open to trade in goods and
    capital (the Mundell-Fleming model) predicts that fiscal policy has very different….”

    Those who studied those textbooks and these kinds of models created the conditions that led to 2008 crash which still blights EU and UK economies. So what if they are all wrong? Well either they are wrong or the economy is misbehaving! Genuine scientists don’t necessarily think their models must be correct just because they can justify them with some pretty looking mathematics. All models need to be checked against the real world and if there is any variance it’s the models that have to be junked and not the real world.

    As Prof. Bill Mitchell says here:

    “I am referring here to the Mundell-Fleming model which has been the mainstream staple for many years. The modern textbooks still teach these models but the exposition has evolved although remains deeply flawed. It seems that this conceptual framework is still used to make public comments along the lines that the US government is facing insolvency and that the euro remains the best monetary organisation for Europe. Those conclusions are as flawed as the model that spawns them. Flawed macroeconomic models lead to erroneous conclusions.”

    I think he means they are a load of cr*p !


  • Peter,

    I would not disagree that there is much to be cautious of in accepting received wisdom in mainstream economics. Karl Popper argued in the ‘Open Society’ for a scientific approach in which hypothesis are advanced and scientists seek to falsify them. Any hypotheses left standing is a kind of knowledge. All theories have to be evaluated on the basis of empirical evidence and on the basis of our real life experience.

    Joseph Stiglitz also argues against the premises of supply-side economics http://evonomics.com/joseph-stiglitz-inequality-unearned-income/

    “The term ‘rent’ was originally used to describe the returns to land, since the owner of the land receives these payments by virtue of his or his ownership and not because of anything he or she does. The term was then extended to include monopoly profits (or monopoly rents)— the income that one receives simply from control of a monopoly— and in general returns due to similar ownership claims. Thus, rent-seeking means getting an income not as a reward for creating wealth but by grabbing a larger share of the wealth that would have been produced anyway. Indeed, rent-seekers typically destroy wealth, as a by-product of their taking away from others. A monopolist who overcharges for her or his product takes money from those whom she or he is overcharging and at the same time destroys value. To get her or his monopoly price, she or he has to restrict production.

    Growth in top incomes in the past three decades has been driven mainly in two occupational categories: those in the financial sector (both executives and professionals) and non-financial executives. Evidence suggests that rents have contributed on a large scale to the strong increase in the incomes of both.”

    “It is also well documented that banks deemed ‘too big to fail’ enjoy a rent due to an implicit state guarantee. Investors know that these large financial institutions can count, in effect, on a government guarantee, and thus they are willing to provide them funds at lower interest rates. counter Credit Default Swaps (CDSs) and derivatives) too have generated large rents, with the market dominated by four players. It is not surprising that the rents enjoyed in this way by big banks translated into higher incomes for their managers and shareholders.”

  • Joe, I agree with Peter Martin, that the model is likely faulty. I also note that some economists disagree with Roberto Perotti.

    Peter, you make an interesting point. Logic suggests that Y = C + I + G + (X – M) = Y = C + S + T is always true.

    There must be something wrong with the equation for as you say the economy is never in equilibrium.

    You imply that the national debt should be included in GDP this must clearly be wrong, because as I have pointed out for over a hundred years our National Debt was larger than our GDP. Also the value of stocks and shares can’t be included. Wikipedia states, “GDP (Gross Domestic Product) is the value of all goods and services sold within a country during one year. GDP measures flows rather than stocks (example: the public deficit is a flow, the government debt is a stock). Flows are derived from the National Accounting relationship between aggregate spending and income.”

    If we start with

    Y = C + I + G + X = C + S + T + M

    100 = 50 + 20 + 20 + 10 = 50 + 20 + 20 + 10

    If G is increased by 10 you state S has to increase by 10 as well

    110 = 50 + 20 + 30 + 10 = 50 + 30 + 20 + 10

    This isn’t what happens. What happens is:

    110 = 50 + 20 + 30 + 10 = 55 + 22 + 22 + 11

    115 = 55 + 20 + 30 + 10 = 57.5 + 23 + 23 + 11.5

    117.5 = 57.5 + 20 + 30 + 10 = 58.75 + 23.5 + 23.5 + 11.75

    Above C (Expenditure) does not equal C (Income)!

    We end up with:

    120 = 60 + 20 + 30 + 10 = 60 + 24 + 24 +12

    In the first equation the extra government spending is financed from savings. They magically appear together. In the second only the extra government spending magically appears and works its way through the economy, so that 4 is financed from increased tax take, 4 from savings at home and 2 from abroad.

  • Michael BG,

    “I agree with Peter Martin, that the model is likely faulty”. How these things are determined are by empirical studies by economists around the world and crucially whether hypotheses fit with the reality we observe. If the propositions are robust and can be observed in practice they become part of mainstream thinking until it is proved otherwise.

    In the UK national accounts we have a position where the government’ current expenditure is covered by taxation and investment expenditure is financed by borrowing (deficit). Total domestic savings finance private sector investment (new housing construction and business investment) and government investment. Net consumption of imports – the trade deficit (current account deficit) is financed by reinvestment of the savings of the foreign sector in domestic assets both private and public.
    The difference between national (both public and private) savings and investment is equal to the balance of payments current account.

  • Peter Martin 1st Sep '18 - 2:46pm

    @ Michael BG,

    There must be something wrong with the equation for as you say the economy is never in equilibrium

    I don’t think this follows. The parameters in the equation, or at least some of them, can be changing in an unpredictable way but the overall identity must still be true. The only dispute is over the question of S and I. JoeB, and some others, would have them as being one and the same. I would say you can’t assume that.

    “You imply that the national debt should be included in GDP” </em.

    No I didn't say that. I was saying that the National Debt isn't correctly defined. JoeB is fond of definitions but my point is that you often need to look beyond the definitions to what things really mean. For example, in the USA, someone 'forgot' to include the coinage in the definition of National Debt. So therefore to eliminate the National Debt in the USA the Government simply has to mint 20 Trillion Dollar Coins. Does this change anything? I'd say not but if you rely on definitions it does.


  • Joe, I wish it was as easy as you imply. It would be great to know that if the government deficit increased by £4 billion the economy would grow by £5 billion. However, there have been more than one study and while some agree with Roberto Perotti others don’t and I expect the reason is that each economist produces results which agree with their political view of economics.

    “the IMF have calculated the long-run multiplier at 1.5 for developed countries and 1.6 for developing countries” reported in July 2013 (https://www.tutor2u.net/economics/reference/multiplier-effect.)

    I don’t understand why you think what you wrote is relevant.

    The government deficit is financed by savings from its citizens or from the money foreigners have because we have purchased their goods.

    Investment is financed by savings from its citizens or from the money foreigners have because we have purchased their goods.

    So (G – T) + I = S + (M – X)

    Then (G – T) + I – S = (M – X) is true, but what is your point?

    Peter, as I wrote you implied it – “My net savings would include any National Savings certs I might own and the 1:1 relationship between Govt debt and those is clearly apparent.”

