LibLink: John Pugh MP – With hindsight, Cable’s deficit reduction plan looks better than Osborne’s

Lib Dem MP John Pugh has written a thoughtful, balanced piece on economic policy for the New Statesman website. He freely admits he has voted for every part of George Osborne’s economic strategy brought before the Commons (“I did not know if it would achieve all its major objectives but I certainly did not know it would not”) but says the facts are plain: it’s not working. Here’s an excerpt:

Yes, jobs are being created in the private sector, unemployment is not moving upwards, the deficit is down, our export markets are engaging with the emerging economies, inflation is low and our credit good. However, friend and foe alike acknowledge that the plan hinges on economic growth and there’s little positive news yet on that. …

What I entirely reasonably claim is that George’s plan conceived before the 2010 election and implemented after it was bolder and potentially riskier than that advocated by Vince Cable and the Lib Dem Treasury team. Retrospectively and with all benefits of hindsight, slowing a little the pace of deficit of reduction to better protect economically-useful capital expenditure as suggested by Vince looks as though it might have been a better bet.

It is not that Plan A could not have worked or that the sage of Twickenham was necessarily right. It required though a number of other things to go right or not go badly wrong – for the Chancellor to be lucky – and this Chancellor has not been lucky.

You can read John’s piece in full here.

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23 Comments

  • Alex Sabine 21st Aug '12 - 1:47pm

    Would this be Vince’s plan of 2009, 2010 or his eliptical pronouncements in government? His most detailed exposition on this subject was his paper for the Reform think-tank in late 2009, which argued for almost precisely the size and timescale of deficit reduction subsequently pursued by George Osborne (before the Chancellor watered it down a little in the 2011 Autumn Statement, that is).

    http://www.reform.co.uk/client_files/www.reform.co.uk/files/Tackling%20the%20fiscal%20crisis%20FINAL.pdf

    Of course it is not unknown for Vince to offer significantly different advice at different times, presumably citing Keynes’s bon mots about the facts changing. (I’m sure it has nothing to do with the audience…)

  • Daniel Henry 21st Aug '12 - 1:55pm

    Except Vince always advocated big infrastructure spending to aid the recovery. Also, the economy was always to be given first priority before the deficit, recognising that you can’t cut a deficit with reduced tax intake and increased unemployment benefits.

    I thought John Pugh was being very diplomatic in using the word “hindsight”.

  • Tim Nichols 21st Aug '12 - 2:44pm

    I did not know if it would achieve all its major objectives but I certainly did not know it would not. I do not claim to know how crucial events in the EU have been in derailing that strategy.

    It is not that Plan A could not have worked or that the sage of Twickenham was necessarily right. It required though a number of other things to go right or not go badly wrong – for the Chancellor to be lucky – and this Chancellor has not been lucky.

    Now is hardly the time for politicians who come to us to profess their ignorance and impotence. If that’s all you have, resign your seat and let someone else be voted in with more to offer.

    There’s no shortage of people who felt very confidently able to warn that Plan A was going to be a disaster, and who could explain exactly why with strong economic arguments. I did, but I’m nothing special. Many, many people did.

    Osborne has had no bad luck. It’s the British people who have had the bad luck that we have a Chancellor who is a dangerous and incompetent idealogue, and whose disastrous policies are being propped up by the votes of people who really ought to know better, like John Pugh.

    Rather than hearing from someone with an ‘I-didn’t-tell-you-so’ story, we should be listening to those with the ‘I-told-you-so’ stories. They’re the ones who have most clearly understood our economic predicament and the policies that we really need.

    If you number yourself amongst those who have been right in their predictions and in calling for a Keynesian Plan B, please don’t bashfully and modestly hold back your ‘I-told-you-sos’. That kind of modesty is a luxury we can afford only when the debate has since become academic.

    But this debate is still the most important matter in the land; and the wrong people with the wrong ideas are still running the show. We need your voices loudly, clearly and confidently.

  • Alex Sabine 21st Aug '12 - 3:40pm

    @ Daniel Henry – “Except Vince always advocated big infrastructure spending to aid the recovery.”

