Opinion: So what’s really wrong with the economy?

The autumn statement was reminiscent of the 1961 Sid James film ‘Carry on Regardless’. Austerity policy is not working, and the claim that it will work is constantly pushed to the far future. What’s wrong? There is nothing wrong with the real supply side economy. But there are two crucial things wrong with the financial economy, meaning that we have a crisis of demand, not of supply. These are:

1. Disposable income has grown significantly less than GDP

2. Financial orthodoxy insists on balancing government accounts

Between 2001 and 2007 when the crisis hit, GDP grew by 19.5% but disposable income by only 11.5% (ONS data in constant 2009 prices). This represents a demand gap of 4.5% of GDP. This was also true over a longer period from 1993 to 2007 when GDP grew by 58% and disposable income by 48%.

To enable consumer expenditure to also grow by 19.5%, the income gap was funded by increased household borrowing which left households and banks over-leveraged, causing some banks to fail and others to need refinancing. This familiar story is shown in the following graphs. Since 2007 it’s been a crisis which won’t go away.

How can disposable income grow more slowly than GDP? At a recent Festival of Economics in Bristol, three different answers were put forward. The Guardian’s Larry Elliot claimed that wage depression resulted from lack of union power. The Sunday Times’ David Smith claimed that it was due to increased tax to fund increased government expenditure. Paul Gregg, professor at Bath university, fingered the gap between productivity and real wages as the root cause, which he and Stephen Machin have explored in their recent Resolution Foundation paper.

What should be done about this income gap? Put simply, we can either increase income up to GDP, or reduce GDP down to income, as in current austerity policy. Would stronger trade unions resolve the problem? If productivity is an important driver, then the reduction in the income component of GDP is inevitable, and requires a more radical solution.

Such a more radical solution is available, i.e.:

1. Fund the income gap by a citizen income. My rough calculation of the amount of citizen income which would have been needed to fund the income gap each year is:

2. Do not count this as deficit spending added to cumulating government debt, but simply write it off each year.

3. Distribute it on smartcards with the value expiring at the end of the year to encourage the income to be spent.

4. Target lower income groups.

Here we come to the second thing wrong with the financial economy, the old chestnut that governments must balance their books. Households and businesses have to, so why not governments? The seemingly obvious nature of this dominant view doesn’t make it correct. A thought experiment of a totally automated economy soon shows a case in which the whole of GDP consumption would be deficit financed, and moreover that the deficit would be entirely written off each year. The inevitability of deficit in this thought experiment concurs with current real practical experience that, in fact, some deficit is here to stay unless we either drastically cut our economy, or implement a radical solution.

* Geoff Crocker is a professional economist writing on technology at http://www.philosophyoftechnology.com and on basic income at www.ubi.org. His recent book ‘Basic Income and Sovereign Money – the alternative to economic crisis and austerity policy’ was recommended by Martin Wolf in the FT 2020 summer reading list.

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  • I don’t think it is true that ‘austerity isn’t working’.
    Even the term ‘austerity’ is misleading – we would be better off saying ‘reality’ or ‘honesty’.

    There are many UK companies growing strongly in spite of the overall economic conditions. These firms are not relient on house-price inflation, credit bubbles, or govt. subsidy. These are the firms we want to succeed and are doing just that. Trying to puff-up the old bubble will just keep the doomed companies going longer and cause a bigger pop when they fail. We need a clearout of non-productive activities from our economy so resources are available for real growth.

  • Maybe remove employer’s NIC for people on the minimum wage and raise the minimum wage by the corresponding amount would get it to £7.07 from £6.19 for people outside London which is still short of £7.45 Living Wage but the evidence seems to show that small increases in minimum wage don’t harm businesses so maybe a several year plan to increase to bridge the gap. Alas, my back of a beer mat calculation shows a cost of about £60 bn and so I understand why everyone thinks a Living Wage is a good idea but no-one has got round to committing to it. Nevertheless in the interests of debate and the fact that it would remove the need for in-full-time-work-benefit and stimulate growth in the economy. My back of beer mat calculation is as follows: 4.8 million people on less than living wage which, assuming none of them lives in London (which is clearly wrong) and that they work 40 hours a week for 48 weeks a year (also flag in the ground as I don’t know any better)

  • Andrew Suffield 10th Dec '12 - 11:01am

    Here we come to the second thing wrong with the financial economy, the old chestnut that governments must balance their books. Households and businesses have to, so why not governments? The seemingly obvious nature of this dominant view doesn’t make it correct.