    Your National Saving Certificates should not be included in GDP unless you purchased them this year. The National Debt has no relationship to current savings.

    However, the historical net domestic savings and the historical net foreign investment should equal the National Debt.

  • Peter Marin,

    Accounting identities are just definitions of terms, statements of accounting methodologies. Nothing more.

    When Kuznets developed the system of national accounts he wanted to measure and model production of real goods and services in the economy. The reason S=I in the national accounts and why income = expenditure is that this is the basic assumption from which the national accounts are developed. Assuming that S=I means that all the money surpluses generated in a given period are plowed into real investment spending or inventories. Kuznets described “the real savings of the nation” as real capital — the tangible and intangible assets that we use to create goods and services in the future.
    This assumption necessarily defines Savings not as Income minus spending, but as Income minus Consumption Spending. That is how the equation is made to balance.

    In the national accounts, “Savings” as defined is calculated as a residual; it’s not counted/estimated. Income is estimated (using either the expenditure or Income approach). Subtract Consumption Spending and what’s left is called that Savings.

    If total income = total spending and total spending is consumption + investment ; then defining savings as income less consumption means that total savings has to arithmetically = total investment spending.

    Gross domestic investment” equals “gross saving” including international inflows/outflows (imports/exports), and government deficit/surplus.
    If you exclude government surpluses (savings) or deficits (dis-savings) from gross saving you can come up with a formula that says the government must run deficits to enable the non-government sector (households, firms and the foreign sector) to accumulate capital. The savings Identity doesn’t imply anything causative, much less normative. Neither does reorganising the accounting identities to show that savings of household, firms and overseas agents less private investment expenditures is equal to the government deficit imply anything causative or normative.

  • Michael BG,

    the link you reference provides the answer to your question. When an economy has these features: plenty of spare capacity; propensity to import and tax is low; and there is a high propensity to consume and extra income multiplier effects from a fiscal stimulus from government spending on infrastructure can be expected. When an economy has a high propensity to import, is close to productive capacity limits rising demand causes rising inflation, higher inflation causes rising interest rates and the multiplier effect of fiscal stimulus is low or negative. When the economy is operating normally, as now, we must look to higher taxation in areas that do not dampen productive activity to increase funding for public services. Pubic investment in housing and appropriate productivity enhancing infrastructure can pay for itself in increased economic gains and hence is properly financed by borrowing.
    This tallies with the results of Perotti’s study where he found a range as low as minus 2.3 to as high as 3.7, across different countries and for the UK a multiplier declined from 0.1 in 1960-79 to minus 1.2 in 1980-2001. This is what Jim Callaghan and Dennis Healey were talking about in the 1970s.
    There are already several areas of the UK economy where labour shortages are prevalent and vacancies go unfilled, not least in the NHS and construction sector even though we are not building anything like the housing required to meet demand.
    What we need to do is reform the tax system to capture economic rents to fund public services and support welfare reform as Joseph Stiglitz outlines; and borrow to invest the proceeds of economic growth in public housing and infrastructure.

  • Peter Martin 1st Sep '18 - 6:55pm

    @ JoeB,

    “Assuming that S=I means that all the money surpluses generated in a given period are plowed into real investment spending or inventories. Kuznets described “the real savings of the nation” as real capital…..”

    This is not a good assumption. There’s another widespread assumption that when we save, the banks act as intermediaries and lend out our savings to others who want to invest. So if the Government is also active in the borrowing market then we have a ‘crowding out’ effect, with essentially the Govt soaking up funds which would otherwise be available to the private sector. If everyone else is trying to borrow too then interest rates have to rise to restore the balance.

    It all sounds plausible enough until you look at the data. After the GFC the Government’s deficit peaked at ~ 11% of GDP. And at the same time as the Govt was borrowing heavily interest rates fell sharply. They fell sharply because the Govt wanted them to fall sharply! So the correct way to look at Government borrowing is to see it as Govt spending more into the economy than they take out. This means that, contrary to what the mainstream textbooks might say, the bigger the Government deficit the more downward pressure there is on interest rates. It’s just the opposite of crowding out.

    Once you get this the right way around then its clear enough that S does not equal I.

    I’m sure everyone knows this, which is why S and I are always considered to be separate terms in the National Accounts.

  • Peter,
    Neo-classical economists believe that saving and investment equality is brought about by the rate of interest. When saving tends to exceed investments, the rate of interest falls to discourage savings on the one hand and encourage investment on the other bringing the economy back into equilibrium.
    Keynes questioned these assumptions. He held that the equality between saving and investment is brought about not by the rate of interest, but by changes in income. As and when investment exceeds savings, increased investments (through multiplier) must increase the aggregate income of the community to such a level that the increased saving out of the increased income is equal to increased investment.
    Thus, income change is the mechanism through which the equality between saving and investment is established. Keynes’s approach to saving and investment equality suggest that they can be equal at less than full employment.
    In Keynes theory actual saving and investment are still always equal but not necessarily in equilibrium. The paradox of thrift suggests that if everyone tries to save, income will fall and the total of aggregate savings will fall with it.

    Both saving and investment at a particular time are equal to Y- C; therefore, failure to spend more on the part of one man means the failure to earn more income on the part of another. This happens because a man is able to increase his saving, only by curtailing his consumption, which leads to a decline in effective demand and hence income and employment. This is an important implication of S and I identity.
    By functional equality of saving and investment, we mean that both savers and investors, though they are quite different persons having different motives, act and react to income changes in such a way that their desires to save and invest get reconciled in the very process of their actions and reactions. Thus, we can easily conceive of a functional relationship between saving and national income on the one hand and investment and national income on the other.

    S and I are and can be, equal at less than full employment (popularly called underemployment equilibrium). Neo-classicals would call is a disequilibrium situation of the short period. But Keynes called it an equilibrium of the economy at a point of less than full employment.

  • Peter Martin 2nd Sep '18 - 7:20am


    I’m not sure anyone else will still be following what they might consider an abstruse technical debate.

    It’s actually a highly political debate. Those who peddle the idea that savings have to equal investments are trying to also peddle the idea that there’s no need for governments to run deficits or accumulate debt. In a closed economy, and the world is a closed economy, then if S=I it must follow that T=G. No deficits means no Govt Debt.

    In other words if someone is saving for their retirement, someone else is borrowing to buy a house and there’s no need for any Govt involvement.

    This is clearly not how the global economy works. If we total up all the worlds National Debts we get a figure of some $70 trillion. We don’t owe that money to Mars. We owe it to ourselves. The Government’s net debt, in $ or £, or whatever, corresponds to everyone else’s net savings.

    In other words, the rest of us own the debt. Our savings aren’t entirely our investments.

    PS At least we agree that neoclassical economists have it all wrong. Why such economists, and Patrick Minford is one is a mystery to me!

    PPS Bill Mitchell regularly sets a quiz on his blog. A correct understanding of the sectoral balances is a favourite theme. Like in Q1 as below:

    PPPS Jan Hatzius of Golman Sachs is an advocate of the same approach and the chart on this link shows that sometimes S-I is positive and other times its negative.