    Well in fact all 3 parties envisaged big cash cuts in capital spending once the temporary boost of 2008-09 was withdrawn. The fact that capital spending is easier to cut than current spending is one of the main reasons why it is preferred to current spending as a ‘stimulus’ measure; it has more chance of meeting the key criterion of being temporary rather than permanent.

    Darling actually envisaged bigger cuts to the capital budget, but Osborne decided to bear down heavier on current spending (which virtually escaped the axe under the Darling baseline) and preserve more capital projects. This was in line with Cable’s complaint before 2010 that Labour’s plan rested too heavily on capital cuts without dealing with the ongoing overspending reflected in the large projected current deficits.

    The coalition has tweaked the balance somewhat, but has still chosen an approach which relies on investment cutbacks while largely maintaining revenue budgets at the record levels inherited from Labour.

    In my view it needs to more to tilt this balance. The markets and most economists would accept, indeed welcome, the restoration of some infrastructure spending provided more was done to reduce high recurrent costs in public sector current budgets and transfer payments.

  • Alex Sabine 21st Aug '12 - 3:49pm

    The irony is that one capital project that unites most of business behind it (and which Darling called for in his ‘open letter’ the other day) is extra aviation capacity – which Lib Dem ministers (even, I guess, those in economic portfolios like Cable) would be expected to block!

  • Bill le Breton 21st Aug '12 - 6:37pm

    Alex reminds us of the Reform booklet’s publication (Tackling the Fiscal Crisis). I remember the review of it by the Free Thinking Economist.

    I wrote to his blog then (September 2009) that the more important pamphlet would be one entitled “Tackling the Monetary Crisis.”

    At the time the money supply was going south, deflation was the great danger (NGDP had plunged 8% in a year) which convinced people and firms of the prudence of hanging on to their cash (which would buy more assets later) and deleverage like mad.

    The monetary authorities needed then and there to loosen policy dramatically and, working together with Government, money needed to be created at a rate to compensate for its destruction through private sector deleveraging and cash hording + the extra required for growth. There was silence. No pamphlet. Not a whisper.

    Three years later growth remains a dream, PY (for the economists) continues to increase well below trend and capacity, yet people keep bashing on about fiscal policy as if monetary policy did not exist.

    It does – the Bank of England continues to fail to compensate for the reduction in money supply and in the velocity of its circulation. Accelerated deficit reduction stems the flow of money creation further.

    Here are the facts – the Bank of England is presently targeting a two year forecast for inflation of 1.5%. (0.5% below the level it is instructed to target). Each month it undershoots its target and reacts by tightening further.

    If the Government did relax its fiscal stance, if it did bring forward infrastructure projects, the Bank would tighten further to keep its inflation target.

    Actually, it is likely that the decisions to aim for 1.5% (instead of its 2%) id because it has concluded that the Government is relaxing fiscal/infrastructure policy.

    We shall not have growth until we change monetary policy, change the target and change those (on the MPC) who determine it. And replace the GOvernor of the Bank of England now with one willing to do whatever it takes in the way of monetary easing to bring back that trend rate of NGDP growth.

    That is what Liberal Democrats inside and outside of Government need to be campaigning for. Without it fiscal easing would in any effect prove fruitless. And actually, with it, fiscal easing may not actually be required.

  • Richard Dean 21st Aug '12 - 7:03pm

    Hindsight is a very distorting lens. If a different strategy had been adopted, the economy would have reacted differently, and there’s no reall telling whether the result would have been better or worse.

    Bill le Breton is right, in the sense that experience seems to suggest that real growth cannot happen without some associated inflation. That really is the government’s big failure of understanding. Limiting inflation too much also limits growth.

  • I must take issue with John Pugh here. I think this Chancellor has been very lucky on at least three counts.

    We have benefitted greatly from our ‘safe haven’ status and the low interest rates on government borrowings we enjoy as a result. This status is achieved not so much as a consequence of achieving positive results or even the credibility or otherwise of our extended deficit reduction plan, but rather by the dire straits that so many of our European neighbours find themselves in.

    Secondly, despite the double-dip recession we have not seen the kind of increases in unemployment experienced in previous slumps of this severity.