    Indeed, it is not the obviousness or the fact that it is widely held that makes this “correct” (or more precisely, “true”). What makes it true is that this view is held by the people that the government wishes to borrow money from.

    These are the terms on which that money is available for borrowing at current rates. Don’t like it? Don’t borrow so much money… oh wait, think about that…

    It is a lot simpler if you stop trying to find some fundamental reason why things should work this way, because there isn’t one. It is merely an arbitrary rule set by the lenders.

    Austerity policy is not working

    Trivially true, because austerity policy is not being used.

    It’s not “austerity” when the government spends more each year, and kills off some projects in order to fund others that it thinks are more valuable. That’s just “government”.

  • Bill le Breton 10th Dec '12 - 12:40pm

    Andrew, where on earth do you get the idea that the people who buy UK Gilts expect or wish the Government to balance its books? Think about it.

  • Geoff Crocker 10th Dec '12 - 12:55pm

    O dear Simon McGrath. You clearly like this old chestnut. You haven’t read the post properly. Noone is proposing governments spending as much as they like, but stimulating demand in the economy exactly to meet the GDP/income gap. This would be non inflationary.

  • Geoff Crocker 10th Dec '12 - 1:00pm

    Andrew Suffield

    Bill le Breton is right. A recent FT blog by Gavyn Davies analyses a huge nominal debt account between the Treasury and Bank of England. We are in effect writing off deficit (or its accumulation as debt) anyway.

  • Geoff Crocker 10th Dec '12 - 1:09pm

    Liz Maffei

    We share the same objective of stimulating demand in the economy and directing this to lower income groups. My concern is that your wage proposal would put this into product prices. I suggest that technology and automation are bound to continue to reduce the income component of GDP and that a citizen’s income outside both government deficit and the product price is preferable for this reason.

  • Geoff,

    I applaud your thinking on this and find James Roberston’s proposals in ‘Future Money’ for a Citizens Income funded by resource taxation and reclamation of the money creation process for the public good quite an intriguing and innovative approach to the problem you highlight.

    My own preferred solution to the problem of real incomes lagging productivity is threefold:

    Firstly, the Citizens income you advocate funded by combing the personal tax allowance and coming Universal Credit into a single Universal basic income..

    Secondly, Job guarantees aimed at providing a sustainable solution to the dual problems of inflation and unemployment. A minimum wage job guarantee provides a floor to demand. Instead of the unemployed serving as a reserve army of labour, a buffer stock of employed people (employed in the job guarantee program) provides the same protection against inflation without the social costs of unemployment, Minimum private sector wages will need to rise towards a living wage to secure the Labour required creating a virtuous circle of increasing demand for surplus productivity.

    Thirdly, land Value Taxation and Seigniorage, aimed at shifting a significant element of the incidence of taxation away from product prices, Labour and production to the capture of economic rents.

    This approach is aimed at addressing the issues you have set out in the article, but retains the existing framework of balanced budgets and sound money.

  • Matthew Huntbach 10th Dec '12 - 2:15pm

    Can you give the definition of “disposable income” you are using? It would seem to me that if GDP is growing but disposable income is not, then there is money being sucked into things which do not count as”disposable income”. How much of GDP has been sucked into pushing up house prices without getting counted as “disposable income” for example?

  • Geoff Crocker 10th Dec '12 - 2:45pm

    Thanks Joe, I always value debate with you. We clearly agree on the need for demand stimulus in similar forms if slightly varied.

    I do however take a different view on ‘sound money’ and balanced budgets. I would define sound money to mean money emission strictly linked to output GDP. This output GDP constraint prevents inflation.

