Part 1
“Never point out your own mistakes” seems like a good political maxim, so why should we ignore it on this occasion?
Of course, not everyone agrees that austerity was a mistake at all, and some say we should embrace our coalition record. That would be a monumental mistake. Trying to embrace austerity would be like Labour trying to embrace the Iraq war, it would be untenable.
Many people point out that all the major political parties were pushing austerity at the time: during the coalition Labour boasted that the government had, more or less, kept austerity to the levels Labour suggested. Clearly this wasn’t something the Liberal Democrats were solely responsible for. That doesn’t mean it wasn’t a mistake though or that no one knew it was a mistake at the time. While it’s true that many economists working for large banks were very clear that government debt was definitely the problem (and noticeably not the banks themselves!) academic economists took a rather different tack- their warnings were clear and broadly, as it turned out, correct. Even the IMF famously chided the coalition for being too reckless with austerity.
Estimates of GDP per household lost due to austerity in the UK vary with from some at £4000 per household and the Oxford economist Simon Wren-Lewis’ guess being more like £10,000 per household. There is no suggestion it did anything positive. (Simon Wren-Lewis’ book ‘The Lies We Were Told’ chronicles this beautifully. Also worth seeing is the recent report from the NEF featured in Bloomberg estimating the cost at £100 billion.) The famous academic paper (by Reinhart and Rogoff) that was used as political cover for austerity in 2010 turned out to be based on a simple maths error and was ultimately disgraced. Traditional macroeconomics won out- if interest rates go to zero, which they did, governments must either increase spending or hold back their own economies- we chose to hold back our economy.
It’s estimated that around 50,000 UK citizens died unnecessarily due to austerity during the coalition with more afterwards. Which is why it sticks in the throat a little when we’re told, and I’ve heard this a few times from more coalition supporting Lib Dems, that the coalition was “the best government since 1945!” I would gently point out that that the post-1945 era includes the Attlee government, which took on the ideas of Keynes and Beverage, both Liberal party members.
There are people who will still argue we had to worry about holders of UK debt panicking, even though as a country with its own currency UK bondholders are worried about inflation and Bank of England interest rates rather than default and so there was no real worry of UK debt exploding. Even if you don’t buy the economic argument, and I’ve only been able to lay out a small part of it here, austerity is now wildly unpopular and it is particularly unpopular amongst the young. This is only going to become more politically salient.
Of course it’s important to be “electable”- are we “a party of government or merely a party of protest?” being a common turn of phrase. We know that austerity is deeply unpopular. You may have noticed we lost a couple of seats in 2015 and our vote share dropped just a tad! So it’s not clear how supporting austerity makes us more electable, quite the reverse.
Then there’s the third argument- ideology. We are reminded that our party harks back to “a great Liberal tradition!” This misunderstands the Liberal tradition that the Liberal Democrats follow, not to mention the Social Democratic one, I’ll discuss why that’s the case in part 2.
* Stephen is a Council Member for the Social Liberal Forum.
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73 Comments
Thank you for an interesting and informed article on a fundamentally important matter.
Perhaps we are colluding at our nation’s economic and financial self harm until we change our economic policy assumptions and start a highly visible and well informed discussion on economics and finance?
Hudson M, Keen S and Brown E are interesting and helpful writers on such matters.
Absolutely. Defence of austerity was one of the things which caused me to leave the party recently.
The Atlee Government consumed beverages. They embraced Beveridge.
It is important to understand why austerity is a pretty stupid economic policy as well as being against it simply because it is unpopular.
Austerity economics fails on even its own terms. The government’s income, unlike nearly everyone else’s in the economy, isn’t independent of its spending. If it cuts its spending it cuts its income too as the economy also slows. The deficit might even increase if confidence is so low that the decrease in total spending is greater than originally expected.
The Government’s income is largely determined by the buoyancy of the economy. So a quick way of increasing that without increasing Government spending is to encourage everyone else to borrow and spend. In other words the Govt reduces interest rates and stokes up a credit bubble. High prices rise, credit card debt expands, the car market booms on the back of cheap loans.
The party can’t last for long though as the accumulated debt then slows down the economy leading to a return to recession and higher deficits. We’re not far off that now.
Public spending totalled 673 billion in 2010, with a debt of 1.1 trillion which required interest servicing of 31 billion. In 2018 spending was 800 billion with a debt of 1.8 trillion and interest servicing of 55 billion. Not sure where the austerity is in that, would be better to promote a much fairer sharing out of the 800 billion, including closing down much of the political class who live off the back of government inefficiencies. As a country that is pathetically dependent on imports – hence all the fear involved with Brexit – the currency has already been terribly ruined by Gordon Brown and Brexit so a new frugality needs to emerge…
Thank you to Stephen Richmond for this important post. Failing to deal with bad mistakes and reputational damage does our opponent’s job for them. It breaks my heart that the Party helped enable austerity – not only was this a betrayal of our rich intellectual heritage and the platform we fought the 2010 Election on (http://news.bbc.co.uk/1/hi/uk_politics/8565722.stm), but it has damaged our country and helped create fertile conditions for opponents to prosper. That our leadership chose to try and take ownership of the Coalition’s economic policies was political foolishness on stilts. If we want to be a grown up Party of Government – rather than a marginal force – this is one thing we need to recant and promise to never do again. If the Conservatives can overcome appeasement, the poll tax or being the ‘nasty party’, and Labour the second Iraq War, stagflation or the winter of discontent, then we should be able to do this too. We’re better than them, right?
All 3 parties had it in their manifestos because mainstream economic “experts” mainly said it was required, surely? Should non-expert politicians ignore the weight of expertise and instead pick and choice the economic theory and theorists that they like? You would be no better than brexiters and their reliance on Minford, no?
Simon-Wren Lewis is a pretty good economist. His blog focuses on the real issues. This week he was discussing real wages and he makes some important points that are often overlooked in the media (and by Conservative and Labour poiticians):
“… GDP is not the right measure to use if you want to know about standards of living, because it can increase just because there are more people producing things in the economy. A much better measure is GDP per capita (GDP divided by the total population), and that only surpassed pre-GFC peaks at the end of 2015. It is one of the great ironies of UK politics (and a big media failure) that the growth the Conservatives like to boast about is in good part due to immigration they want to stop.
Yet GDP per capita is still higher than it was pre-GFC and real wages are not. The main reason for that is the exchange rate. We have had two very large depreciations since the GFC: one that happened as the crisis was unfolding and one as a result of the Brexit vote. This raises the price of imported consumer goods, which reduces real wages relative to GDP per capita. Another way of making the same point is that although each worker is producing a bit more stuff than pre-GFC, that stuff buys less overseas goods than it used to, which means workers are worse off.”
“…the overall message is that the main reasons for lower UK real wages are stagnant productivity and a decline in sterling. ”
” To increase UK real wages we need to improve productivity, and that means not hitting investment on the head with first austerity and then Brexit. Evidence suggests that the best way to increase productivity is by raising demand so firms need to invest to meet that demand. Raining public investment would be the best way to stimulate aggregate demand.”
That in a nutshell is what needs to happen both to improve the lives of everyone in the UK and to win elections.
The Coalition govenrment and Tories since reduced government spending much less rapidly than either they or Labour claimed they would do when the Coalition first came in in 2010.
It’s an irony that hroughout the Coaliton, the annual governement déficit remained at levels that would have pleased Keynes, I believe, given point i teh economic “cycle” Perhaps, this is why UK fared better than countries like Spain, where cuts were much harsher, although government debt and defict was less (initially) in Spain.
I can’t help feeling discussion of UK austerity should be put in context with what happened in other European countries. When this is done, UK comes out RELATIVELY well.
That doesn’t mean it comes out WELL. In 2010, inheritance of an annual deficit of 11/12% presented a range of bad choices.