  • Peter,

    “Those who peddle the idea that savings have to equal investments are trying to also peddle the idea that there’s no need for governments to run deficits or accumulate debt”

    You are talking about Kuznets and Keynes here. The world governments national debt is typically invested. In the UK net worth of households is estimated at £10 trillion. Approximately 50% of that wealth is in property and most of the remainder in company stocks and private bonds that finance investments made by business in tangible and intellectual property . Public debt is circa £1.8 trillion and approximates government investment in land and infrastructure.

    Keynes did not reject the classical view that interest rates would bring the economy back into line, he pointed out that this would only hold in the long run, and it is the short-run damage we have to deal with – famously saying that in the long run we are all dead .

    The acclaimed economist Joan Robinson said “The purpose of studying economics is not to acquire set of ready-made answers to economic questions, but to learn how to avoid being deceived by an economist.”

    The best way to understand the limitations of economic policies that stimulate aggregate demand is to understand that in the long, such policies (whether monetary or fiscal policy) can change only the price level, not the level of output. Prices (mostly real wages) will eventually adjust until the economy is producing at the full employment level i.e. its normal state, To change the level of output require investment in productivity enhancing improvements.

    Once we understand this, we will recognise that fiscal stimulus is a short-term measure to halt declining output and cyclical unemployment resulting from sticky wages. To increase living standards we need to increase productivity and ensure that economic value produced is fairly distributed between capital and labour to maintain the economy in equilibrium.

    Kuznets was right to describe “the real savings of the nation” as real capital — the tangible and intangible assets that we use to create goods and services in the future.

  • Joe, the propensity to import is not very high having reduced from 32.05% in 2011 to 30.11% in 2016. We might not have a multiplier of 1.25 as per my recent example, but I expect it is closer to that than 1.11.

    It is likely that the reason we have labour shortages is because wages are not high enough to attract people living in the UK to decide to take those jobs when they leave school.

    You seem to believe that we are at full employment level or what you strangely call “its normal state”. I don’t. I wish we could know what size of national stimulus is needed to provide full time jobs to everyone who wants one. Therefore if I was Chancellor of the Exchequer I would proceed with caution. I would provide a small national stimulus of less than £4 billion by increasing benefits and provide a further £5 billion to stimulate the five areas of the country with unemployment levels of 4.2% or above. This hopefully would grow the economy by more than £10 billion (and is only 0.5% of total GDP) and it might reduce the lowest level of unemployment down to 3.5% and the highest (West Midlands) down to 4%.

  • Michael BG,

    as I mention in my comment to Peter Martin, stimulus does not increase the productive capacity of the economy. It injects more money into the economy to purchase the existing quantity of goods and services that producers have to offer. I don’t think this is a disputed contention in economics.
    Full employment is a situation when everyone who wants a job can find one. If people don’t want to take up jobs on offer because wages are not high enough, stimulus will not help. The inflationary effect of putting more money into the economy to buy up existing goods and services may be relatively small, but it acts in exactly the same way as a tax does. It reduces the aggregate level of consumption which in turn reduces aggregate disposable income, and real wages (even if nominal wages stay the same or increase) have to adjust downwards to compensate.
    As Milton Friedman once said “there is no such thing as a free lunch” https://www.youtube.com/watch?v=WC0elAPyXhU.
    Structural employment, such as we see in the UK today, is a long-standing issue. Stimulus, regional or national, is unlikely to make much of an impact. I think direct measures like job guarantees and real apprenticeships that leave younger people with the skills to make a living would be much more effective.
    We need intelligent policies that seek to distribute the benefits of natural resources equitably and provide the foundation for liberal democracy in a mixed market capitalist economy.

  • Joe, you are mistaken to believe that a fiscal stimulus will always create inflation. It would be like believing that increasing the money supply always creates inflation. Of course both can cause inflation. This can happen either because there is no spare capacity in the economy or the stimulus or increase in money supply is too big for the economy to expand to meet the increased demand.

    I can’t believe that you think people should take a job which doesn’t pay enough. As a liberals we should believe that people are rational and if their living standards increased by a meaningful amount by taking a job they would take the job assuming that they felt there would be no mental health cost or other cost in taking the job.

    If the economy is growing, above I think 1.5%, then more jobs are created and so individuals have more choice over the type of work they take, and therefore those people who have failed to find a suitable job are more likely to find one when there are more jobs.

    I also like the idea of job guarantees so long as they are truly voluntary and meet the needs of the individuals given the job. I also would like to see a training guarantee scheme for those not in work which provides training which will result in a permanent job that meets the requirements of the individual given the training.

  • Innocent Bystander 2nd Sep '18 - 7:00pm

    Where are these job “guarantees” coming from? Who is the guarantor?
    Why don’t all the countries in the world just guarantee all their citizens a job?

  • Peter Martin 2nd Sep '18 - 7:02pm

    @ Michael BG,

    You are quite right that a fiscal stimulus does not necessarily increase inflation. It could do if its overdone. JoeB is quite wrong to say “What stimulus does not do is increase the productive capacity of the economy “. Fiscal measures can be used to fine tune the economy. That’s more recently been done by monetary measures, or adjusting interest rates. As rates can’t be lowered any further that not an option any longer.

    Sensible fine tuning will increase the productive capacity of the economy by preventing it falling into the “ill health” of too much recession on one hand or too much inflation on the other.

    @ JoeB,

    If you are bring house prices and share prices into the argument then you’re either indulging in more obfuscation or you don’t understand what the National Debt and the Sectoral balances mean, or all three.

    The USA has a National Debt of some $20 trillion. This doesn’t mean that the USA in total has a negative net worth. It has lots of assets which aren’t included in debts and deficits. Alaska was bought from Russia in the 19th century for a £7 million dollars. What’s its value now? It’s really impossible to put a figure on it so no-one tries!

  • Peter Martin 2nd Sep '18 - 7:12pm

    @ Innocent Bystander,

    This is the basic idea in its simplest form:


    And in somewhat more detail:

  • Peter Martin 2nd Sep '18 - 10:19pm

    @ JoeB,

    I’m all for theories standing up to reality.

    The reality is that it is quite usual, normal even, for Govts (in the UK, USA, Canada, Australia, NZ etc) to run deficits.

    Yet, you say “that government must run deficits to accommodate the propensity to save of households, domestic firms and foreign exporters is rather far-fetched.”

    “Far-fetched” is you telling me that the UK Govt, any time soon will start running budget surpluses! You know, as well as I do, that it just won’t happen.

    So, please, get real in your thinking! You can argue for a LVT, if you like, but it won’t change the reality that if the UK as whole runs trade deficit (which it is bound to if it lets the £ freely float) then someone in the UK has to ‘borrow’ to fund that. That has ultimately, in large part, to be down to Govt.

  • Peter Martin,

    it is normal for governments everywhere to run deficits for investment in capital expenditures. The taxes to fund such expenditures are collected in the future as the capital investments are consumed/depreciate. That is simply good financial management.

    There is no good reason to run budget surpluses (unless it is required to deflate a consumption bubble in the economy) as there are always public housing and infrastructure projects that require financing and will enhance the productivity of the economy and debt to GDP is reduced primarily as a consequence of economic growth/inflation.