    Lastly, despite unprecented monetary loosening in the form of near zero base rates and massive quantative easing, depressed global demand for commodities has contained overall domestic inflation within relatively manageable limits.

    All of these outcomes run contrary to the experience of prior economic downturns in the UK.

    I would concur with Alex Sabine comments here that the the restoration of some infrastructure spending would be widely welcomed, provided more was done to reduce high recurrent costs in public sector current budgets and transfer payments. Ultimately, current spending has to brought in line with the historic trend level of tax receipts.

    The recent publication by policy exchange Ending expensive social tenanciesk merits consideration as a means of freeing up funds to kickstart local council social housing construction.

  • Bill le Breton 22nd Aug '12 - 8:14am

    @ Geoffrey writes, ‘The reason that noone in the Parliamentary party wants to stand up to Osborne would appear to be psychological – we don’t want to lose face and we don’t want to be seen as shirking the tough decisions – even if they happen to be wrong.’

    This is how political narratives develop a momentum of their own. Their psychological power is not an indication of their true potential to explain what is going on and to direct appropriate policy action.

    In this case, ‘we’ and the Conservatives have too much invested in the narrative that “The ‘crisis’ was a consequence of Labour’s ‘light regulation’, its encouragement of ‘casino capitalism’ its ‘irresponsible public spending’ and an unsustainable housing ‘bubble’ that was bound to burst.”

    This narrative played well to a fearful electorate concerned for their safety and attracted by a promise of bold (fiscal) action. Labour lost, a Coalition came to power.

    The Coalition proceeded along the story-line, the next chapter of which outlined the ‘quest’ for accelerated deficit reduction and fiscal rectitude.

    (Obama got into a similar position by bashing Bush’s tax cuts; Germany by bashing the PIIGS.)

    The other ‘people’ who had a vested interest in this narrative were and are the central bankers. Their job is to manage aggregate demand. They failed in the run up to the ‘bust’ (but could blame Labour/Bush/southern Europe). They failed in the aftermath but could continue to blame the fiscal authorities. The more they do so the less they need to justify their own continuing failure to provide sufficient aggregate demand to restore stability.

    @ Joe lists the ‘luck’ that Osborne has had. This luck has also shielded the dominant political narrative from proper and critical analysis – even when it has been failing for four long years.

    Joe maintains that the Bank of England has conducted ‘unprecented monetary loosening’. Unprecedented yes, but why should we think that ‘unprecedented’ is by definition sufficient in these once in a century conditions? It clearly hasn’t been.

    In the UK, in the US, in Europe and in Japan this narrative hides from exposure the true incompetents in this global tragedy – central bankers, the economists who continue to defend their policies despite failure after failure and the politicians who prefer the story that has given them power to the reality that may see them losing it.

  • Geoffrey, not just about “losing face”, also about admitting to catastrophic judgment calls which probably put an end to various political careers. You can understand a certain unwillingness!

  • Andrew Suffield 22nd Aug '12 - 8:35am

    There’s no shortage of people who felt very confidently able to warn that Plan A was going to be a disaster, and who could explain exactly why with strong economic arguments

    Hold up there a minute. Those people were clearly wrong. There hasn’t been any disaster.

    There just hasn’t been much of a success either. The economy hasn’t shown any real signs of changing much at all. All we’ve been getting is tiny amounts of growth and tiny amounts of recession, adding up to not a lot of movement.

    All of the people who predicted success have been proven wrong. All of the people who predicted disaster have been proven wrong. We should clearly stop listening to all those people. This includes most people who write for newspapers.

    (It’s pretty hard to call whether or not the government’s approach was wise – it hasn’t made things any better, but it has weathered the eurozone chaos without any significant damage to our economy. Is that a good performance or a bad one? I have no way to tell, and I doubt any commentators do either.)

    I continue to favor expanding investment in “safe” projects, like housing and transport – and avoiding speculative investment by the government in risky business ventures or consumer spending, which are just a gamble.