    I don’t think government budgets have to balance or indeed can balance or do balance. I run with a theory of money that it is virtual, does not obey the laws of thermodynamics, and can be created and destroyed. In the thought experiment I refer to, say a mega machine plugged into the earth generated 1.4 trillion things a year with no employment. We’d need to distribute 1.4 trillion vouchers a year which were handed in in exchange for 1 thing each and then thrown away. In this case the whole GDP is ‘deficit’ and is completely written off each year.

    I suggest we have an inevitable element of this phenomenon in advanced technology economies and cannot avoid productivity growing above real wages and cannot avoid an inevitable deficit in government funding.

  • Geoff Crocker 10th Dec '12 - 2:50pm

    Matthew Huntbach

    You can find all the (very extensive) definitions of disposable income on the ONS web site. As you say, the GDP / disposable income gap has gone somewhere, probably into retained profit and current corporate cash piles. However I suggest that productivity rising ahead of real wages is inevitable in an advanced technology economy and we have to adjust to it. House prices have been pushed up but this is by mortgage funding in excess of the new debt used to supplement disposable income to meet consumer expenditure up to 2007 when this unsustainable system collapsed.

  • Andrew Suffield 10th Dec '12 - 3:04pm

    A recent FT blog by Gavyn Davies analyses a huge nominal debt account between the Treasury and Bank of England. We are in effect writing off deficit (or its accumulation as debt) anyway.

    This does not appear to be in any way relevant to either point I made.

    Andrew, where on earth do you get the idea that the people who buy UK Gilts expect or wish the Government to balance its books?

    Erm, this is a bit like being asked to explain why rain is wet, but…

    Government bonds are purchased by large investors on the basis of the credit rating and the interest rate. Credit ratings are calculated by various agencies on the basis of economic factors, which for governments includes the ratio between its outstanding debt, trade balance, expenditure balance, and (sadly) GDP.

    UK gilts are bonds which are primarily purchased by insurance underwriters and pension funds, which religiously follow this procedure.

    Hence, the people who buy gilts are very interested in whether the UK government balances its books. They will not lend at low interest rates to countries which are unwilling or unable to do so.

  • Geoff
    The key to your discussion on GDP, and the graphs you have presented, all centre around the fact that things changed around 2007. And you say yourself that, “Since 2007 it’s been a crisis which won’t go away.”
    So why did world growth begin to stall around 2007? If we observe what else happened around that period we find that, World Conventional Crude Oil Production, began to plateau around 2006.
    Understandably, governments are trying to mitigate this lack of ‘production growth’ in Conventional Crude oil, by implementing efficiency measures , and by cranking up production of more expensive Unconventional Oil, such as Bio fuels, Gas to Liquids and suchlike.
    Around the 2007 mark, the price of Crude Oil briefly hit $147 per barrel. before falling briefly (in response to the global collapse), and then again rising to hover in the $110 per barrel range ever since.
    This fact, I believe, is crucial to understanding the when, and the why, growth faded in 2007. Very few economists seem to understand how fundamental the cost of energy and in particular oil, is, in global economic wellbeing.
    You also say that the disposable income gap has gone somewhere. Those steep increases in oil/energy costs, are I believe the ‘sink’, for that disposable income. Governments, businesses and individuals, are increasingly pouring more of their disposable income into rising energy costs, only to find their GDP, production, and economic wellbeing, simply at best, ‘running n the spot’,
    So we can say that, the economic growth we have enjoyed for 70+ years, was based on cheap energy, ( and more crucially, cheap oil). Around the period 2005 to 2007, due to Conventional Oil reaching its production limits, Conventional Oil, went from cheap, to expensive. As a result, economic growth (worldwide), is stalling, falling and flat lining, because growth cannot survive and thrive, using expensive energy (oil).
    So in answer to your headline question, ~ “what is wrong with the economy?”
    Expensive energy, killed it.
    Unless we can find a new source of (( cheap energy )), economic growth will not return to anything like the levels we have enjoyed. And thus, no amount of magical Keynesian economic thinking, imaginary money printing, or other ill considered economic shell games or sleight of hand, will change, mask, or mitigate, the ( expensive energy = low or no growth ) dilemma, we now face.