I am fairly neutral about whether “Austerity” is still needed now but the important point is that borrowing is an idiotic strategy in the long term. Our aim should be for Government to be in surplus most of the time & we should be honest that means higher Taxes or Lower spending.
For Governments, as for individuals, Debt means paying money to other people, surplus means they pay you. The difference of course is that individuals can’t control their own Income while Governments can.
Paul Barker,
governments do need to borrow within budgetary constraints to maintain and increase investment over the longer-term, just as firms need to borrow to invest in innovation and growing their capacity or households when they are making big capital expenditures like houses and cars.
I do think that current spending (including amortization of prior years capital spending) should be financed by current taxation outside of economic downturns and this will likely require higher taxes (particularly on land and wealth) to meet the needs of a rapidly ageing population.
@JoeB,
“Yet GDP per capita is still higher than it was pre-GFC and real wages are not. The main reason for that is the exchange rate.”
I don’t know about that. Real wages are wages relative to prices and if the exchange rate falls, and GDP per capita will fall or rise depending on which currency it is being measured in. There’s usually quite a bit of scope to switch to between currencies to get a result to suit!
The other, perhaps easier to understand factor, is the share of National Income which goes to wage earners. That could fall and be responsible for lower wages.
“To increase UK real wages we need to improve productivity,”
Like most of the mainstream you get this the wrong way around. To improve productivity you need to increase real wages. Think of yourself as an apple grower. You can spend on a machine to pick the apples or you can hire workers to pick them manually. You’ll still need workers even with the machine but their productivity will be higher. So are you more likely to buy the machine if wages are low or if they are high?
@ Paul Barker,
“….now but the important point is that borrowing is an idiotic strategy in the long term”.
The £ is an IOU of government so all government money, all government bonds like Gilts and premium bonds is a liability of the Government. That £10 note in your wallet is a liability of the Government and your asset as the holder. So you can only have an asset if the Government accepts respnsibility for the liability. If you buy Premium bonds you own Government bonds which is GOvt debt. You’ve just swapped one type of Govt IOU for another and that’s all Govt borrowing is.
Everything in an accounting sense has to sum to zero. So if we want positive numbers in our bank accounts someone somewhere has to hold the negative numbers and ultimately that can only be Govt.
If we add all the world’s National Debts they total the equivalent of over $70 trillion. We don’t owe that money to Mars!
Thank you to Stephen Richmond for this important post. Failing to deal with historic mistakes and reputational damage does our opponent’s job for them. It breaks my heart that the Party helped enable the Conservative’s austerity programme – not only was this a betrayal of our rich intellectual heritage and the platform we fought the 2010 Election on (http://news.bbc.co.uk/1/hi/uk_politics/8565722.stm), but it has damaged our country and helped create fertile conditions for opponents to prosper. That our leadership chose to try and then take ownership of the Coalition’s economic policies was political foolishness on stilts. If we want to be a grown up Party of Government – rather than a marginal force – this is one thing we need to recant and promise never to do again. If the Conservatives can overcome appeasement, the poll tax or being the ‘nasty party’, and Labour the second Iraq War, stagflation or the winter of discontent, then we should be able to do this too. We’re better than them, right?
The author is quite right.
The ideological reason for Austerity worked very well indeed.
This was never to deal with the 2008 GFC but to reduce the size of the State and it has certainly worked to do that.
The trouble is that doing this is completely against every economic theory around.
In times of deflation, the Government must spend more money to keep up demand.
Jim Murray
The word “austerity” is a problem.
Austerity to me means that you don’t spend money on vanity projects or plans which deliver a marginal profit in the future.
Austerity to me means meals on the family table and a roof overhead, an occasional trip to the theatre and free walks in the park.
Austerity to me means that everyone gives something, but those who can give most do so.
Austerity to me means that government sets business tax rates to extract money without undermining commerce.
When any part of “austerity budgeting” takes more money from the poor than from the rich, “austerity budgeting” has gone wrong.
@ Chris Moore,
UK comes out RELATIVELY well…..That doesn’t mean it comes out WELL. In 2010, inheritance of an annual deficit of 11/12% presented a range of bad choices.
You, too, are hung up on the idea that deficits are bad and surpluses are good. National economies aren’t like companies with surpluses to be equated to profits and deficits equated to losses.
The Government running a surplus means it’s taking out more from the economy than it’s putting back in. So, from that POV a surplus doesn’t sound so good. If the Govt is in surplus it means someone else is in deficit. This someone else is probably the average voter. So try getting his vote by telling him you want to put him in deficit! Not a good idea. 🙂
Surpluses and deficits have to be looked at in the wider context of what else is happening in the economy. Is the economy losing ££ to pay for net imports? If so then they need to be replenished from somewhere and that means Govt running a deficit.
The Govt should be only concerned with inflation on the one hand and a depressed economy on the other. It needs to tailor its spending and taxation levels to strike a sensible mid course. Sometimes there will be surpluses and but usually there won’t.
@ James Murray,
Does austerity shrink the size of the State? If you want workers to pay more of their their own healthcare, for example, you’re going to have to ensure they have stable well paying jobs. You aren’t going to get that by imposing austerity economics. There is a way to reduce the size of the State but that does have to involve expansionary economic practice too.
Before this thread becomes yet another argument between the economists here, could I please plead for our party to oppose austerity with immediate effect, by demanding that the freeze on welfare benefits, due to last another year, should be ended. Our poorest citizens are going to have too hard a time as it is, with the increase in council taxes next month. Our first priority as a party should surely be to demand that our policies on welfare and taxation reforms should be taken up.
I reluctantly supported austerity at the time because something clearly had to be done to try to balance the books. Yes, there were alternatives; but the Coalition went for belt tightening and, in a rather macabre way, it has worked to some extent. However, you do have to ask yourself whether the ‘cure’ has actually done more damage than the ‘disease’.
Katharine is right about all those amateur economists getting off on arguments that quite frankly get us nowhere. We are where we are. I just wish that the lessons of 2008 had been learned and that, by now, we would have had a more effective control of tax havens and the global finance in general, which quite frankly keeps putting two fingers up to democratic accountability.
Unlike Lord Mandelson I am just not “perfectly relaxed” about people getting “filthy rich”, regardless of whether or not they agree to pay their taxes. Just how much money does one person need anyway?
@Katharine Pindar – absolutely agree! BTW, I was interested to note that TIG are currently circulating an email petition to end the benefits freeze, with an accompanying video from Heidi Allen.
Perhaps some fundamental questions on “our”austerity might include the following:
Is “our” economy run for the benefit of our society or is our society run for the benefit of “our” economy?
Do weath and power have a correlation?
If so, is a consequence of “our” austerity, which is an accelerating diffence between the wealthy and not wealthy, have serious consequences for our democracy?
How much independence is actually possible for “our” economy in view of the power of the “economic” theories and practices of the USA?
Does the main stream media present an unbiased representation of economic theories and practices?
@ Sean Hagan and @ Katharine “I was interested to note that TIG are currently circulating an email petition to end the benefits freeze”.
The Lib Dems could have done that. Why didn’t they ?
February stats from my local foodbank : Rising trend : 402 people fed (38% children).
Reasons ? 33% low income 27% benefit changes 18% refused crisis grant.
Last twelve months 5,103 fed (1,915 children). 49% single people, 23% single parents with child, 15% to families 9% to couples 4% others. Why ? 28% low income, 27% benefit (UC) changes and delays.
Katharine,
the party has been calling for an end to the benefits freeze from this year since the Autumn of last year https://www.libdems.org.uk/cable_speech_calling_for_a_halt_to_universal_credit
The economic austerity being referred to by the author of this article is concerned with its macro-economic impact on GDP, borrowings and overall spending in the economy etc.
