David Laws has been writing for This is Cornwall. He says:
When Bill Clinton fought to become the US President, one of his staff put up a poster on the wall of the campaign headquarters. The poster read: “It’s the economy, stupid!” It was a blunt reminder to his staff to focus on the big issue of the election, and nothing else. For the British Government, and for people in our region, it is still the economy which is the biggest challenge facing us.
Last week, we received the grim news that the UK economy shrunk in size in the first three months of the year, putting us technically back into “recession”.
He concludes:
Here are four things we should do. The first is to speed up public sector investment schemes, and dismantle any barriers to these going ahead. The second is to help the private sector – flush with cash – to invest in big projects such as a Severn Barrage, new transport links, or the development of new businesses and markets.
A third priority has to be the “Green Deal”, being introduced this autumn. The Green Deal will unlock billions of pounds to be spent on improving the fuel efficiency of homes – cutting bills and keeping us all warmer. This will also create and protect jobs such as builders, plumbers and engineers.
Finally, we need more homes. Here in the South West, housing is too expensive and there are too many people on the waiting lists for affordable property. More homes, in the right places, will be good for families and good for growth.
Read the full article here.
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32 Comments
David Laws “If we stick with this policy, the Bank of England will keep interest rates down at the lowest ever level, and it may well pump tens of billions more money into our economy through “quantitative easing”.”
In other words, because we have a fiat currency, we don’t have to borrow, we can print it. And then do all the nice things he suggests, as public goods, rather than give the money to the private sector and then subsidise them to do what we want them to do. Which strikes me as – just a bit silly. They’re on investment strike.
So he identifies the problem as imported inflation, then hopes for more QE, which weakens the currency and leads to higher rates of inflation.
Back to Economics 101 for the disgraced former minister.
@Timak
How is being found to be claiming LESS on your expenses than you could have “disgraced”? How about Ed Balls, a triple house flipper? Isn’t that even more disgraceful? It is just he’s got the brass neck not to resign over it.
Back on topic though, I’m surprised David Laws is so keen about the Green Deal. There are major problems in that people will simply not pay to have their houses insulated etc. There is huge resistance out there and people have to be bribed massively in order to make energy saving measures.
Getting investment going in the UK is going to be very tough and I don’t think the government has so far shown it has the ability to do so.
On the Green Deal, why wait for autumn? Seems to me that kick starting it earlier could bring all its benefits for jobs and lower heating bills before winter kicks in. While this is a long term project, getting as many people benefiting this winter would be good both for the people concerned and get one of the better Lib Dem led policies up and running with more time to accrue some electoral benefit.
What’s the point in bragging about ‘record low interest rates’ if you don’t take advantage of them? Now is the time to borrow what you need to build infrastructure, houses etc. get people into work and keep the wheels of the nation from grinding to a halt. The private sector confidence fairy is not appearing any time soon(we’ve been waiting 2 years+) so the government has to step in and do something.
borrowing to inest is a good thing, as laws admits. is he a keynesian? hard to say given that he regualrly praises osborne’s economic decisons. but he should shout loud and clear that we can and should borrow to build new homes foe xample.
The title of this piece and the policy prescriptions appear at first sight to be incongruent.
David Law’s accurately assesses the cause of the recession as being driven by a decrease in individuals and firms willingness or ability to carry debt. We “pay for” decreased indebtedness by devoting our income to the purchase of safe assets (including especially our own outstanding debt) rather than spending on real goods and services. Unfortunately, money spent on financial asset purchases does not create income (they are asset swaps), and may not be cycled back into income for producers of real goods and services. So, in aggregate the attempt to reduce indebtedness leads to a reduction of income that sabotages the attempt to pay down debt. This is the famous “paradox of thrift” – that should be the title of this piece.
We simultaneously experience unemployment (reduced spending and income to real goods and service providers means that people are laid off) and financial distress (reduced income and fixed debt makes prior debt ever more burdensome).