  • I find the graphs in this article rather encouraging.
    The debt bubble has definitely burst – it was always going to happen, just a matter of ‘when’.
    The effect on GDP has been relatively small, and we are perhaps a year away from full recovery.
    Carry On!

  • Geoff Crocker 10th Dec '12 - 4:39pm


    My post agrees with you that the real supply side of the economy is in great shape. The problem is with deficient demand which can occur when technology and automation cause productivity to grow faster than real wages. So we do need some demand stimulus. I agree that this can’t be in terms of borrowing as this soon becomes unsustainable. So a citizen’s income funded outside government borrowing is the only answer in an advanced technology economy.

  • Geoff Crocker 10th Dec '12 - 4:43pm

    Andrew Suffield

    Do we want to manage our economies under the dictats of the credit rating agencies? There is a current demand deficiency and, if we are to avoid recession, it has to be made good with a stimulus which does not add to government debt. Despite your orthodoxy, this can be done in a way which makes the Gavyn Davies blog very relevant.

  • @ Bill le Breton

    “Andrew, where on earth do you get the idea that the people who buy UK Gilts expect or wish the Government to balance its books? Think about it.”

    You appear to make the same mistake as so many journalists and politicians between Debt and Deficit. The government “balancing its books” is addressing the deficit, ie stopping the expansion of debt.

    Your argument appears to assume that those government bond buyers want to have a supply of bonds having a balanced book (no deficit and no debt repayment) would continue to provide for a ready supply of government debt (the secondary market stock and the new issues as debt has to be rolled over). There fore there would continue to be supply.

    If however the government continues to run a large deficit then each bond currently held becomes more risky and therefore worth less (we have to think about the real value of bonds rather than the one manipulated by QE).

    So the buyers of bonds do want the government to balance its books, even if they don’t want all government debt repaid (something impossible in the foreseeable future).

    Equally that is not to say that repayment of government debt is a bad thing either, just because there is a demand for something does not give it social value, less government debt available would force more money to be invested in private sector investment.

    Think about it.

  • Richard Dean 10th Dec '12 - 7:05pm

    What would these proposals do for inflation?

  • Bill le Breton 10th Dec '12 - 7:46pm

    Psi – why am I making a mistake between the national debt and deficits? I make no such confusion.

    To both you and Andrew I ask, in the last 100 years in how many years did the Government ‘balance its books’? In how many years when it failed to balance its books did traders refuse to buy our gilts?

    You both need to take care with the wildly generalizing statements you make.

  • Geoff Crocker 10th Dec '12 - 7:50pm

    John Dunn

    2007 was not an energy price shock like 1973. Rather the increased household debt taken out from 2001-2007 left households and banks over-leveraged.


    My proposal is that funding of a citizen’s income should not be added to government deficit or accumulated deficit = debt but simply issued.

    Richard Dean

    If the amount issued exactly equalled the GDP / income gap, then it would be non-inflationary

  • Richard Dean 10th Dec '12 - 8:18pm

    Dear Father Christmas,

    Please do not give me free money. Free money is certainly inflationary. The price of a good is the amount of money people have to spend on it, so the price of GDP is the amount of money people have to spend. So, if GDP stays fixed while the amount of money spent on it increases, the price of goods obviously increases.

    Please feel free to write off any debts that people owe you if you want. Particularly if it is me who owes you something. But don’t you dare write off debts that you owe me. Talk to Andrew Suffield. I won’t have it. Not if you expect me to lend money to you again sometime in the future.

    In this season of goodwill, why not think instead of re-distributing work, from those who have it, to those who don’t? It might not solve your debt crisis, but it would make unemployed people happy!

    Yours etc
    The Population

  • David Pollard 10th Dec '12 - 8:28pm

    Maybe the Government does not have to balance its books, but we keep getting told that the bigger the debt, the higher the interest payment on the debt. Is that wrong?

  • Geoff you say :
    “I run with a theory of money that it is virtual, does not obey the laws of thermodynamics, and can be created and destroyed.”
    I wish you well in your attempt to circumvent the laws of thermodynamics. Only the foolish, the brave, and an economist would try it. But I suppose it gives us clear evidence, if we needed it, that economics is not a science.