    The trade deficit or current account deficit is financed by the return of funding via the capital account. In the UK, as a major financial centre that is predominantly private sector investments in business investments and sterling securities (shares and corporate bonds). An element of overseas portfolio investments will include UK gilts, but the majority of UK debt issues are taken up by UK financial institutions – banks, pension, insurance and investment funds.

    We have discussed in-depth here the savings investment accounting equality. In the national accounts consumption includes all consumption – domestically produced goods and services and imports consumed by households, firms and government. Investment includes expenditure on domestic capital goods by households, firms and government. Total income is equal to consumption, Investment, government spending and net exports. Savings are derived by deducting consumption and taxes from income. You can say that savings (domestic private sector, public dissaving and foreign surplus) equal investment; or that the difference between domestic savings less investment less the government deficit is equal to the balance of payments current account; or as MMT prefers domestic savings less investment spending and the trade deficit is equal to the government deficit.

    All are accounting identities that change based on the decisions and interactions of households, firms, governments and overseas exporters and importers based on such factors as fiscal stance, business confidence, inflation, interest rates, capital flows and exchange rates. Net financial assets is a theoretical construct in MMT akin to central bank reserves. All private sector financial assets represent in some form a claim on real assets.

  • Peter Martin 3rd Sep '18 - 7:59am

    @ JoeB,

    So what you are saying is that its “far-fetched” for Government’s to have to run deficits to keep the economy ticking over except when it’s for capital spending and then its completely “normal”. So according to this thinking it’s quite acceptable to build a new bridge, because that’s a capital item, and then theoretically we could sell it off to some capitalist who would then impose tolls on it. But it would be “far-fetched” to spend that same money on education because that’s mainly current spending and we can’t sell off our educated kids to pay our debts in the same way that we could sell off the bridge.

    So that’s you thinking. I see. And you also think that ” taxes.. fund such expenditures”. So where does the money come from before its available for taxpayers to pay their taxes? If you start of at t=0 then Govt spending has to come first and tax payment has to follow. It can’t be any other way. Because with the best will in the world, no-one can pay their taxes unless there is already some money in the economy. And no Government can reclaim more money from the economy than they’ve created in the first place. It’s simply not possible to create ten mangoes (I seem to remember that you used them as currency) and demand that taxpayers pay back twelve. Unless they are allowed to grow their own mangoes! Possibly they would. But here the analogy falls down. Taxpayers can’t create their own ££. There are stiff criminal penalties for counterfeiting! And contrary to popular misconception Government doesn’t take bank IOUs as tax payment.

    So it’s quite natural for Government to spend more than they receive back. If they’ve spent out 100 and receive back 90, where are the other 10? You don’t have to be a genius to work this out. 🙂

    And yes the holders of the 10 have a claim on the real assets of the future. So what to do about that? How about doing whatever we can to make sure that the economy is in good shape so that there will be something to buy with these 10 ? We don’t want to have to sell either our kids or the bridge. We do want the bridge to be well built so it won’t collapse, and we do want our educated kids to be running a successful future economy.

  • Peter Martin 3rd Sep '18 - 8:00am


    We don’t want to be fretting about the 10 (billion £ or whatever) that we’ve spent out into the economy but we haven’t got back in taxes. If the economy is overheating we can have some trimming of spending and raising of taxes to prevent inflation. Otherwise we can do the opposite. If we don’t run the economy this way we’ll just carry on in the doldrums as we are now. And there’ll be lots of articles in LDV about “Poverty In Britain”, “Our Failing NHS” etc etc. If we go even further and listen to those stupid German economists we’ll end up like Greece and Italy, with a future GDP much smaller than it is now. So if anyone has saved their money there will be much less to buy with it when they do want to spend it.

  • Peter Martin 3rd Sep '18 - 9:21am
  • Joe, reflating the economy is not inflation. Quantitative Easing didn’t create inflation; that was a surprise. If there was no unmet demand why would anyone produce more? Your economic beliefs mean you must think there is nothing the government can do to stimulate economic growth. I am glad I don’t share your economic beliefs.

    If there is a deficit this does not mean there is an economic stimulus. If you believe so and calculate the multiplier on this incorrect belief it is no wonder you don’t get the correct value. I am not convinced there is any way to measure the multiplier. Even if the deficit is increased from one year to another there is no way of knowing if the increase in the economy was due entirely to that economic stimulus, or if the economy contracted how much the contraction was reduced by the economic stimulus.

  • Peter Martin,

    I think the problem for promoters of MMT is twofold. Many of the premises on which the theoretical framework are built are shaky and few serious economists, including most post-Keynesian economists will give it much credence.

    Two obvious failings of MMT are a limited understanding of the nature of money and the purpose of taxes. Money serves as a store of value that you can hold for a time , as the unit of account in which contracts are written, as a standard of deferred payment that enables credit markets to function and as a medium of exchange. Payment of taxes is a relatively minor use or function of money.

    Actual output is created before taxes can be levied. There have to be real goods and services produced before a taxing authority can lay claim to part of the output for the provision of public services. That applies whether it is William the Conqueror and his doomsday book or HM Revenue and Customs in 2018. Output comes first then taxes using the currency of the realm as the medium of exchange can be levied.

    A progressive political party needs to both radical and credible. One without the other is ineffective. Radical policies that have no credence are doomed to failure just as tinkering at the edges or offering no solutions to modern day problems.

  • Michael BG,

    there is always unmet demand. Scarcity is the fundamental and unavoidable phenomenon that creates a need for the science of economics. Even if money s not scarce, time and/or physical resources will be., so people have to make choices about what to produce and consume. The law of diminishing returns describes the fact that each additional amount of resource that’s thrown at a production process brings forth successively smaller amounts of output.

    Economics is governed by the fundamental laws of supply and demand. This applies to all factors of production- Land, Labour and Capital – as well as the medium of exchange used to facilitate transactions – money.

    Government’s don’t produces goods and services – people and firms utilising the factors of production do. The government manages most of our security, education and health services but the majority of economic production is conducted in the private sector where the level of output produced is determined by prices that can be obtained in the market versus the costs of inputs to production. Maximum output is achieved at the equilibrium level.

    Government stimulus can aid in in speeding up the restoration of the equilibrium of the economy after it has been thrown off course by a negative shock. It does so by influencing the price level. Increases real wages (wage growth above inflation) and improvements in the standard of living are determined by productivity gains not by money stimulus.

  • Joe, economics might call itself a science but it isn’t really. It is an art subject like history. There are no laws in economics just theories. Governments do provides services and could provide goods. Even 19th century governments provided some services – defence, law and order and welfare.

    I thought you didn’t believe labour obeyed the normal demand and supply theory. I thought you believed that if an employer can employ someone outside of the UK it didn’t have any effect on wages. For demand and supply theory to work the conditions have to be right, if I remember them correctly, they are: perfect knowledge, lots of suppliers and lots of buyers and entry into the market should be easy.