Ending the benefits freeze is simply a spending choice priority. Something that can be done whether or not the Chancellor retains austerity as a central plank of Conservative economic policy or whether Libdem welfare and taxation policies are taken up by the government.
Vince Cable….”[But] the fact that UC is becoming loathed and is being implemented incompetently and harshly does not invalidate the reasoning behind it. I strongly repudiate the Labour Party’s suggestion that Universal Credit should be scrapped without being clear what the replacement is: a classic case of soundbites taking precedence over thought-through policies .”……………
Governments are famous for ‘great idea’s but when costs, workability and adverse affects become it’s defining feature that is the time to say, “Enough is enough”.
As for the remark “without being clear what the replacement is”; perhaps someone should tell Vince that most claimants are still on the ‘old system’ which is far more effective and far less costly!
Katharine,
“….could I please plead for our party to oppose austerity with immediate effect, by demanding that the freeze on welfare benefits
Yes I would agree that welfare benefits should be unfrozen. BUT it would take more than that to end austerity economics.
@ John Marriott,
“We are where we are. I just wish that the lessons of 2008 had been learned…”
I can understand your frustration about economists. I wish the lessons had been learned too! BUT what would you say they were or should be? There’s been quite an attempt to convince us all that it was high Public debts which were cause of the problem which is just Bullsh*t !
Expats,
the welfare system has never been satisfactory and never will be until the problem of rents that Beveridge identified https://www.theguardian.com/housing-network/2012/nov/22/beveridge-problem-rent-welfare-reform is addressed and we are able to move away from a reliance on means testing that Beveridge expected would dwindle away over time. Both Universal Credit and the Legacy system are completely reliant on extensive means testing, coercion, and increasingly costly and inadequate housing benefit payments.
Peter Martin,
The basic accounting equation is Assets less Liabilities = equity. The government has no equity of its own, it is simply a pass-through agency holding assets and incurring liabilities on behalf of the public. When the government spends money it simultaneously creates a claim against the personal assets/income of taxpayers. Those claims are satisfied by tax collections in the current period; deferred tax collections in future periods as government debt matures and is repaid from taxes; or inflation and/or currency depreciation to erode the value of savings. New debt is issued to fund new capital spending and/or current spending deficits.
Taxpayers generate income by producing goods and services and create equity by saving (not consuming) part of their production. The more the government spends the greater the level of claims against the private assets/income of taxpayers. Hence, government spending cannot exceed the capacity of the working population to generate the income that enables that spending to be maintained year after year. Attempts to increase per capita spending and the overall level of taxes, when the economy is at full employment, without generating corresponding increases in productivity that increase per capita GDP always depress household disposable income, offsetting any increased demand generated by government spending.
Redistribution of income (goods and services produced) can be effectively achieved, (without depressing real wages or household incomes) by taxation of economic rents. This is primarily a tool to address poverty and inequality through a fairer distribution of value created in the economy. However, some macro-economists like Joe Stiglitz have produced economic models that suggest lifting the deadweight of taxes on wage incomes by shifting the burden towards land rents would generate significant increases in productivity and real wages.
Increasing real wages by strategic investment in the economy is the real issue and ultimately the only means to improving overall standards of living.
@ Joe B,
“The government has no equity of its own”
Well of course it does. It owns the BoE and the BoE owns gold reserves. It owns land, mineral rights, public buildings. But I agree that this doesn’t matter when we are just discussing the financial system which is now totally disconnected from gold.
But on the wider question of the significance of US or UK government National Debts of £20 trillion and $2 trillion we have to consider the assets too. In the case of the US just what are the total assets of the US government? There’s oil and mineral reserves, lots of Federal land and buildings, the electromagnetic spectrum, fishing rights. These are just about incalculable but they are orders of magnitude larger than any debt.
But it doesn’t really matter anyway, in a financial sense, because there is no guarantee of anything at all in exchange for a US$. At one time the guarantee was a qnty of gold. Now you’ll just get 10 dimes!
I agree with you, Stephen Richmond and with what you have written in your article. We had a different economic policy in our 2010 manifesto, but our MPs and in particular David Laws wasted no time in ditching it (according to David Laws’ own book ‘22 Days in May’).
Joe, I am pleasantly surprised that you quote Simon-Wren Lewis with approval, “Evidence suggests that the best way to increase productivity is by raising demand so firms need to invest to meet that demand”. In the past you have given the impression that you didn’t think that raising demand would drive more to be produced.
Michael BG,
I have always made the distinction between strategic investment that increases productivity and consumption spending in an economy near full employment. The first raises demand and the ability to meet it. The second raises demand but not the resouces to meet it so prices increase instead without any lasting increase to living standards.
This is Simon-Wren Lewis key point about real wages and why he says “…the overall message is that the main reasons for lower UK real wages are stagnant productivity and a decline in sterling. ”
Spending on consumption in the UK is approx 64% of GDP. Spending on imports is circa 32% of GDP.
Joe Bourke: I like this article, Joe, and I admire your own economic analyses as they relate to our party’s policies. But we do need to do more to bring these policies to public attention, by I think constant iteration of the needs in practical terms, such as showing the food bank statistics in particular areas as David Raw does, and linking the needs to the policies we have to offer. I was concerned at my own local party’s Executive meeting where my suggested motion for Conference promoting Philip Alston’s ideas was discussed, when one of our members objected that we must as a party provide proof of how we are going to pay for welfare enhancements. If a committed Liberal Democrat is worried about that, there is little hope that Mr and Mrs Jo Bloggs will be assured that we have the answers. This site will lighten my own ignorance about macro-economics, but it will not readily lead to discussion of how we can tell the public about our valuable proposals for ending austerity.
Whether “austerity” worked depends on what is meant by it, and the answer to “worked for whom?”. We need to consider how we frame our policies.
We need to start to look at what we mean by consumption. What can be sustainably consumed by people? We are in the position where we have destroyed many of our planet’s ecosystems, where we are making our planet into a large garbage tip. We are polluting our land, sea and air.
There is a need to have a vision of how people can actively manage the planet. This can only be done by the involvement of everyone.
We must also consider the enormous amounts of voluntary work being carried out – work which underpins our society.
The problem with the concept of austerity is not just the over simplicity of analysis, but a failure to even start to analyse the real lives of real people. The way to start this is to involve them. We need to move our ideas of democracy out of the nineteenth century.
“If we want to win elections we have to denounce austerity “.
Yesterday : Britain Elects @britainelects
Haddenham & Stone (Aylesbury Vale) result:
GRN: 50.8% (+36.5)
CON: 32.8% (-3.3)
LDEM: 14.0% (+3.6)
LAB: 2.5% (+2.5)
Green GAIN from Conservative.
No Ind(s) (-25.4) and UKIP (-13.9) as prev.
00:12 – 8 Mar 2019
@ Katharine,
“…….when one of our members objected that we must as a party provide proof of how we are going to pay for welfare enhancements.”
The killer question “how are you going to pay for it” is always going to be fired at you by the neo-libs and those who don’t know any better. If you go back to the early days of WW2, and slightly earlier, the feeling was that there was no way the country could afford a war, simply because there was no money in the kitty after the 30s depression.
Keynes answered this in his short book “How to Pay for the War”. It makes interesting reading still. The underlying idea is that it isn’t the amount of money that matters but the real resources which are available in the economy.
An unemployed young person, who is in receipt of welfare benefits, or, even worse, has ended up in jail because of a poor environment and poor life chances is waste of resources. With the right approach they probably don’t need and never have needed welfare benefits. Utilising all the resources which are available to us is just as important now as it was in wartime days – and we don’t need to start another war to relearn what we should already know!
https://en.wikipedia.org/wiki/How_to_Pay_for_the_War:_A_Radical_Plan_for_the_Chancellor_of_the_Exchequer
Katharine,
ending the benefits freeze is a spending priority choice as Vince Cable points out in this article last November https://www.scotsman.com/news/opinion/vince-cable-brexit-s-real-life-impacts-are-already-hitting-uk-hard-1-4823306
“Hammond also decided to lift the tax threshold for higher earners to £50,000 a year early, which we voted against this week. The move will cost the Treasury about £1.3 billion, which should have been used to fill the hole in Universal Credit or end the benefits freeze a year early.”