  • Peter Watson 22nd Aug '12 - 8:46am

    @Andrew Suffield
    I’m no economist, but wasn’t Ed Balls warning that the coalition’s policies would stifle growth and lead to a double-dip recession, while the coalition, even a year into implementing its policies, were telling us that would not happen.
    Surely we should query the usefulness of Osborne and Alexander (nee Laws) when they make Balls look good.

  • I distinctly remember Osborne poo pooing the idea of a double dip and his allegedly carefully worked out economic strategy being referred to as “Osborne’s big Gamble”. It looks increasingly like he put his money on a donkey.
    Of course Cable’s economic plan was better, but so was the the original Labour plan. They were both built on a certain amount of flexibility and I really don’t think either would have cut the top rate of tax just as the economy was stagnating . At the moment the Government is borrowing to stand still , which was also widely predicted. As for the idea that we need inflation. People just aren’t spending, so pay freezes and further cuts would merely exasperate the problem.
    Personally, I’d raise tax to reduce the need for borrowing. and let inflation or even deflation take it’s natural course. But then again I’m not really a believer in small government,

  • Tim Nichols 23rd Aug '12 - 4:11pm

    @ Kit Smith

    Proper kudos to you for considering the evidence and admitting that your previous view was wrong.

    Are you a PCC? If not, please become one – we need more politicians who are able to do that!

  • Bill le Breton 23rd Aug '12 - 6:22pm

    It is good to see Kit promoting the thoughts of Martin Wolf (and Ed Randall). I hope he has read this slightly earlier blog by Wolf: The Case for Truly Bold Monetary Policy, here http://www.ft.com/cms/s/0/024b7a7a-bfa7-11e1-bb88-00144feabdc0.html?ftcamp=published_links%2Frss%2Fcomment_columnists_martin-wolf%2Ffeed%2F%2Fproduct#axzz24OFnPKaK

    Wolf writes,
    The big point is this: the ability to use the balance sheet of the central bank freely, when banks are not lending, gives the government the freedom to borrow ultra-cheaply. One benefit is that it can slow the reduction in the fiscal deficit until the economy recovers, if it wishes to do so, since it needs to sell very little debt to the public. Another is that the BoE’s balance sheet can be used to support lending into the economy, as now planned, or to finance direct transfers of purchasing power via so-called helicopter money. In the last resort, the power to create money rests properly with the state. When private sector supply is diminishing, as now, the state not only can, but should, step in, with real urgency.”

    This is all consistent with Koo, to whom Ed refers in his paper.

    Stepping in with real urgency (and without a self imposed prior limit) should be Liberal Democrat policy within the Quad.

  • Peter Watson 24th Aug '12 - 2:00am

    @Kit Smith
    ” It is not easy to accept such a counter-intuitive argument that lots of debt can be solved by more debt (used in a different way to last time).”
    I remember someone on this site using Osborne/Cameron/Clegg’s (flawed) domestic analogy of a household with the credit card maxed out to suggest that borrowing money to repair your car in order to get to work is an example where borrowing a bit more can help with paying off debts. And those same political leaders encourage our teenagers who want to go to university to take on a huge level of personal debt before they earn a penny.

  • Bill le Breton 24th Aug '12 - 8:29am

    Peter you are right. This ‘burdening our grandchildren’ argument is fallacious – bequeathing our grandchildren a smaller economy than would otherwise be the case is the real neglect of the powers that be, including our economically illiterate leadership.

    At the risk of providing too long a quote, Martin Wolf ended his recent series (pointed to by Kit, above) with what I think should be the foundations of Liberal Democrat macro-economic policy. The seven points and the series should be required reading in what remains of the holiday http://blogs.ft.com/martin-wolf-exchange/2012/07/30/accelerating-private-sector-deleveraging/#axzz24OEAl9NM

    Martin Wolf writes:

    “I will finish this series of posts on balance-sheet recession by making seven concluding points.