Reduction of real wages is not a solution. Real wage reductions might mitigate unemployment temporarily, but they also engender financial distress. Financial distress then causes agents to redouble their efforts to satisfy debts, reducing aggregate income and requiring further reductions in real wages ad infinitum. The only way out is to increase real wages relative to the real burden of debt. Inflation is helpful only if real incomes hold steady, or, at very least, fall more slowly than the real value of prior debt.
We have had high inflation in the past few years. The real price of labour has fallen significantly. Unemployment remains at over 8% while real wages are lower than they were 7 years ago and are continuing to fall. The real burden of debt has fallen, but real wages and incomes have fallen even farther, leaving people less able than ever to satisfy debts they’ve contracted and so purchase financial security.
As David Laws seems to infer, but is not quite able to bring himself to say, we need to pursue a reflationary policy. The goal should be to reduce the real value of debt relative to incomes. One way to do this is to stabilize the nominal income path at its prior trend while tolerating whatever inflation that engenders. This implies a large increase in nominal income from current levels. If nominal income is held to a gently rising path, the burden of aggregate debt relative to income will never unexpectedly rise.
NGDP targeting would be a big improvement on the current inflation targeting approach of the BofE, but not sufficient of itself. Monetary policy reflation needs to be combined with an expansionary fiscal policy in the four areas that Mr. Laws has identified; public sector investment; private sector investment in economic infrastructure; energy efficiency and new housing.
This necessitates an increased tolerance by the government for public sector borrowing to kick start investment and induce the necessary confidence in the private sector to follow suit. This investment is equally a necessary foundation for the longer term rebalancing of the economy towards a greater focus on manufacturing and production.
Ultimately, this is the only credible deficit reduction plan available to us in what is commonly diagnosed as a ‘balance sheet’ recession.
@ LondonLiberal
“borrowing to invest is a good thing, as laws admits. is he a keynesian?”
Herein lies the problem, there is no trusted economic theory to call on with our present dilemma. The relative newly hyper-active global free market is a new feature and so has no long-term studies to rely upon.
Current wisdom is that the more these monsters site their operating bases in the UK and the more active they are the better. However, as we have seen the larger and more sophisticated the organisation is, the more likely they are to avoid corporation tax through the use of tax havens and the highest earners will avoid paying personal tax through various tax avoidance schemes.
Apart from this they will almost certainly site their main operation outside of Europe or, if inside, in Poland or another of the ex Soviet states where wage rates are much lower – so they do not help to reduce unemployment.
In my view, we have already seen enough to know that the activities of these giants effectively drains the benefit to the host nation of any economic activity with which they become involved. More graphically – acting like some new breed of economic vampire that feed off healthy nations until they are drained of economic life.
Good to see the emphasis on housing. Raising house building from current 100k to the 1930s level (480k, adjusted for population size) would raise employment by 1.3m. That’s what I call a growth strategy!
I agree with much of Joe’s argument but I see what appears to be a problem. Most household debt seems to be mortgage for housing. It represents a choice that people have made, and part of that choice is about having something valuable at the end of the mortgage period. That part of the household debt won’t go away anytime soon.
If we build more homes, we risk reducing the real price of housing, creating negative equity which will reduce the value of the thing people want at the end of the mortgage. This is essentially an attack on the choice that people have made. New houses also means more people taking out mortgages – the subprime problem again – so it incresases debt and increases debt risk. So surely one aspect of the solution is to build anything else, but NOT housing?
My other question is – why do we regard mortgage debt as a bad thing? It’s good that people decide to have a stake in the nation. It’s good that people decide to settle down for a long haul of work to pay debt to achieve some form of stability and wealth. This debt doesn’t look like a problem at all! Can it be that the real problem lies in the other part of household debt – the part that is not mortgage?
Can we not find a solution that supports the choices made by ordinary people? What do houses need? Furniture, plumbing, gadgets, toys for children, education for them. Marketing theory tells us to invest in industries where there is lokely to be demand, so … aren’t these the industries we should be investing in? Not Severn Barrages?
The Tories and Lib Dems borrowed £18.2 Billion in Mar 12, more then Mar 11.