    Production levels are not solely determined by increased productivity. Imagine I run a company and I employ one person and that person can produce one widget a week. However I can double my production by employing two people and triple it by employing three, but productivity has remained constant.

  • Peter Martin 3rd Sep '18 - 10:44pm

    @ JoeB,

    I did say I wasn’t going to comment any further but I’ve changed my mind by more silly comments. For example:

    Two obvious failings of MMT are a limited understanding of the nature of money and the purpose of taxes.

    This is just unsubstantiated assertion and complete nonsense. For a start there’s no prior assumption that money is neutral. The nature of fiat money can be easily understood as a ‘tax voucher’. If Government’s created pieces of paper and actually called them £5 , £10 tax vouchers etc they would be functionally equivalent to £5 and £10 notes. The obligation for us to pay our taxes and the sovereign states insistence that they be paid in the national currency are what gives the currency a value. Now that there is no gold and silver involved what else is there?

    Of course this doesn’t mean that a fiat currency can only be used to pay taxes. Anyone making that argument is being deliberately obtuse.

    “Actual output is created before taxes can be levied.”

    If you are saying “output is created before taxes are levied” you’d be correct. Let us imagine a society which somehow manages without money making the transition to a monetary economy. Of course they’d have to previously create something for themselves, like a food supply, otherwise they’d all have been dead long ago. But they still can’t pay their taxes in money unless the Government supplies that money into the economy first. They can pay their taxes in fish, potatotes and chickens etc but that’s not generally the most efficient way to run an economy.

    Which ever way you look at it no-one can pay taxes in something which doesn’t exist!

    The purpose of creating the money, from the Govt’s POV, is to create sellers of the real goods and services they want to buy with their currencies. Govt’s don’t need money per se. They may, or may not, want fish, potatoes and chickens. If they do they use their created currency to buy them.

  • Peter Martin 3rd Sep '18 - 10:46pm

    The first sentence really should read ” I’ve changed my mind after reading more silly comments”

    Anyway to continue:

    “Personally, I think we need to focus on what we know works.”

    The corollary is we need to avoid what we know doesn’t work! It was supposedly mainstream policies which led to the GFC. They probably will lead to the breakup of the EU too. Time to learn from previous mistakes!

    “Government’s don’t produce goods and services”

    But they usually do, if they are a currency issuer, control the economy. They can have too much inflation, if they get things wrong in one way, They can have too much recession and stagnation if they get it wrong in another. Getting it wrong does have a huge adverse impact on the production of goods and services.

    I do wonder why these statements of the obvious are really necessary!

  • Peter Martin,

    you are putting forward the position of modern monetary theory that is something of an outlier within the post-Keynesian school of economic thought. You are perfectly entitled to do so. However, while I feel there is merit in parts of the analysis, I also believe there are contradictions in the underlying assumptions and policy prescriptions that are derived from those assumptions, as I have outlined above.
    Governments exist because there are challenges we cannot deal with unless we come together as a nation state. When failures arise in the operation of markets and large financial institutions, utilities or big data companies exploit a monopoly position, the problems have to be tackled at state level.

    The idea of a command-and-control statist socialism where the economy can be run from the centre is an illusion. The left’s traditional answers – to pull the levers of state power through nationalisation, currency and capital controls and restrictions on imports failed to recognise that new reality that national economies are interconnected in a global economy and that money and goods now move freely across borders irrespective of national decisions.

    Likewise the right’s assertion that prosperity will simply trickle down to those in need and the best thing government is get out of the way is patently false, as is the idea that financial markets and monopolies do not need close monitoring and regulation.

    Social Liberalism is a philosophy that places individuals and communities at the heart of the economic system and recognises both the importance of addressing inequality and of International cooperation to developing a sustainable economy. Fiscal realism and individual responsibility is part and parcel of that philosophy, while recognising that liberty is dependent on economic freedom and hence a proper sharing of the benefits of technological progress between labour and capital.

    This does require a certain clarity of thinking such as understanding that what gives a currency value is the productive output of the economy and the ability to exchange that currency for real goods and services, even if that does not fit neatly with the MMT framework. It also requires recognition that GDP is calculated by totting up spending in the economy and Savings are calculated by totting up investment spending by household, firms, governments and foreign direct investment.

  • Peter Martin 4th Sep '18 - 7:26am


    In my day job as an electronics engineer, the challenge often meant improving the design of something or other. Say it was an aerial. Probably on your roof you’ll have a TV aerial that is made of stiff metal tubing and has a kind of fishbone structure. So what are are all those bits of tubing doing and why does it work the way it does? Similarly with a lot of components on a printed circuit board. The first thing is to understand how things work. Only then have you got any chance at all of making some improvements.

    Similarly for anyone interested in economics, and that should be everyone who’s also interested in politics, the question is how do economies work? And that doesn’t involve any politics at all. We can look at economies that have different degrees of State control. That are more socialist or less socialist. More capitalist and less capitalist. And the fact that they exist means that they work, at least to some extent. Even ones that we disapprove of like in North Korea.

    So just as a Chemist might start of with what atoms and molecules are and do, it would make sense to start off with just what are the ££ and $$ of the modern economy. Its been over 40 years since any connection with gold was removed. That was a significant event. Before that we could say that the $ had a value because it was guaranteed against an amount of gold. And the pound had a value because it was guaranteed against at a certain number of dollars. That’s no longer the case. But many economists carry on as if we were still on some kind of gold standard!

    So we have to move with the times. Keynes’ insights were useful but he wasn’t analysing what we have now. ie Freely floating currencies with no attachment to gold or silver.

    There’s nothing in any study of modern money which can possibly be counter to LibDem principles. It’s just starting with what actually is, understanding how things work at the moment, and taking it from there.

  • Peter Martin,

    It is nice to see a comment I can agree with. The two key problems we face are private sector debt (the great bulk of which is mortgage lending) and under-funding of pubic services and welfare.

    Individual savings borrowed and spent on consumption or invested in real assets support the real economy (In aggregate all savings are invested – hence savings = investment). Savings inter-mediated by the finance sector for the purchase of land do not support the real economy – land being a non-produced asset.

    There is far too great a share of value created in the economy (GDP) that is skimmed off as economic rents in the form of rents and interest that accumulates as capital surpluses, draining disposable income and investment in productive assets. There is no need to run large government deficits beyond borrowing required for investment in infrastructure and public housing. Collecting taxes on economic rents is needed to put the funding of public services and welfare provision on a sustainable basis.

    Once it is understood that it is private sector debt and inflated land values that distort the real economy and drain the funding needed for public services, we can begin to make progress in addressing inequality and the public finances.

  • The idea of the free market with fixed rules for demand and supply only works in theory not in practice. I can’t think of any market where the buyers and sellers have perfect knowledge. Do you check the price of every item you wish to buy in your “weekly” shop on line before you set out? Do you work out how much it would cost to go to the cheapest shop compared to the benefit from the lower price?