    1. First, if an economy is to escape from the legacy of excessive accumulations of private debt without a prolonged depression and permanent damage to productive capacity, it is vital that policymakers sustain the growth of nominal GDP. Macroeconomic policy should be devoted to that end, provided the country retains the necessary policy freedom, as the US does.
    2. Second, an active fiscal policy will help by offsetting the long-lasting surpluses generated in a private sector hit by a balance-sheet contraction. Monetary policy, either on its own, or in conjunction with other policies, should aim at steady growth of nominal GDP. The most effective ways of achieving this are likely to be highly unorthodox. This may well require close co-operation between the fiscal and monetary authorities, if possible. In the US , alas, it now seems impossible.
    3. Third, it is also necessary to restructure debt directly. Yet when gross private debt may need to be lowered by as much as 100 per cent of GDP, restructuring cannot be achieved painlessly or swiftly. Again, it will be easier to do this, the more dynamic is the overall economy. Debt restructuring and other such policies should be regarded as complementary to fiscal support for deleveraging, not substitutes for it.
    4. Fourth, we should not focus our attention on arbitrary ceilings for public sector debt. An attempt to cut deficits, to keep debt below, say, 90 per cent of GDP, may be costlier than letting it rise above that level. Policymaking is always about choosing the best of bad alternatives.
    5. Fifth, people must also not focus on the allegedly immoral bequest of fiscal debt to future generations. They must also consider the assets we bequeath. If the result of temporary fiscal deficits is a larger economy both now and in future, as Brad DeLong and Larry Summers have argued, it is well worth accepting them.
    6. Sixth, the danger remains of economic collapse and deflation. That danger would be particularly severe if policymakers went for premature retrenchment. A rapid shift towards fiscal balance in the US would surely generate a big downswing in the economy. The results could be politically and economically catastrophic. Timing is everything.
    7. Finally, there latively benign outcome is more likely if the government finances investment and uses its fiscal policy to encourage private sector investment. In other words, assets matter. So does the overall size of the economy. Not least, people who are alive right now matter. Too often, fiscal conservatives sound just like the revolutionaries who were prepared to sacrifice present generations for what turned outto be imaginary future benefits.”

  • At the risk of getting myself in serious deep water here (not being an economist), I can’t help thinking that growth-focused economists, as quoted here, are not fully taking on board what used to be called “The limits of Growth”. If my understanding is correct – and I am sure others will let me know – Nominal GDP, which Wolf says should be supported to steadily rise, is different from GDP in that it can rise for a combination of two reasons, 1 Actual increases in output etc, and 2 The money value of goods and services produced, when there is inflation in the system.

    If we recognise that there are real commodity and natural resource use limits on us, and that growth in GDP must be limited also, but we say that nGDP should rise, does that mean that we want inflation in the system, and how do we make sure that doesn’t run out of control?

    I also can recognise that there are difficult political conundrums to solve when we accept that natural limits are there – especially with rising human populations. It would, however, seem sensible to build in some assumptions of resource limitation into the way we measure and forecast trends. It seems to me that that would lead to a more managed arrival at the Earth’s limits, rather than current economic thinking, which seems to be calculated for humanity to hit the buffers at full speed! Yes, these issues are political, but economic assumptions seem shaped not to help the political adjustments which will be needed. NB I do not think that fiscal contraction per se, as exemplified by current policy, is useful, as this affects people at the bottom and middle more than the top, and also has an assumption that somehow it is temporary, and we will return to boom conditions “once we recover”.

  • Bill le Breton 24th Aug '12 - 4:40pm

    Tim,
    Prior to 2008 there was a long period of stable NGDP growth of around 5% in this country – made up as you say of inflation and real growth: roughly 2% inflation and 3% growth.
    The boon of this was stability itself. It enabled people to make decisions with a certain degree of certainty over the extent of demand that could be expected in the economy.
    The figure had also been arrived at because it tended to maximize the use of resources or to use much of the human capacity of our country. The Central Bank was doing a good job in this period.
    Had that growth figure persisted virtually all the debts incurred (ie freely agreed by borrowers and lending intermediaries) would have been sustainable – certainly enough for the system to cope with normal default levels.
    This was not only the case in the UK, but also across the US and throughout Europe.
    The overtight monetary policy of the inflation hawks mean they have much to answer for.
    Level targeting of NGDP, that is compensating for under or over shooting in subsequent years, has everything to recommend it. It is really a very Liberal and a very Social Democrat policy.

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