Totally undercutting David Laws argument.
The Government does not have to borrow to build a house.
This is how it works:
The government employs a builder to build a house.
The builder sends in his bill to the Government, say £200,000.
The Government writes a cheque (on its account at the Bank of England) and sends it to the builder.
The builder presents the cheque at his high street bank and his account there is credited to the amount he has charged the Government, £200,000.
The commercial bank then presents the cheque to Bank of England which credits the bank’s account at the Bank of England with £200,000 and debits the Government’s account at the Bank of England by £200,000.
The builder goes off to buy some more land, employs more people and builds another couple of houses.
That money raises demand in the economy. There’s plenty of under used builders, plumbers, electricians now doing more work, earning more income and spending more.
OK, there’s more cash and deposit money out there, but because so many firms are paying down debt it is just making up for the money that is being destroyed by this deleveraging process.
(ie. I pay off £10,000 of my outstanding mortgage with a cheque drawn on my account. The mortgage company reduces my outstanding loan and presents the cheque to my bank which debits my account. £10,000. It has been destroyed £10,000 … unless the building society can find someone else to borrow the money … which it can’t or won’t at the moment.
Provided the Government keeps an eye on the wages of builders and the balance of payments and provided it explains what it is doing to these audiences:
To the markets (this is how we shall return growth to its trend level and no further)
to workers/their unions (start bidding up wages and we shall stop this),
and to us the citizens (do you see how we are turning the economy, be confident in tomorrow) all will be well.
For a currency issuing government like ours there is always money available – it never runs out!
” New houses also means more people taking out mortgages – the subprime problem again – so it incresases debt and increases debt risk.”
Not sure that holds Richard, subprime was the result of poor lending by banks – and social engineering by Fannie and freddie – so build more houses by all means, just prevent equity-less mortgages and strict credit criteria on 95 percent ltv mortgages.
Bill le Breton.
Your prescription creates rip-roaring inflation! It means that the house is being paid for by the reduction in value of everybody’s money! No wonder people don’t vote LibDem!
Housebuilding reduces the value of existing houses. It creates more debt, because buyers borrow. The debt is more sub-prime, because prime debtors already have houses. And there may already be a housing glut. In my street three out of 20 houses are for sale, no buyers, and two or three more were taken off the market because there are no buyers.
@jedibeeftrix.
Your solution translates into: build more houses, but don’t sell them, let the builder keep the debt. It’s not a solution to the debt issue.
Under the terms of the Maastricht Treaty, EU member states are not allowed to finance their public deficits by printing money. That is one reason why the Bank of England will not simply credit government accounts with newly created money and buys government bonds from financial institutions, not directly from the government.
The Bank believes this form of QE is different because it is “printing money” as part of monetary policy – to prevent deflation. It is not printing money to help the government finance its deficit.
The effect, nevertheless, is that the BofE currently holds approximately 30% of outstanding government debt. The interest on this debt is paid by one government department (the treasury) to another government dept (BofE). QE is supposed to be a temporary measure, but may be in place for a long time. If the government debt held by the BofE was simply cancelled this would be an overt monetisation of the debt. As long as the possibility remains that QE will be reversed it can be characterised as a temporary monetary measure.
In the Southwest wages are below the national average. House prices have reached 14 times average income. The Southwest has been an attractive location for second home buyers and many local people fund themselves priced out of the market.
It is possible that QE funds could be used to establish a national or regional housebuilding fund. However, the fund should be a temporary measure capable of reversal. In this case as banks and building societies issued private mortgages to homebuyers, the QE funds created to establish the initial fund would be withdrawn from circulation. QE might therefor be employed for affordable and shared equity housing that is sold to private buyers and independent housing associations but not for local authority social rented housing.
Government spending on infrastructure needs to be recovered from future taxation. Unlike housing development, infrastructure financing is permanently held (unless the infrastructure is transferred to the private sector) and for this reason is probably best funded by long term borrowing and not what should be temporary QE.