    I now understand why you think, erroneously, that the economy has a natural state and this state is your full employment state. I hope you are wrong and students of economics are not taught that the economy works as per the neoclassical model even over the long run. Current economics believe that there is a NAIRU (Non-Accelerating Inflation Rate of Unemployment) but it is questionable if there is really a NAIRU. Personally I think increases in real wages would be a very good thing and might in the UK lead to investment to increase productivity.

    I have heard of the ‘law of diminishing returns’. In my example I could purchase more tools and keep increasing the size of my premises so I can retain the output of each worker to one widget a week. However, even if my employee’s productivity was falling the amount produced would be increasing. There is no need to improve productivity so long as I can keep employing new people and provide them with the knowledge, tools and space to make my widgets. It is only when I can’t employ any more people that in these circumstances that I have to think about increasing productivity. Therefore we can conclude from the micro to the macro that productivity is more likely to be increased the closer the economy is to full employment.

    I am glad you have returned to some common ground: –

    (S-I) + (G-T) + (X-M) = 0

    Therefore S + (X-M) = I + (T – G)

    But neither (X-M) nor (T – G) are savings nor investment in this calculation. It should also be remembered that I is spending.

  • Peter Martin 4th Sep '18 - 5:43pm


    I agree with the points you make about private debt and the underfunding of public services.

    I first came across the concept of sectoral balances through reading Bill Mitchell’s blog and he seems to cover the topic as well as anyone. I was slightly concerned just how well we could separate consumption spending and investment spending. If I buy a mobile phone or a computer for my business I can class that as investment but at the same time I’m using that same PC to write comments on LDV and use my mobile phone to receive family calls ! So I’m not totally convinced about how well that works out in practice.

    This is just one of many posts written by Bill.


    Maybe if you have time you can figure out where and how there might be some divergence of opinion on the question of S=I.

    @ Michael BG,

    Yes that’s a good point about I is spending. My ‘gut feeling’ is that it’s the amount of spending that matters in the economy and that it doesn’t really matter too much whether its classed as consumption (current) or investment (capital). In any case there are lots of grey areas, such as ‘investment’ in education and health, which aren’t really counted as ‘investment’ in the National accounts.

    I possibly need to think about this a bit more and see if I can resolve this one.

  • Peter Martin 4th Sep '18 - 7:05pm

    @ JoeB,

    I’ve just come across this which discusses the S=I question.

    Simon Wren -Lewis isn’t in the MMT fold!


  • Simon-wren Lewis is a very readable economist. He gives the standard Keynesian explanation for why S=I noting that investment includes both capital building + stockbuilding. When aggregate demand suffers a negative shock, output fall as firms cut back on production to reduce inventories. Incomes fall in turn and the aggregate level of savings falls as a result until inventories stabilise and savings once again equal capital spending.

    He wrote a influential paper in 2015 with Jonathan Portes – Issues in the design of fiscal rules https://onlinelibrary.wiley.com/doi/pdf/10.1111/manc.12118 a version of which has been adopted as Labour’s fiscal credibility rule.

    The paper concludes “We can use the UK as an example of how these rules might be applied to a particular country with its own monetary policy. Experience over the last few decades suggests that UK governments have not been subject to sustained deficit bias: the increase in debt that has occurred since 2008 was largely the result of an extraordinary shock and quite legitimate attempts to mitigate its impact. This suggests an appropriate framework for the UK, once interest rates rise above the ZLB, would be a rolling medium‐term target for the actual rather than cyclically adjusted primary deficit. This rolling target would be more robust to shocks than a target that specified a fixed date, and it also avoids the need for cyclical adjustment. However, historical experience also suggests periods in which UK governments have tried to circumvent their own rules (either the actual rules or the intention of those rules), so the UK’s fiscal council, the OBR, should be given a much wider remit to certify that the government is not manipulating the rolling nature of the target. Experience also suggests a tendency to put too much weight on cuts in public investment during fiscal retrenchment, so there should be a specific target for the ratio of public investment to GDP. The OBR should also be involved in comparing the implications of alternative deficit targets for the long run level of government debt.”

  • Peter Martin 5th Sep '18 - 9:56am

    @ JoeB,

    Did you read the Jan Hatzius interview in the earlier link?

    He says:

    “…..every dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero.That’s the starting point. It’s a truism, basically.”

    He really should say ‘non-government surpluses’ rather than ‘private sector’. If we then split up non-government into overseas and private domestic sector we get:

    Government Deficit = Private Domestic Sector Surplus + Trade Deficit

    So it seems clear that the Government Deficit = G-T
    Trade Deficit = M-X
    So this must mean that the PDS Surplus = S-I

    If you look at the first graph on the link the thick black line is the private sector surplus for the USA. This is usually positive. But sometimes it does go negative as it did at the turn of the millenium. This enabled President Clinton to claim credit for running a budget surplus. But in reality, it was a danger sign. The PDS was borrowing too much.

    It was also heavily negative after 2005 and up to the GFC. Again this was another danger sign which was ignored.

    Jan Hatzius is no anti-capitalist leftie! Don’t you think he might be on to something here?

  • Peter,
    The national accounts are a simplified representation of key sectors in the economy. Household investment in personal real assets is treated as consumption and government investment in public housing and infrastructure is treated as government spending. Because the national account assumes all firms profits are distributed, only households make savings and these savings are used by firms to invest.
    In totting up GDP we want to figure out how much has been expended on products made within the UK by residents and foreigners i.e. domestic consumption and exports. Goods that we import are added to domestically produced consumption to get total consumption.

    In the non-government sector the savings of domestic household and the savings of the foreign surplus finance investment made by firms and the government deficit. If the government is borrowing for investment only the surplus of the non-government sector will be equal to investment (as defined in the national accounts) + investment spending included in government spending.

    The law of supply and demand and the law of diminishing returns basically hold that no matter what different sectors do over the long term, prices will adjust to balance with supply and productivity will fall as employment levels increase unless the increase is matched with higher levels of capital investment.
    The key variable that is impacted by these phenomenon is real wages.
    International trade is good for everyone’s prosperity on the basis of the higher productivity opportunities of comparative advantage. Labour productivity, however, needs to be maintained. If capital investment is allowed to decline then the law of diminishing returns acts to reduce productivity.
    Countries like the US and UK have seen stagnant or real wage declines in recent decades – a problem some economists would associate with large trade imbalances and under-investment in private and public infrastructure – as Keynes warned in 1945.

  • Peter Martin 5th Sep '18 - 2:11pm


    You’re still not answering the question and are taking refuge in comments like “The national accounts are a simplified representation of key sectors in the economy” with the implication that they are an over simplification. There’s no other word to use than ‘obfuscation’ !!

    So what do you make of Jan Hartzius’ claim that the graph is “The World’s Most Important Chart” ?

    You don’t have to literally agree with that but he obviously thinks it’s pretty important. So can you agree to that?

  • Peter Martin 5th Sep '18 - 7:12pm

    You are still being very evasive. I ask you about Jan Hatzius and you don’t mention him at all in your reply.

    He presents a chart with a thick black line showing that the nets savings of the private domestic sector. Usually its positive. Sometimes it goes negative. I would say this has to be S-I but maybe you don’t agree? Maybe you think that S=I and therefore S-I always equals 0 ?