@ Chris Moore
In our 2010 manifesto we talked of having an economic stimulus after the election and waiting until the economy was strong enough before trying to reduce the deficit. 2010 was not a good point to deflate the economy and so by the end of 2011 and beginning of 2012 the Coalition’s austerity economic policies nearly put us back into recession. At the time it was reported that we were back in recession. We must never forget how badly we failed in running the economy in those years.
@ Joe Bourke
Government investment in infrastructure does not increase productivity. It is the increase in demand generated by the increased government spending, linked to the need to invest to increase productivity because it is not possible to increase the amount produced by just employing people, which leads to increased productivity.
Building infrastructure in the most economy depressed areas can encourage business to locate to those places but doesn’t increase the amount being produced.
Michael BG,
see consultation paper https://d3n8a8pro7vhmx.cloudfront.net/libdems/pages/13634/attachments/original/1487155349/21stC_Consultation_Paper_(Online).pdf?1487155349
“3.5.1Britain needs better transport infrastructure, a modern railway system, and less congestion on our roads with a focuson sustainability and greener energy. The current low interest rates make this an ideal time to make good Britain’s historic lack of
infrastructure investment, which is universally recognised as a major hindrance to our productivity and international competitiveness. Our existing policy commitments include ensuring new rail franchises include a stronger focus on customers, including a programme of investment in new stations, lines and station facilities, setting out 10-year rolling capital investment plans, developing a comprehensive plan to electrify the overwhelming majority of the UK rail network, reopen smaller stations, restore twin-track lines to major routes and proceed with HS2, a new round of funding to bring more private investment into renewable energy, and making saving energy a top infrastructure priority, though a programme of public investment, market regulation and tax incentives. We also want to see a programme of installing hyper-fast, fibre optic broadband across the UK.”
Libdem economic policy https://www.libdems.org.uk/economy
“A long-term stable economy requires more than just discipline over spending. It requires us to invest in people, innovation and infrastructure in order to give our economy the opportunity to remain competitive for the future.
Liberal Democrats will therefore commit to a responsible and realistic £100 billion package of additional infrastructure investment. This will prioritise:
New direct spending on house-building to help build 300,000 homes a year by 2022.
A programme of installing hyper-fast, fibre optic broadband across the UK.
Capital investment in schools and hospitals to support capacity increases and modernisation.
Significant investment in road and rail infrastructure, including a continued commitment to HS2, Crossrail 2 and rail electrification.
Additional funding to bring more private investment into renewable energy.
£5 billion of initial capital for a new British Housing and Infrastructure Development Bank, using public money to attract private investment for these priorities.”
Joe, what you have posted doesn’t change the facts, building better and modern infrastructure is a very useful thing to do, but it doesn’t increase productivity, but if done in the poorer areas of the UK it should encourage businesses to set up in those areas. Having more things being produced in an area does not mean productivity has increased.
Building a new road does not increase productivity, but it could mean that more is produced because it can get to its market quicker. However, if demand for the items does not increase then the amount produced will not increase. The important thing is increasing demand, which leads to businesses wanting to increase the amount produced and they can do this by either increasing the number of people they employ or by increasing productivity.
Michael BG,
as the consultation paper notes “Britain’s historic lack of infrastructure investment,is universally recognised as a major hindrance to our productivity and international competitiveness. This FT article discusses the issue https://www.ft.com/content/cac19ffa-fc7f-11e7-9bfc-052cbba03425
As noted earlier spending on consumption in the UK is approx 64% of GDP. Spending on imports is circa 32% of GDP. Trade with other countries constrains the ability of domestic fiscal policymakers to use stimulus policies. In 1981, Mitterrand implemented a program to stimulate aggregate demand through increased government spending and tax cuts .
There was an initial boost to French growth in 1982 (from 1.6% to 2.4%) but it quickly vanished, with growth falling back to 1.2% in 1983.
The upturn in the French economy led French households to increase their spending, but much of this was on foreign goods. The French stimulus spilled over to countries that produced more competitive products, like Japan (electronic goods) and Germany (cars). There was a surge of imports into France and of exports in Germany. The French stimulus policy mostly benefitted its trading partners who had more competitive goods. France slipped behind the other European countries, with lower growth and a higher government budget deficit than it had before the stimulus.
The failure of Mitterrand’s policy was reflected in economic terms by pressure on the French franc. Between 1981 and 1983, the French government had to devalue the franc three times in an effort to make French goods more competitive with those produced abroad. A new Prime Minister was appointed and an austerity policy introduced to repair the damage.
The Mitterrand experiment highlights the limits of using a fiscal stimulus. In the case of France. Most of the stimulus leaked out of France. This is an example of poor policymaking due to a failure to understand the country’s links with the rest of the world.
Michael BG – I kinda agree with you that infrastructure investments only indirectly improve productivity, except for broadband and digital infrastructures because they directly affect tech firms, as well as energy production, which also directly affect firms’ operation.
I have to say that, it is the means of production, plants, machinery and equipment of businesses that directly affect national productivity. And all three parties’ manifestos seem to ignore this area. Now, if LibDem decides to spend, say, £10bn to subsidize automation in manufacturing, it will directly boost productivity.
https://www.barclayscorporate.com/insight-and-research/industry-expertise/investment-in-automation.html
Invest £1.2 bn in automation can generate an extra £60.5bn to the economy.
Joe, I sometimes wonder if you actually read what you post links to – “Policymakers believe infrastructure improvements are vital to improving the UK’s poor productivity performance” (bold added). Please note it is a belief and not a fact.
It also quotes, Tej Parijh, “Infrastructure is one piece of the puzzle. It’s the facilitator, but investing in infrastructure alone won’t solve the problem”.
Average economic growth in France 1980-84 was 1.2% compared to 0.9% in West Germany and 0.7% in the UK. That looks like France’s economic policy was not a failure compared to others as you suggested. Also lots of the stimulus was spent on public works, research and investment in the nationalised industries.
It seems to me that the main reason for the failure of France to achieve full employment in this period was that it was in the ERM and the monetary policy of the Bank of France was to try to keep the franc overvalued, the USA’s high interest rates and the too low valuation of the Deutschmark. (When the UK was faced with currency pressures we left the ERM in 1992; in “August 1993 the margin (of the ERM) was expanded by 15% to accommodate speculation against the French franc and other currencies” [Wikipedia]). I think having an overvalued currency is a bad thing and when this happens the currency should be allowed to fall in value.
Michael BG,
Investing in modern buildings and equipment for schools and hospitals increases the productivity of public services workers directly. Investing in road and rail newtorks improves the capacity to move goods and people aroud the country. The linked FT article is headed “Outmoded infrastructure blamed for UK’s productivity slowdown – Better digital and physical connections could unshackle UK business, economists say”
As the article notes, “Policymakers believe infrastructure improvements are vital to improving the UK’s poor productivity performance. It is seen as an enabling factor: fast broadband and good road and air links do not necessarily make a business successful and productive, but it is hard to be so without them.”
Libdem policy is set-out in the manifesto https://www.libdems.org.uk/economy
“Liberal Democrats reject the Conservative Government’s damaging and irrational commitment to run budget surpluses on both capital and revenue, which imposes completely unnecessary deep cuts in spending and limits the scope for much-needed capital investment. But we have no intention of just throwing away our hard-fought efforts to control the deficit during the Coalition years. Liberal Democrats will therefore commit to eliminating the deficit in day-to-day spending by 2020. This means we will be able to keep debt as a share of national wealth falling through the Parliament, unless there is a recession. Once we have brought current expenditure into balance we will ensure that overall public spending grows roughly in line with the economy. This means that we can improve key public services and provide them with the investment they need.