@Richard Dean
1. If house prices fall as a result of more being built, then the risk of the new buyers/borrowers defaulting on their loans is REDUCED because it cost them less to buy the house.
2. If a reduction in house prices leads to existing mortgage holders being in negative equity, then so what? They paid what they thought their houses were worth and negative equity has no effect on them unless they want to move. That lack of mobility is part of the risk of buying a house.
With respect, arguing that houses shouldn’t be built because prices might go down absurd, especially when set against the backdrop of inflation busting rises in house prices over the last decade that have left many young people unable to buy. Sub-prime lending in the UK (interest only mortgages, 100% LTVs, self-certified mortgage fraud, etc)
was responsible for those large price increases. Those large price increases have increased the risk of people defaulting on mortgages. lower house prices would mean less people defaulting in the future.
And… the reason those houses you’re talking about haven’t sold is rather simple: If something isn’t selling in a market there is only one reason – it’s overpriced.
Richard Dean is partly right, ie Bill Le Breton shouldn’t be allowed anywhere near LibDem policy formulation! As for the houses for sale in your street, Richard, at least someone is living in them(?).. more of note is the number that are standing empty, and that is the real worry. There are thousands of empty properties where the owner has no intention of letting them as the return is so poor after, all the tax has been paid, agents fees, repairs and maintenance, worry over bad tenants, etc. Over any ten year period, even through a recession, housing is a good hedge for your money. Vacant commercial property has a similar cycle, even when vacant, the owner can still borrow against its value. The best thing the govt has done is the help to first time buyers as that will gradually get the market moving again. Where new housing is needed, yes that will generate jobs and creat demand for furniture and fittings, but lets tackle the tax situation whereby owners are just sitting on portfolios of empty property. and penalise less those who are letting the property out. .
building a Severn Barrage will achieve one thing only, trashing a world renowned estuary. Spend the same money on developing the myriad of renewables generating devices already being invented, and get far more power far sooner, – and develop green industries with massie export potential at the same time.
A barrage is only good for those promoting it, and they all have shares in the construction industries.
I hope that ‘Peter’ (no relation) will withdraw and apologise for his post of 3.06pm suggesting Bill Le Breton “shouldn’t be allowed anywhere near LibDem policy formulation”. That is a personal smear that contributes nothing to this debate. Having known Bill for over 30 years I suspect that if he WAS allowed near LibDem policy formulation we might have both a better set of policies at national level than we currently have and a much clearer and more effective promotion of those policies which, in turn, may have resulted in less of our excellent councillors losing their seats last Thursday due to people voting against us because they don’t like Nick Clegg and the national party.
@Peter
A Servern Barrage should deliver from 3 – 8 % of our national electrical demand, depending on where the barrage is to be built, and it should be able to store the means to generate that demand until it is actually needed, entirely free from emission of carbon dioxide. That would be a large contribution towards our energy security and towards our carbon budgets.
There are conservation issues, but they are not insurmountable. Beyond the employment created in construction, power generation and transmission, there should be opportunities created in leisure, too, with safe opportunities for boating and the like. The barrage itself should also be able to offer communications between south Wales and south-west England.
@Steve. Another reason for not planning to reduce house prices is electoral: people won’t vote LibDem if their houses lose value as a consequence.
@Peter. I agree that vacant housing might be a more relevant target. The need to refurbish them will create jobs, and the clearing of derelict property will additionally improve neighbourhoods. Perhaps we need a higher tax on usused assets compared to used ones, or fines for keeping houses vacant or for not reparing derelict property.
@Peter Chegwyn. The “insult” to Bill was probably my fault originally, for mentioning votes. Many apologies to everyone who was offended. But the fact remains, Bill’s prescription is not good policy, as perhaps Joe Bourke’s explanation of QE may imply.