    Every economic model is necessarily a simplification. It isn’t possible to include every bottle of milk or loaf of bread that’s sold. We all know that. So why mention it?

  • Peter Martin 5th Sep '18 - 10:17pm

    @ JoeB,

    I must say I’m doing my best to engage with you but you repeatedly ignore such questions as why, if S=I as you claim the thick black line in Jan Hatzius’ graph isn’t just a straight line on the x axis which is always equal to zero.

    I also find it extremely galling that you see fit to point out “The movements in sectoral balances cannot tell us about causality”. Do you think I don’t know that?

    You should tell yourself this, and most of the other commentators to LDV who think along mainstream lines. The mainstream thinks, or at least doesn’t go out of its way to explain otherwise, that that there are lots of simple causalities in the accounts. That’s why most people, including Vince Cable, think the way to cut the deficit is to cut spending. What about the effect of a reduced G on all the other terms in the equations for the National Accounts?

    You can’t change one and hold the ones constant that you want to be constant and just expect the other ones to only vary in the way you want them to.

    I’m always trying to explain this. The usual one is that if you raise income tax by 1p then it will produce an extra £6 billion for the NHS. But maybe it won’t. Probably it won’t. Because I know very well, thank you very much, about causality, or rather the lack of it.

  • Peter,

    I find it hard to believe that you cannot understand the difference between aggregate savings comprised of private sector savings (Y-C-T) + public surplus/deficit (G-T) and Foreign surplus (M-X). Aggregate savings across all three sectors = the residual in the GDP equation – Investment (I).

    Savings (or dis-savings) in a single sector such as the private sector (S) will not equal investment.

    I do think you are very confused when you equate what Jan Hazius refers to as private sector surplus with household savings and make statements such as “the government must run a deficit so the private sector can net save”, and then go on to say “savings are a good thing so deficits must be too”. You cannot hope to explain anything to anyone, let alone Vince Cable, when you make such elementary errors.

    Jan Hazious writes “Since mid-2009, that surplus has gradually come down as businesses and households have gotten closer to where they need to be from a long-term balance sheet perspective. They’ve paid down debt, they’ve eliminated the excess supply of housing, and that’s basically allowed them to reduce the financial surpluses that they run. They’re still running large surpluses – still 5.5 to 7 percent of GDP, but they’re no longer as large. We expect those figures to come down as the balance sheet adjustment process makes further strides and that’s an underlying source of boost to the economy that’s happening on the one side.”

    If you understand what he is saying, it is the reduction in the private sector surplus that he expects will provide a boost to the economy.

    So I reiterate S-I is not savings. It is a sectoral balance representing the difference between domestic savings and Investment. Godley calls it net financial assets, Hazios calls it private sector surplus.

  • Peter Martin 6th Sep '18 - 8:14am

    @ JoeB,

    You keep saying that S-I is not savings. I would say its net savings. So what is it then? What would you say the black line was, if not S-I, in the Hatzius’ graph? Incidentally I would say the other two are (G-T) and (X-M). What would you say?

    I know you don’t answer simple questions but I thought I’d ask anyway.

    Jan Hatzius also says:

    “…..one sector’s income is another sector’s spending, so it all has to add up to zero.”

    So if the Govt is in deficit it must mean that at least one of the other sectors, ie the PDS or the overseas sector is in surplus. As the UK runs a persistant trade deficit then the Govt has to run its own deficit to keep the economy going and replenish money lost to it to pay our net import bill.

    So all attempts to balance the Govt budget are futile unless the currency is devalued to such an extent that we run a large export surplus – German style.

  • Peter Martin 6th Sep '18 - 8:34am

    PS . “Godley calls it net financial assets, Hazios calls it private sector surplus.”

    OK so I call it net savings. I don’t want to get bogged down in an argument about semantics. I’m happy to switch to switch to either of these terms.

    Which one would you prefer?

  • Peter,

    MMT refers to the difference between Domestic savings (S) and business investment (I) as net financial assets.

    Jan Hatzius charts This balance (S-I) against the government deficit and trade balance, showing that as the difference between domestic savings and business investment narrows the government deficit reduces.

    Economists refer to this as the paradigm of thrift. If households in aggregate try to increase savings in reaction to a demand shock, consumer spending falls, inventories start to build and firms cutback on output and investment and reduce prices to clear unsold stock.

    Keynes is clear that business investment drives increased income and hence savings. In a recession the government allows automatic stabilisers (increased benefit payments and reduced tax receipts) to increase its deficit and accelerates investment spending and/or reduces tax to restore consumer confidence. As consumption increases, business regains its animal spirits and investment increases.

    After an economic shock, price adjustments tend to return an economy to producing at full-employment output. While firms can adjust prices quickly nominal wages are sticky so will not fall quickly. Monetary and fiscal stimulus injects money into the economy generating inflation above nominal wage rises. In this way real wages are educed and the equilibrium of supply and demand across the economy restored.

    It is important to distinguish between he short-run i.e the period of time in which firms haven’t yet made price changes in response to an economic shock; and the long run i.e. the period of time after firms have made all necessary price changes in response to an economic shock.

    In the short-run period the government deficit will rapidly increase. In the long-run period the government deficit will gradually decline. Real wages is the key to improving living standards, not the level of deficit or debt – hence the importance of investment and productivity.

  • Peter Martin 6th Sep '18 - 9:12pm

    @ Joe B,

    I don’t mind too much what we call it as long as we know what it means. We need to be clear whether we are talking about what I think economists like to refer to as stocks and flows. So its net financial assets in total and the change in net financial assets over a period of time. Also we need to exclude financial assets which are in a foreign currency.

    In a closed economy, or in an economy where imports exactly equal exports, the black line for (S-I) in the Hatzius graph will be an exact mirror image of (G-T). In other words, and as you say “as difference between domestic savings and business investment narrows the government deficit reduces.”. It has to. Penny for penny.

    Also we shouldn’t easily say that “net financial assets” are reducing because the Government is reducing its deficit, or the Govt deficit is reducing because “net financial assets are reducing”. It could be either or more likely a bit of both.

    If we add back in the external sector then the one is no longer a mirror image of the other, but providing the external sector’s balance isn’t changing too quickly the mirror image property is still apparent in the graph.

  • Peter Martin,

    the Hatzius graph expresses the sectoral balance flows as a % of GDP across the time period 1970 to 2012 with the foreign surplus shown as the inverse of the current deficit.

    Think about what net financial assets means. In the national accounts aggregate savings (AS) = Investment. If we take the government deficit out of the equation, we can say domestic savings (S) + the foreign sector capital account = Investment + increase in net financial assets (S-I).

    Net financial assets then are that element of aggregate savings (AS) borrowed by the government sector.Government spending in the GDP equation is not split between consumption and investment spending.

    There is insufficient aggregate demand/GDP for domestic firms to profitably invest both domestic savings and the foreign surplus, as demand met by imports exceeds overseas demand for UK exports (the UK being a service dominated economy). Unless the trade deficit can be narrowed this situation will continue.