A long-term stable economy requires more than just discipline over spending. It requires us to invest in people, innovation and infrastructure in order to give our economy the opportunity to remain competitive for the future.”
A fiscal stimulus (outside of recession) is not required and counter-productive in a trading nation like the UK where a large element of consumer spending is on imported goods.
Libdem policy is straigtfoward “to keep debt as a share of national wealth falling through the next Parliament, while maintaining a steady level of borrowing for capital spending.
Improved productivity provides for growth in real wages (as Simon-Wren Lewis explain). Fiscal stimulus provides no log-term growth only a short-term pump priming.
Joe, I know that you believe that building things increases productivity but it doesn’t. Only if demand increases, and businesses can’t employ more people, do businesses decide to invest to increase productivity.
If a new school is built each teacher working in the country does not produce more educated children, what happen is more teachers are employed and more educated children are produced. Productivity per teacher has remained unchanged.
Having the capacity to move goods round the country does not improve productivity. If demand increased somewhere and a business wanted to produce more and use this new spare transportation capacity it could either employ more people (like in the school example) or invest in their business so their existing workers produce more and so increase productivity.
To be clear building these items does not improve productivity but it should increase demand and then businesses have the choice either to employ more people or increase productivity. So long as businesses have the option of just employing more people they are unlikely to invest (as it costs money) to improve productivity. This is why I advocate that the EU spends more money in the poorer countries and regions to encourage businesses to set up there and so reduce the need for people to migrate to be better off.
I have already informed you that there is now a surplus on current government spending. I agree we need to spend more on investing in people. I also think it would be good to encourage innovation but governments have always found it difficult to pick winners.
(Just because it is Lib Dem policy is not an argument that it is the right policy.)
Michael BG,
Productivity gains come from both public services and the private sector of the economy. The focus of government policies should be on making businesses and markets more competitive. Maintaining a constant higher level of public capital investment financed by borrowing (as advocated in the Libdem Manifesto) acts on the demand and complements supply side policies.
Policies that can be deployed to improve productivity include:
– Increasing government and private sector investment on infrastructure e.g. improving telecommunications (broadband) and transport networks (road, rail and ports) to speed movement of people and goods and lower the cost of doing business
– Expanding the size of the capital stock and reduce the average age of capital by encouraging a higher level of business investment (inward and/or domestic) – for example through maintaining internationally competitive rates or corporation tax or a sustained period of lower interest rates
– Tax and welfare reforms to improve work incentives and increase the incomes from people working more productively e.g. the coalition’s increase in the personal allowance.
– Increasing real wages/household disposable incomes with a shift in taxes on wages towards a shift in taxes on land and wealth.
– Improving the quality and affordability of education and training will increase its effectiveness at raising productivity – for example an expanded programme of apprenticeship schemes, adult education and investment in STEM subjects
– Improving access to and quality of health care to reduce sickness and absence which should increase output per worker
– Facilitating inward migration of skilled labour to improve the quality of the labour force
– Deregulation of markets to encourage stronger competition leading to greater efficiency e.g. increased competition in financial services, retailing
– Measures to boost business start-ups and research and innovation which could all lead to higher productivity in the long run
– Tax breaks on the use of new technologies and low carbon, energy efficient products
– Government measures to increase bank lending to further increase investment and productivity e.g. the Funding for Lending scheme introduced by the Bank of England
– Investment in making housing more affordable improves the geographical mobility of labour https://www.economist.com/the-economist-explains/2015/07/19/how-cheaper-housing-can-boost-productivity
@ Joeb,
“Fiscal stimulus provides no long-term growth only a short-term pump priming.”
You’ve made this assertion so many times without any explanation that I suspect you simply don’t have one. We should be aiming to have a growth rate of around 3%. We managed this is pre GFC days so why can’t we now?
3% growth means that we spend, in total, 3% more this year than last year, if inflation is zero. Or 5% more if we meet our inflation target of 2%. So where is the 3-5% increase to come from? In the past it has, in large part, come from inflating the private sector debt bubble. But interest rates are now so low and the level of private sector debt so high that this is no longer an option.
Or perhaps you think we can expand our economy by conjuring up an export led boom from somewhere? Is there anyone who thinks this is at all likely or even possible?
So the only remaining option is to grow the economy by fiscal measures. If you can’t explain your objection and alternative in simple terms without resorting to obfuscation or appeals to the authority of Simon Wren Lewis (or whoever) then I can only conclude you don’t know what you are talking about.
Peter Martin,
this is a simple primer on fiscal policy that is not difficult to understand https://www.econlib.org/library/Enc/FiscalPolicy.html
“Whether for good or for ill, fiscal policy’s ability to affect the level of output via aggregate demand wears off over time. Higher aggregate demand due to a fiscal stimulus, for example, eventually shows up only in higher prices and does not increase output at all. That is because, over the long run, the level of output is determined not by demand but by the supply of factors of production (capital, labor, and technology). These factors of production determine a “natural rate” of output around which business cycles and macroeconomic policies can cause only temporary fluctuations. An attempt to keep output above its natural rate by means of aggregate demand policies will lead only to ever-accelerating inflation.”
For a fuller understanding of real world economics, I recommend Vince Cable’s 2014 speech to the Royal Economic Society https://www.libdemvoice.org/a-longer-read-vince-cable-on-recovery-and-beyond-37988.html in which he identifies four major areas of policy action required:
– boosting the disposable income of low and middle earners;
– stimulating business investment (with the help of public investment);
– taking action, including through the industrial strategy, to tackle bottlenecks in skills, business finance, exports and UK supply chains;
– and building lots of new homes.
@ JoeB,
You’re still not answering the question. As usual you are resorting to obfuscation with references to what someone else thinks on a topic that is barely anything to do with the original question.
So let me try again. If we are to have 3% growth we need to have at least 3% more spending power. Probably something like 5% as previously explained.
Where is it to come from?
1) More borrowing in the Private Sector.
2) More Govt spending.
3) A boost in our export sales.
So which is it 1, 2 or 3?
Or do you have another option?
Peter Martin,
One of these basics of macroeconomics is Keynes oft repeated quote on the quantity theory of money “In the long run we are all dead.”
Keynes agreed that in the long run the concept of the neutrality of money true and over time wages and prices would adjust to an economic shock and the economy would return to its natural full employment level. However in the short term this may not necessarily be so due to people’s and banks’ preference for hoarding money.
Keynes point was the economy does not adjust instantaneously and the path to equilibrium can take a very long time due to various frictions in the market and people’s change in preferences while adjustments are taking place. It is of little use if economists tell people that in the long run all will be good. Long run can take years.
In the Keynesian model, Governments can speed up the return of to full employment with the judicious use of monetary and fiscal policy.
This is the purpose of monetary and fiscal stimulus – to return the economy to operating at its natural full capacity after an economic shock. As David Weill notes in his article “An attempt to keep output above its natural rate by means of aggregate demand policies will lead only to ever-accelerating inflation.” and “over the long run, the level of output is determined not by demand but by the supply of factors of production (capital, labor, and technology).”
Long-term growth requires both an increase in demand and in supply .
GDP growth UK has averaged 2.3% in the period 1970-2016. In recent decades a signicant element of of that growth has been attributable to increases in labour supply from net inward migration. Population growth does not of itself increase GDP per capita. For that we need to look to other means of increasing supply factors, namely:
– Increased capital. e.g. investment in new factories or investment in infrastructure, such as transport and broadband.
– Increase in labour productivity, through better education and training or improved technology.
– Technological improvements to improve the productivity of capital and labour e.g. the wider adoption of artificial intelligence and robotics.