@Peter
Actually your post is interesting. No matter how desirable a project is, someone is bound to object. The moment that the government proposes to build the Severn Barrage, Greenpeace will say that it will wipe out the British population of the lesser liverwort, the bespectacled wartfrog and the bilious seal, UKIP and the usual Tories will say coal is cheaper, Shell will say frack this, the Daily Mail will say that it causes cancer, someone else will claim that it will harm surfing at Newquay, upset the oyster beds and bring ruination on the crab and sardine fisheries.
So, it won’t happen, unless David Laws and other supporters make a big noise based on local interests.
Remove the ‘right to buy’ and build ‘council houses’.
As a nation we are woefully short of affordable housing and the latest coalition ‘tinkering’ will do little to solve the problem
In the post-war years this country built thousands of ‘pre-fabs (like the Wimpy No-Fines houses ). Today modern ‘pre-fabs’ can use mainly ‘green’ materials, incorporate solar panels, etc..
In 1945 the Minister of Health – Aneurin Bevan stated:” Pre-war, the higher income groups had their houses, the lower income groups had not. We propose to start to solve the housing problems of the lower income groups. The emphasis of our house building programme will be housing to let, that means we shall ask local authorities to be the main instruments for the housing programme”
Today, such revolutionary thinking could create new industries, thousands of jobs (skilled and unskilled) and help solve the housing crisis. Councils, borrowing at low rates of interest, could house their homeless at far below the current ‘housing allowance’ and this system, with no ‘right-to buy’, would only bring down rents and not affect home-owners.
BTW…McDonalds use prefabricated structures for their buildings, and set a record of constructing a building and opening for business within 13 hours.
@Richard Dean
“Another reason for not planning to reduce house prices is electoral: people won’t vote LibDem if their houses lose value as a consequence.”
Another reason? There isn’t a single legitmate reason for wanting to keep house prices at their currently inflated, high prices. High house prices cause economic stagnation and a loss of labour force mobility. They will also cause increasing amounts of lost votes as the younger, priced-out generation comes of age. Any party that can actually address the housing problem will become more popular in the coming years – maybe not amongst the gray-haired, baby-booming, vested interests – but they’re declinging in numbers whilst the priced-out generations are increasing in numbers.
@Steve. That younger, priced out generation also wants assets whose value is not capable of being reduced by arbitrary government action. They’ll be looking for stability or growth in house prices. Jason’s proposal looks a lot better, except it may have a problem – building to rent means government goes into more debt, not less.
I have no idea what “the” solution is, except that I suspect that new ways of thinking about debt might help find it or them. Debt for houses seems to be good debt – it represents an economic stimulus that happened (the house building) which is now being paid for. One person’s savings is another’s debt, so a debt crisis is the same as a savings crisis / paradox, looked at from the opposite direction.
Peter, I do agree with you concerning empty properties and as the other Peter who has known me for thirty years may tell you, my principle interest in the 1970s was housing and empty housing – the huge number of empty prison officer homes in the Isle of Wight at a time of acute homelessness there.
But many are in the wrong place and/or in great need of renovation. Another reason to get the builders in!
What I would ask you to consider is, what are the effects on the money supply when the private sector is paying down debt or sitting on large amounts of ‘savings’? The process of deleveraging destroys money – the electronic £1 is deleted . Do you agree? If not then there is no point in us taking this further.
If you do, then we need to examine what the effect of a reduction in the money supply is on nominal (or money) GDP (or an increase less than the growth in nominal GDP). I happen to think it is deflationary. That, if the money supply does not keep pace and does not grow by an amount that signals to people in the all the markets that NGDP is growing, then, that growth will not occur.
The creation of money at this time and under a strict plan would not cause run away inflationary. We are not Zimbabwe. It would stimulate the economy and take up the slack that so obviously exists – the output gap.
If you were kind enough to follow me to this point, we should then ask, if the private sector is not able or willing *at this point in time* to create money, then, growth can only come from action by Government (if it is a currency issuer). And by this, I don’t mean borrowing more. (That is just a transfer of money from a lender to a borrower).
As Joe says, the EU at present endeavours to legislate against this, but for how long? Until Greece has left the Euro … and Spain … and Portugal … and Italy … and France?