  • Geoff Crocker 10th Dec '12 - 10:20pm

    David Pollard

    No, you’re right. But the point is that the government does not have to define funding of a citizen’s income as deficit accumulating to debt. It just issues the funding to meet the GDP/income gap, as long as this does not exceed the value of GDP.

  • Andrew Suffield 11th Dec '12 - 12:35am

    Do we want to manage our economies under the dictats of the credit rating agencies?

    Maybe not. But those are your choices: do things their way, or stop borrowing money from them. Both choices are valid.

    You are advocating borrowing money from them while ignoring the conditions under which they are willing to lend us money. That’s absurd. There is no reason why they would comply.

    To both you and Andrew I ask, in the last 100 years in how many years did the Government ‘balance its books’? In how many years when it failed to balance its books did traders refuse to buy our gilts?

    The answer would be “in the ones when Greece most desperately needed the money”. Fortunately for us, our government has never fallen into the trap of listening to the scam artists who peddle the “spend money you don’t have, Keynes said it was okay” line, so we’ve never experienced total economic collapse and the breakdown of society.

    You know full well that in a relatively intact economy it’s not a matter of refusing to buy, it’s a matter of demanding a higher interest rate. That just gives us less money to spend in the following year, because an even larger percentage of GDP goes into servicing the debt. I know that you are aware of this because you’ve been repeatedly told in all the other threads on the subject. You are pretending not to know this. That is why I do not intend to waste further time on you.

  • @ Bill le Berton

    “To both you and Andrew I ask, in the last 100 years in how many years did the Government ‘balance its books’? In how many years when it failed to balance its books did traders refuse to buy our gilts? ”

    So lets use the house hold comparison, if I earn a £26000 per year and am in some form of training which I have to pay for and it costs £100 per year the bank is not going to have a problem with lending me £100 as it looks like I am going to be able to repay it (if it for example will last 4 years).

    If however I earn £26000 and I am borrowing from the bank £6500 per year and show no sign of how I will reduce that borrowing level or repay it then the bank will loose patience.

    Governments can force pension funds to buy guilts so it is able to kick the can further down the road but then you have ripped off your population when they need to be self sufficient.

    As for the last time the government failed to sell its bonds (that I remember): May 2009

  • Geoff Crocker 11th Dec '12 - 8:10am

    Andrew Suffield and Psi

    I am not advocating borrowing. I don’t however accept Psi’s analogy of government borrowing as equivalent to household borrowing – this is a fundamental mistake which drives current ‘balance the books’ policy. I also don’t accept Andrew’s dismissive attitude towards Keynes, whose intellectual contribution to economics was profound and remains highly relevant.

    I am advocating free issue of funding of a citizen income BUT strictly limited to the GDP / disposable income gap.

  • Geoff Crocker 11th Dec '12 - 8:24am

    John Dunn

    Well economics is a science in the sense defined by Karl Popper, ie that it proposes explanatory hypotheses and tests them empirically. And money is virtual. Banks create virtual money in extending credit which is a multiple of their reserves as their regular business.

  • Jonathan Webber 11th Dec '12 - 8:45am

    The Autumn Statement recognises the importance of international trade and exports to the UK economy. BIS through Dr Vince Cable and Minister of Trade, Stephen Green, have committed greater resource to UK Trade & Investment and have ambitious targets that include doubling the UK’s exports from about £500 billion to £ trillion by 2020. Additionaly the UK is looking to add a further 100,000 SME exporters to current numbers by 2015 and alter our ratio of exporters from its present 1:5 to 1:4 – which would bring the UK in line with our European counterparts.

    The FCO has also launched a major initiative under the ‘Prosperity’ banner – and I hosted 50+ FCO officers in Birmingham yesterday to explore ways by which a competitive and export-led UK can expand into new markets.

    For any non-exporters (or export curious) may I commend the UKTI website – http://www.ukti.gov.uk – and the ongoing Export Insight visits? Talk to your local International Trade Advisor (free – and find him or her on the website) as these visits are really good.

    I declare an interest: I’m Director of International Trade & Development at the Birmingham Chamber of Commerce, I run UKTI in Birmingham & Solihull – and I’m West Midlands Lib Dem Regional Chair.