@ JoeB,
Let me try yet again:
If we are to grow our economy by 3% and hit our inflation target of 2% we need to find another 5% of spending.
Do you agree? 1) Yes 2) No
If yes, where is that spending primarily to come from?
1) Everyone in the UK spending more
2) The Government in the UK spending more
3) Everyone outside the UK spending more? ie they buy more of our exports.
Editorial note
I’ve had to intervene to remove some truly unnecessary rudeness from this stream, which is a pity really, given that it is an otherwise interesting one.
Do try to argue, rather than insult. Failure to do so will lead to further intervention.
@ Peter Martin,
In answer to your “simple” question, I would offer 3) Maybe.
You haven’t indicated whether you mean 3% real growth or 3% growth. They aren’t the same thing.
And, whilst 3% growth may have been viable in the past, is it now? Population growth, its impact on resource availability and the need to make growth sustainable may make a lower target growth rate a more sensible aim.
@ Mark,
I agree that there are those who make the point, quite rightly, that we can’t grow for ever. In that case we need to make a conscious decision that we are quite happy with what we’ve got and we don’t need any more growth. That would be the Green position. So are the LibDems saying that too? I don’t think so.
If the economy doesn’t grow we all know from experience that it stagnates and unemployment rises. We are fairly good at always finding ways of doing the same thing with less effort ie being more productive. So IMO we have to aim for some growth at the same time we are devoting our increased income towards more environmentally beneficial policies.
I’m sorry if you thought I was unnecessarily rude but some people just can’t give a simple answer to a simple question and it can get very frustrating.
Joe, I am glad that you recognise that government investment in building things increases demand. It is this demand that can lead businesses to invest to meet it, and better roads may assist in meeting this extra demand.
Lowering the cost of transportation does not increase productivity. However, having a faster internet could increase productivity if staff were spending a lot of time waiting for their internet to work.
I think increasing minimum wages and especially the ‘National Living Wage’ to 70% of each region’s medium earnings would encourage businesses in the move expensive regions to increase productivity.
I agree providing free education and training should increase productivity and therefore building extra colleges to provide this training to adults might increase productivity of those being educated or trained in the new college (but it doesn’t increase teacher productivity).
Building more houses would increase demand and it is this extra demand which might lead to increased productivity. I would not want to encourage people to move to London and south-east England. Having regional Living Wages would hopefully reverse the migration of people to London and the south-east and instead encourage people to migrate to the poorer regions where the new jobs would be.
Joe, if demand is not increasing why would any business invest in new machinery to increase production and productivity?
Peter, indeed our economy was growing by about 3% a year pre-2008. This is why I advocate increasing government spending by five sixth of the gap between 3% and the forecast level of economic growth so this economic growth can be produced. I think if the economy is only growing by 1% or less this normally leads in the UK to an increase in unemployment.
Michael BG,
“I am glad that you recognise that government investment in building things increases demand.”
I don’t. Maintaining a constant and stable higher level of public capital investment financed by borrowing acts to maintain demand at consistent levels and complements supply side policies to improve factor productivity i.e. the productivity of both capital and labour.
Inreases in domestic demand are a result of increases in real wages and increases in exports are a result of increases demand for British goods. Both are dependent on International competitiveness and total factor productivity.
These are well understood foundations of economics and incorporated by those tasked with developing Libdem economic policy.
Joe, if government spending remains constant there is no increase in demand, if however the government spends extra money in building a road then it will provide extra demand for materials and labour. How can you argue this is not true?
If demand is constant then the economy stagnates and can’t grow. Why would anyone produce more if there is no demand for more? As I have stated if UK growth is 1% or less then normally unemployment in the UK rises.
There can be increased demand for British good either because demand for them has increased in the UK or in foreign countries. How can you argue this is not true?
I thought you believed that real wages can only increase if productivity increases. I have demonstrated that businesses will only increase their production and productivity when there is increased demand. However, if you believe that real wages could increase without productivity increasing then businesses might look to reduce their labour costs by investing to increase productivity.
Michael BG,
under Libdem plans government spending is held constant at somewhere around 40% of GDP. Net capital investment of circa 3.5% is financed by borrowing with the balance of 36.5% financed by taxes.
Government spending in the economy grows as the economy grows not the other way around. The economy, real wages and demand grow by increasing the output of goods and services i.e. real growth (not simply nominal growth).
During recessions, there is a need to stimulate growth with monetary and/or fiscal policy (pump-priming) to restore the economy to full employment. Neither monetary or fiscal policy can raise output above its natural level which is determined not by demand but by the supply of factors of production (capital, labor, and technology).
You cannot increase economic growth in a full-employment economy without increasing either Labour resources through population growth or the productivity of the factors of production i.e. Land, Labour and Capital.
Joe, now you seem to be talking about increasing government spending while keeping its percentage of the economy constant. If you wish to keep the government spending 40% of GDP then when GDP increases you need the government to spend more money. This is a fiscal stimulus.
The amount the government spends does not automatically increase as GDP increases. It doesn’t even automatically increase in line with inflation. The government has to decide on both, whether to increase spending in line with inflation and whether to increase the amount spent in line with economic growth.
Have you not accepted that when the government spends extra money on building things this increases the size of the economy? This is a basic part of Keynesian theory.
Why do you have such a problem in accepting that before a business will produce more, demand for its goods have to increase? This is just basic economics.
Full employment is not full capacity. You must recognise that when there is full employment the economy can produce more by increasing productivity. The 3% target for growth is an historical average which is why it is my target. However, if inflation was increasing rapidly with the government aiming to grow the economy by 3% each year then the government would need to reduce its target to the sustainable level of growth for the UK economy.
The ‘natural level’ is not fixed. It should increase every year. That is why economic growth is possible every year. If the ‘natural level’ was static and the economy was at this level economic growth would not be possible.
Even if every person of working age was engaged in full time employment it would be possible to increase production by increasing the amount of overtime worked. (Maybe pensioners could be enticed back to work; maybe the government would remove some restrictions on employing school children [when I was at school it was possible for a 14 year old to work outside of school hours]). Currently there is the option to employ people from aboard as well. So you are mistaken to believe that “You cannot increase economic growth in a full-employment economy without increasing either Labour resources through population growth or the productivity of the factors of production i.e. Land, Labour and Capital” (bold added).
@ Michael BG,
I’ve said before that it is waste of time trying to have a reasonable discussion with neoliberals. I’d define a neoliberal as anyone who uses the phrase “magic money tree” with any seriousness. 🙂 There’s an ideological block against Government economic activity that it’s just about impossible to overcome. Its a case of private spending = good, govt spending = bad as far as they are concerned.
In the mind of a neoliberal, inflation is caused only by Govt spending. But it should be obvious it can be caused by any kind of spending. Even a demand for exports will push up prices. If the Japanese are in the market for fish, for example, the export of fish to Japan will push up local prices. In the 80’s Mrs Thatchers govt had started to get inflation under control. Then in the late 80s Nigel Lawson inflated the economy with a credit boom and pushed inflation back up into double figures at the same time as the Govt was running just about a balanced budget.
Again more incorrect neoliberal thinking. That wasn’t supposed to happen. The balanced budget was supposed to lead to low inflation!
Michael BG,
the profit-seeking firm is at the heart of the economy. They employ over 80% of the workforce and produce the great majority of goods and services in the economy. Firms will seek to invest and expand whn they are operating at full capacity and there is a return on investment commebsurate to the risk. They will expand by adding capacity, buying suppliers or distributors, competing with other companies in theproduction of products or entering new markets abroad.
This is how the economy grows. It is based on confidence and stable demand.
Peter, I am not convinced that Joe Bourke is a neoliberal. I just think he doesn’t understand how the economy works. He doesn’t call for deregulation and reductions in government spending.