    The UK and the US are something of an anomaly among the wealthier developed countries in being large net importers of capital unlike the big manufacturers Japan and Germany (or the EU as a whole) and the oil exporters.

    The US is a large and diversified economy not overly reliant on foreign trade that attracts major foreign investment. The dollar is the dominant international reserve currency and US treasuries the go to safe haven in times of volatility in international financial markets.

    The UK is also a major financial centre. As long as wealthy foreigners are buying Premiership football clubs, high priced London apartments and stash ill gotten gains in city financial institutions we should be able to sustain a large current account deficit indefinetely. However, I wouldn’t want to bet the farm on large trade imbalances continuing forever without causing some economic disruption for debtor and creditor countries alike down the line.

  • Peter Martin 7th Sep '18 - 6:29am

    @ JoeB,

    I think we might be slowly grinding our way to some sort of consensus. I might just make the following observations:

    “If we take the government deficit out of the equation…..”

    You can’t do that. At least not so early in any explanation of what’s going on.

    “Unless the trade deficit can be narrowed this situation will continue.”

    Yes if you mean the current situation which does include Govt, and means Govts have to run budget deficits. That’s why you can’t leave Govt out of the picture.

    “…..as demand met by imports exceeds overseas demand for UK exports”

    Yes that will always be true if the pound’s value is inflated because of the capital inflow.

    “The UK and the US are something of an anomaly among the wealthier developed countries in being large net importers of capital unlike the big manufacturers Japan and Germany (or the EU as a whole) and the oil exporters.”

    Any big net exporter has to prevent their currency rising in value somehow. Otherwise they are priced out of the market. This means they have to discourage capital inflows.

    “As long as wealthy foreigners are buying Premiership football clubs, high priced London apartments and stash ill gotten gains in city financial institutions we should be able to sustain a large current account deficit indefinitely”

    Maybe. But should we want to run our economy on this basis? We should be looking at ways to stop the influx of unwanted capital which just inflates the pound’s value, sucks in too many imports, and kills our own industry. Presumably German football clubs aren’t for sale in this way?

  • Peter,

    net financial assets equates to lending to governments, so naturally as government borrowings increase and business investment decreases, this will be mirrored by a increase in the difference between non-government savings and private sector investment.

    If you had a Chancellors debate on the issue it might go something like this:

    Conservative – More government borrowing leaves less private sector savings available for use by business, crowding-out the investment British companies need to create wealth.

    Labour – We need to invest in our NHS and public services, nationalise the railways and utilities and abolish university tuition fees. We will borrow on the international markets to restore the vitality of our welfare state.

    Libdems – In normal times, we will borrow for investment only to rebuild our public housing stock and public infrastructure. The economic gains will fund the debt service costs we incur on borrowing and develop our wealth-producing capacity as a country.

    That’s why economics should properly be called political economy as it used to be.

    PS: German football clubs are required to be majority owned by local supporters. A sensible policy that prevents these community clubs being sold-off to the highest bidder.

  • Peter Martin 8th Sep '18 - 7:26am

    @ JoeB,

    “net financial assets equates to lending to governments”

    Well yes. I’ve always said that government borrowing is the surplus of the private and overseas sectors combined. So we agree on that?

    The point about the sectoral balances isn’t that they tell you everything you need to know. They don’t. But they are useful and they do allow an insight into when we need to worry about deficits, and not just Govt deficits, and when we don’t.

    You’re right too in the way politics distorts our view of how the economy actually works. Being on the left, I would be in favour of a larger public sector than most Lib Dems, who, in turn would probably be in favour of a larger public sector than the Tories. But, it’s just a matter of opinion. There’s no ‘correct’ figure such as 40% of GDP or whatever.

    The big mistake made by those on the right is to think you get smaller Govt by running smaller deficits. And then to think you get smaller deficits by cutting spending and raising taxes. That’s not usually true. I’d rather they at least knew what they were doing so they could at least realise their objective in a sensible way without running the economy into the ground when they get it all wrong!.

    I favour the German model re football clubs too. But, better regulation of football clubs will be the only a small part of what is needed to keep out unwanted foreign capital.

  • Peter,

    “The big mistake made by those on the right is to think you get smaller Govt by running smaller deficits.”

    I am not so sure about this, you might get smaller government just not a smaller deficit. I don’t think cutting corporation tax for companies while cutting welfare benefits was a justifiable policy. The arguments were based on increasing investment. Cutting spending at the lower end of incomes will not reduce the deficit as it takes spending out of the economy and relies on making that up with capital spending by business. It is effectively a redistribution of income from the poorest to large corporations.

    Equally cutting government spending in the first years of the coalition from 2010 was a big mistake that took two years to be corrected and reversed. It is hard to believe that it wasn’t understood this would slow the recovery and Vince cable was trying to make clear at the time.

    I do think automatic stabilisers can do most of the work of smoothing the impacts of spending and tax. Ultimately, fiscal stimulus has to be part of the policy mix but the distribution of income is equally important. For a stable economy income needs to be recycled as spending. If more and more of national wealth is accumulated as non-productive capital we will be back to the days of subsistence wages for the great majority and most value created in the economy going to rent-seeking activities.

    Almost all large government debt prior to WW2 was incurred to finance wars in the18th, 19th and 20th centuries.. Wealth was concentrated in few hands and two main asserts – Land and Gilts. The Victorian economy boomed after the defeat of Napoleon, but very little of the massive increase in wealth production filtered down to the great mass of working people.

  • Peter Martin 9th Sep '18 - 9:30am

    I am not so sure about this, you might get smaller government just not a smaller deficit.

    Yes sure – you might. But equally you might not. Say you had a Govt which represented 20% of GDP. This would be considered small. Say the country was a net importer to the tune of 5% of GDP. Say also that the population were keen savers (or keen acquirers of net financial assets. However you want to put it) also to the extent of 5% of GDP. So the Government’s deficit would be 10% of GDP. This would be considered quite large.

    So arithmetically it’s quite possible to have a small Govt and a large deficit.

    “Almost all large government debt prior to WW2 was incurred to finance wars in the 18th, 19th and 20th centuries.”

    This is true. But if Govts had been more enlightened the same spending, the same borrowing, and the same debt could have been put to better use. But no doubt they felt the same need to ‘balance the budget’ as we do now. It took the prospect of losing a war to make them see things differently.

    Wars, and WW2 in particular, saw a huge jump in technological achievements. So much so that less than a quarter of a century afterwards the USA put a man on the moon. This, in itself, was more an indicator of technological progress. But it wouldn’t have happened without the wartime spending.

    The real rise in living standards was a as a result of better communications, better computers, better production methods etc. Which were all made possible by that wartime spending. Also in may ways, the western economies were still on a quasi-war-footing. There was Vietnam and the wider Cold war spending generally.

    Another thing to bear in mind is that currencies were largely tied to gold, either directly or indirectly with pegs to others currencies, until fairly recently. Except when wars broke out of course. This does change macro-economic possibilities considerably. The right still believes in the constraints of the gold standard even as it disappears into ancient history!

    There’s nothing like a war to focus the minds of the PTB on how economies really work!

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