Government expenditure by the method described above creates two types of stimulus, fiscal and monetary, in one go. It is just what we need. And it would help house the homeless, assist those who wish to buy for the first time, or to rent-to-buy. The growth would reduce the Debt/GDP ratio. The 5/6% inflation level for three years would erode debt and help encourage firms to invest and people to make purchases.
Look what occurred when everyone *knew* that the price of stamps was set to increase on the 30th April.
I don’t think the idea should be dismissed so flatly.
Good morning Joe. You write, “As long as the possibility remains that QE will be reversed it can be characterised as a temporary monetary measure”.
If I was a firm contemplating an investment at x% rate of interest and I expected that in the near future the Government would reverse QE and raise interest rates, would it discourage me from borrowing now?
@Richard
“@Steve. That younger, priced out generation also wants assets whose value is not capable of being reduced by arbitrary government action.”
You’re the one that is interested in the value of ‘assets’ (houses are actually depreciating assets over the long term anyway) rising. Young people don’t give a monkeys about the value of a house going down once they’ve bought it. They just want to be able to buy a house to live in at a reasonable price. The subsequent price is inconsequential to anyone but a speculator (second home owners, BTL, etc).
Hi Bill,
the point about QE being characterised as a semi-temporary emergency measure is that if it were not , it might be seen as an overt monetisation of debt and a breach of the terms of the Maastricht treaty by the UK.
I appreciate your point that to effectively target NGDP (aggregate demand), the bank needs to make it clear that tightening of the money supply would only occur as and when NGDP is threatening to run ahead of target.
Even if there were no treaty restrictions, I am not so sure that the BofE could effectively restrain NGDP to a smooth and gently rising target by creating and spending money by fiat. New money created by the issue of new government debt has an inbuilt market control mechanism and hence maintains confidence in the currency both domesticaly and internationally.
Money is created in the private sector primarily by commercial and shadow banking systems. The central bank has a limited ability to control expansion of the money supply and the transmission mechanisms through which it flows. I think we might have to have a system of full reserve banking for market monetarism to work in practice, but that’s a banking reform that does not currently appear on anyone’s agenda.
Indeed, Joe. Do we reckon the attempt to target nominal GDP would run up against Goodhart’s Law? Or, since in this case you would be focusing on your actual objective (stable growth in money national income) rather than a proxy (stable money supply growth), would it in reality permit discretion by the central bank in the use of policy instruments rather than rigid adherence to rules…?
To take one methodological difficulty, measuring quarterly GDP in a complex modern economy is an art rather than a science, and preliminary estimates are subject to substantial revision.
There’s a good discussion of this in the American context here: http://www.clucerf.org/blog/2011/12/05/goodharts-law-and-monetary-policy/
The idea being that adopting a nominal GDP target could be a neat way of encapsulating the Fed’s dual mandate (to keep inflation low and activity high) into a single target.
I am no expert in these arcane matters, so please correct me if I’m barking up the wrong tree…
@Steve. Many apologies, I am old and poor enough not to understand young people! In the Independent today, there is an article about the “beating the housing crisis”. which quotes several young(ish families who have had to share homes with parents and even grandparents. Most go into this “multigenerational living “for financial reaosns, but all seem be discovering advantages and even pleasures of a close extended family group together. I am familiar with the incredible biasses in newspapers, and maybe the article was sponsored by Ikea who got a plug, but even so the article does seem to raise questions about the reality of the “crisis”. Comments following the article were also interesting.
http://www.independent.co.uk/news/uk/home-news/beating-the-housing-shortage-one-home-three-generations-7626973.html
As well as being poor and old and houseless, I am also a business owner and I know how hard it is for an organization to get out of long term debt. I don’t see any miracle cures for the debt crisis, it will be a long hard slog with mistakes on the way. It seems that the populations of countries as a whole have overspent and must now spend many years earning more than they consume (a debt paradox like a savings paradox?). Perhaps the aging crisis can provide the consumers need to solve the debt crisis? Will buikding houses allow us to solve it?