Joe, I think your belief that “stable demand” is a good thing is because you have never worked in a sales environment. Perhaps you haven’t been involved in setting budgets for businesses either. Most businesses aim to increase their sales each year. This is only possible for all businesses when demand is growing, i.e. when the economy is growing. Of course each business aims to be competitive but it is rare for a business to have as an aim putting another business out of business. Most businesses would prefer it if they didn’t have to compete with other businesses.
If a government run the economy so that there was stable demand, unemployment would rise. The government needs to at least manage the economy so that growth is above 1% and higher if it wants to achieve even your definition of full employment.
@ Michael BG,
Maybe Joe BG isn’t the worst of the neoliberals but he’s still stuck on the idea that the Government only has a role in the economy as a last resort when everything else has failed. So if interest rates are ultra low and the economy needs to be kick started after a severe recession then, very reluctantly, he acknowledges that a fiscal stimulus might be needed.
He can’t see that it would be much better to use sensible fiscal measures to prevent the economy getting in to a recessed state to start with. He doesn’t explain why. He doesn’t really know why, except that he wants minimum govt involvement and says to have more would lead to high inflation. Again he can’t explain why – except he might reference someone else who thinks the same thing too when pressed.
Michael BG,
with all due respect I have a great deal of experience working as a finance director across a number of countries and in various economic settings and political environments.
Libdem policy is based on evidence and the development of current policy is led by a leading economist, Vince Cable. As mentioned above For a fuller understanding of real world economics, I recommend Vince Cable’s 2014 speech to the Royal Economic Society https://www.libdemvoice.org/a-longer-read-vince-cable-on-recovery-and-beyond-37988.html in which he identifies four major areas of policy action required:
– boosting the disposable income of low and middle earners;
– stimulating business investment (with the help of public investment);
– taking action, including through the industrial strategy, to tackle bottlenecks in skills, business finance, exports and UK supply chains;
– and building lots of new homes.
Demand in microeconomics is defined as desire for a commodity backed by willingness and ability to pay for the commodity. Aggregate demand is a macroeconomic concept which means the total money or price which all the firms and entrepreneurs expect to receive from the sale of output produced by a given number of workers employed.
Aggregate demand price is the amount of money which the entrepreneurs expect to get by selling the output produced by the number of people employed. In other words, it refers to the expected revenue from the sale of output produced at a particular level of employment. Different aggregate demand prices relate to different levels of employment in the economy. Fiscal stimulus can raise aggregate demand when there is spare capacity in the economy but not at a full employment level.
Effective demand was the brainchild of Keynes. It means the total demand for goods and services at different levels of employment. Effective demand excludes latent demand – where the willingness to purchase goods may be limited by the inability to afford it.
In Keynes’s macroeconomic theory, effective demand is the point of equilibrium where aggregate demand = aggregate supply. The importance of Keynes’ view is that effective demand may be insufficient to achieve full employment due to workers without income to produce unsold goods.
The policies reommended in Vince Cable’s speech address effective demand and the ability of workers to afford an increased supply of goods and services.
@ JoeB @ Michael BG,
“……I have a great deal of experience working as a finance director across a number of countries and in various economic settings and political environments.”
This isn’t the point. We’ve all got experience as currency users. Hardly anyone has experience of being a currency issuer. Except perhaps if you’re the banker in game of monopoly!
A business person will often tend to say to Gvt things like “If I ran my business like you ran your Govt, in no time at all I’d end up in the bankruptcy courts……….” They’ll be equating surpluses to profits and and deficits to losses.
A successful business or finance person will only be successful in Govt if they also have the imagination to make the transition away from household economics.
Joe, thank you for the summary of your career which includes no time working in a sales environment. I also note that you didn’t say you had any experience of drawing up company budgets.
I note that Vince in the 2014 speech that you link to stated, “The immediate reason for this improvement is a revival of demand, led by consumer spending” and “Getting the economy moving requires higher demand”, which means that Vince agrees with me increasing demand is the important thing for economic growth.
Vince seems to distance himself from being a Keynesian and seems to claim to be a Monetarist!
Vince even seems to agree with Peter Martin, “In the first Coalition Budget, we anticipated borrowing £37bn in 2014/15; down from the £150bn we were borrowing in 2010. In the next two years, we were hit by a slowdown, such that the taxes that the OBR predicted for 2015 fell by £60bn”. What of course he doesn’t state is that his “slowdown” was reported at the time as a second recession and that the Coalition government’s fiscal policy caused it.
Vince seems to think that 2.4% or 2.6% growth rates are “trend growth”. If economic growth was forecast to be 2.6% then I would only want to see the government increase total government spending by five sixths of 0.4% which is currently about £7 billion.
Boosting income of low and middle earner by cutting taxes or increasing benefits is a fiscal policy. Paying for more teachers to train people for free is a fiscal policy. Building new homes financed by the government is a fiscal policy. All increase demand in the economy.
Aggregate Demand is “the total demand for final goods and services in an economy at a given time” or AD = C + I + G + (X – M).
Michael BG,
my worling experience is in finance of which group and departmental budgets are an integral feature. I am afraid that there is absolutely nothing you can tell me about budgets that I don’t already know.
As for your economic analysis this is known as a fallacy of composition. It arises from confusing microeconmic features like individual demand with macroeconomic feaures like aggregate demand. The paradox of thrift is another such fallacy of composition described in Keynesian economics.
Vince Cable’s speech in 2014 was given when unemployment was at 7.3% i.e. a clear indication of insufficeient aggregate demand in the economy at the time. Today unemployment is at 4% and there are widespread labour shortges throughout the economy.
The economic policies advocated in the Libdem manifesto are clear.
“…we have no intention of just throwing away our hard-fought efforts to control the deficit during the Coalition years. Liberal Democrats will therefore commit to eliminating the deficit in day-to-day spending by 2020. This means we will be able to keep debt as a share of national wealth falling through the Parliament, unless there is a recession. Once we have brought current expenditure into balance we will ensure that overall public spending grows roughly in line with the economy. This means that we can improve key public services and provide them with the investment they need.”
Fiscal stimulus involves incresing the deficit during slowdowns. Libdem policy is to run a balanced current expenditure budget and to maintain borrlowing at a level below nominal growth such that debt as a share of national wealth falls through the Parliament
Funding public services will be brought about by increased tax receipts through both progessive tax policy and stable economic growth.
Stable economic growth will be facilitated by
– employing tax policy to boost the disposable income of low and middle earners by raising the national insurance threshold to the level of the personal allowance
– stimulating business investment (with the help of public investment);
– taking action, including through the industrial strategy, to tackle bottlenecks in skills, business finance, exports and UK supply chains.
– and building lots of new homes.
There is nothing difficult to understand about these policies unless you choose not to.
Joe, I note you didn’t engage with my point about business budgets – that businesses normally budget for an increase in sales income every year. I expect this is because normally the economy is forecast to grow each year. Now that I have quoted Vince do you accept that it is the level of demand in the economy and the expectation of increased demand which determine business decisions to invest most of the time?
A fiscal stimulus is not defined by the state of the economy. A government could increase government spending with a fiscal stimulus even if the economy is growing at it normal maximum. Such a government would be carrying out the wrong policy and the likely effect would be increased inflation.
A Liberal Democrat government could carry out its policies for increased government spending and so produce a fiscal stimulus when the economy cannot cope with such a stimulus. If economic growth in the UK was forecast to be 3% and the government decided to increase government spending by £10 billion to build more houses this would be a fiscal stimulus of about 0.5% of GDP.
I don’t have a problem with maintaining government borrowing growth below 3% of GDP if economic growth is 3% or more.
I am very happy with the idea that the increased government revenue generated by economic growth is spent by the government on current expenditure (assuming economic growth is not above 3%).
I do think business confidence is important for economic growth. If businesses believe that demand is going to grow then they are more likely to invest to increase productivity. I expect this level of confidence to feed into the growth rate forecast. This is why the forecast rate of growth is important for me for determining what level of extra spending the government should do.
This is not a discussion about Lib Dem policies. It is a discussion about the need for demand in the economy to grow leading to more being produced.
Michael,
I have engaged with your point about business budgets. I have said it is a fallacy of composition to equate individual fims budgets with aggregate demand. Firms will seek to grow in a number of ways. Large multinationals wil often seek to expand in faster growing developing economies for good reasons. Some firms will find their sales expanding others will fall back as they are unable to hire or replace workers when there are widespread labour shortages.
This is a discussion about why Libdem Policy is the right approach to deliver economic growth. The manifesto makes it clear if and when discretiionary monetary or fiscal stimulus (as opposed to automatic stabilisers) will be used:
“…we will be able to keep debt as a share of national wealth falling through the Parliament, UNLESS THERE IS A RECESSION. Once we have brought current expenditure into balance we will ensure that overall public spending grows roughly in line with the economy. This means that we can improve key public services and provide them with the investment they need.
In a full employment economy , output (GDP) can only be increased by increasing or utilising more efficiently the factors of production – both Labour and Capital. Labour has to be increased by population growth through inward migration and physical capital (buildings, plant, equipment etc) need both public and private invsestment. By maintaining public investment at levels sufficient to utilise savings not employed by private firms demand is maintained.
Effective demand is the point of equilibrium where aggregate demand = aggregate supply. Effective demand may be insufficient to achieve full employment and cannot be increaaed by fiscal stimulus. Experience tells us that fiscal stimulus at full employment gives a short-term sugar rush but leads to inflation and unemployment at greater levels than previously existed.
Fiscal policy affects the level of output in the long run through the savings rate. Lower saving mean less investment in new plant or increases in the amount that is borrowed overseas. Lower investment will lead to a reduction in the ability to produce output in the future. Increased indebtedness to foreigners means that a higher proportion of national income will have to be sent abroad in the future rather than being consumed domestically.
@ Michael BG @ JoeB,
The use of the word “Budget” in connection with a currency issuing government shows how deeply we are wedded to a neoliberal world view.
You and I can have a Budget. We have to match our spending to our income. Similarly a company or a local council. But a currency issuing government doesn’t. It needs to have a fiscal plan.
So whether neoliberals like it or not, their supposed “budget” is their fiscal plan which controls what is happening in the economy.
Peter Martin,
I would agree the use of the word budget is something of a misnomer in relation to government tax and spending plans. Economic forecast is perhaps a more appropriate term.
However, fiscal plans have to be developed on the basis of the current or expected path of the economy and of course the impact those plans may have on economic variables. I don’t see it as controlling the economy. What treasury budget has ever had outcomes that match the forecast.? It is rather a means of determining tax, spending and investment plans based on national output and political outlook rather than controlling the level or quantum of national output.
@ JoeB,
I agree that “Budget” outcomes are rarely as predicted. But shouldn’t that be an indication to everyone that their models are wrong?
We’re talking about austerity and especially the austerity which occurred at the time of the Con/Lib Dem coalition. And what were we told? That the Govt had to keep spending tight and increase taxation to reduce the deficit. We were told that the aim was for a surplus by the end of the Parliament. That was never going to be possible.
The Government were pushing on an economic control lever which should have been labelled “push this to slow the economy and dampen down inflation”. If they’d read the handbook properly they would have known that it wouldn’t have done much for the deficit.
So the fiscal control levers are there. It’s just that they don’t do what nearly everyone thinks they do.
Joe, when I engaged you in debate in this thread this is what I wrote, “Joe, I am pleasantly surprised that you quote Simon-Wren Lewis with approval, “Evidence suggests that the best way to increase productivity is by raising demand so firms need to invest to meet that demand”. In the past you have given the impression that you didn’t think that raising demand would drive more to be produced”. Therefore our discussion is about how best to increase productivity and not about Lib Dem policy. It has included your mistaken view that a stagnating economy is a good thing and businesses would invest to increase productivity in this circumstance, it has included your mistaken view that a fiscal stimulus can only happen in a depression, it has included your mistaken view that extra government spending on investing on building things is not a fiscal stimulus, it has included pointing out that as government expenditure is part of aggregate demand increasing it will increase aggregate demand. I have also tried to point out what I think the constraints are regarding increasing government spending no matter what it is spent on.
It has also involving trying to persuade you that there is no such thing as an economy being at full capacity, it is always possible for more to be produced even if it can only be done by increasing productivity. It has also involved trying to convince you that government spending on building things is not really any different from spending it on current spending in terms of its influence on business decides to invest to increase productivity.
In your examples about business decisions there is a common factor, businesses make decisions based on their view of whether they believe demand is growing, stagnating or falling
I don’t believe in the neo-liberal idea that government borrowing means that businesses can’t borrow. If businesses were borrowing enough to achieve growth of 3% a year there would be no need for the government to increasing borrowing.
@ Micheal BG @ Joe BG
Simon Wren Lewis ‘sort of’ OK. There are many economists around who are much worse that him. However he’s not quite there.
In 2017 he wrote this:
“……A recession in itself is not a sufficient condition for a fiscal stimulus if monetary policy can do all the work of getting us out of the recession … But when interest rates are stuck at their lower bound…”
Which is exactly the same as the sort of stuff JoeB comes out with. So “monetary policy” is always the first option. SWL, by his own words, is a ‘monetarist’ aka neoliberal. Or at least he’s suffering severe from severe neoliberal inclinations which he struggles to control!
“Doing all the work” simply means means lowering interest rates to encourage everyone to borrow more so the Government can borrow less. But it’s a one way street. Governments, sorry the so-called independent central banks, always find it hard to go in the opposite direction.
This is to raise interest rates to encourage everyone to borrow less so they can borrow more. If they do try to push them up, they risk putting the economy back into recession. If you look at the history of the 2008 crash that is exactly what the US Fed were doing at the time.
So if we over-rely on monetary policy we’ll always end up exactly where we are now. At the so-called “lower bound” or “zero bound”. It’s not an exceptional condition. It’s the new norm. That’s where we’ll always end up as the one way street comes to a dead end.
Joe, you wrote in another thread where I accidentally posted my last post in error, “I presume your comment is posted in the wrong thread, so I will not clog this up by responding other than to note that there is virtually nothing in your comment that accurately represents the views I have outlined elsewhere”.
I found this an interesting response. Are you really saying that you didn’t write, “This is how the economy grows. (sic) It is based on confidence and stable demand”? Does your latter comment mean that you believe that stable demand is actually a bad thing now?
Are you really saying that you didn’t write, “Fiscal stimulus involves increasing the deficit during slowdowns” (typing mistake corrected) and “This is the purpose of monetary and fiscal stimulus – to return the economy to operating at its natural full capacity after an economic shock”? If you agree with me, that a fiscal stimulus can take place at any time, then you have done a very poor job in making this clear.
Are you really saying that you didn’t write, “Fiscal stimulus provides no long-term growth only a short-term pump priming” (typing mistake corrected), while asserting that investing in building things is not a fiscal stimulus? Again if you accept that increasing government spending on current spending or building things are both fiscal stimuli then you have done a very poor job in making this clear.
I can’t see where you accept that government spending is part of aggregate demand and that increasing government spending will increase aggregate demand.
Have I convinced you that that there is no such thing as an economy being at full capacity, it is always possible for more to be produced even if it can only be done by increasing productivity?
Michael BG – Yeah, I found Joe’s comments rather inconsistent. On the one hand, he talked about investment in infrastructures as well as R&D, both of which obviously require public investment. On the other hand, he told you that he did not accept the role of government investment and that fiscal stimulus is just short-term, while government funding of road construction is essentially an example of fiscal stimulus, even though the stated purpose may not be to stimulate demand.