  • Geoff Crocker 11th Dec '12 - 9:38am

    Jonathan Webber

    We all wish you well in developing UK exports. It’s vitally needed if the switch of N Sea oil and gas exports to a heavy energy import bill is to be reversed. And it’s good to hear that FCO are taking their responsibility in this more seriously than they have in the past.

    But it’s difficult to see how UK exports can double when our target export market economies are also suffering economic crisis caused by demand deficiency. By posting in this thread, are you implying that export growth is a credible alternative to stimulating demand in the domestic UK economy? If so, on that point, I’d strongly disagree. We need both, and of the two, reflating domestic demand is the more easily achievable.

  • >How can disposable income grow more slowly than GDP?

    Pretty obvious really, just rework the figures to be per captia rather than gross.

  • Geoff Crocker 11th Dec '12 - 1:18pm


    Not at all. Between 2001 and 2007, GDP/capita grew by 16.1% whilst disposable income / capita grew by 8.1%. There is still a large gap to explain by the other factors cited in my post.

  • Geoff,

    a couple of points to ponder.

    1. Why are prices and wages not adjusting to bring output and demand into equilibrium? In a gloabalised world of flexible labour markets and instaneous electronic pricing this cannot be laid solely at the floor of sticky prices and wages, weakened union power or the deadweight effect of taxation. If, as you suggest, surplus productivity is going into retained profits and corporate cash piles this will ultimately have to be disbursed as investments or dividends, therby flowing through to disposable income at some point.

    2. In your model what happens when periodic increases in disposable income exceed increases in GDP. Does the surplus income generate increased output to bring the supply and demand curve back to equilibrium. Alterntively, will the surplus income pay down existing consumer debt, build up in uninvested savings in the banking system or do prices increase to mop up the surplus disposable income? If the latter, will the BofE not feel compelled to intervene with interest rate hikes to dampen inflation and reduce the impact on prices of increases in disposable income ?

  • Geoff Crocker 11th Dec '12 - 5:59pm


    Good points. Your first point seems to refer to a neo-classical economist’s world in which prices and wages adjust to excess demand or supply, and factors of production can then substitute totally flexibly? I agree that in some markets, globalisation and electronic pricing may at last have helped us get close in practice to the theoretical model of perfect competition. However, I think many rigidities still apply. Take the TUPE rule on employees shifting between organisations for example. I am not against TUPE, but it does enforce wage downward stickiness. And as Paul Gregg’s Resolution Foundation paper which I quoted in my post shows, there are institutional rigidities which mean that unemployed workers do not compete against employed staff. Then take the Keynesian diagnostic that if GDP in excess of disposable income led to price reductions, which contained wage reductions, then disposable income drops further and we enter a downward spiral. Wages currently measure standard of living and if they decline because output GDP has increased, then we have lost the plot and allowed a failure in the financial engineering of the economy to deny us what we are capable of producing and consuming. The reason this didn’t happen between 2001 and 2007 was of course that household borrowing temporarily filled the gap. I’m now arguing for an unfunded citizen income to do the same when needed, ie when output GDP growth > disposable income growth.

    I also worry that retained profit and corporate cash piles will not feed through to disposable income. They may simply stay saved. And in any case they may be disbursed as income to shareholders less likely to spend.

    Your second point raises the possibility of the opposite condition when output GDP growth < disposable income growth. My argument at the moment here is that this condition is unlikely. It depends on what is driving the differential. If it is union power, then perhaps increased union power might conceivably effect this outcome, ie an increase in wages vs profit in the distribution of GDP. I think something similar to your analysis is likely correct in the case of it actually happening. But I am interested in the underlying inexorable effect of technology reducing the wage/income component of output. It seems to me that this must be the case, and the real question is why it isn’t more prominent? It would be great to have some conference where we could deliberate these issues.

  • Geoff,

    I appreciate the point you make about the Keynesian diagnostic that if GDP in excess of disposable income led to price reductions, which contained wage reductions, then disposable income drops further and we enter a downward spiral.

    However, this may not fully account for the extent of globalisation we have seen in recent years. A great deal of low tech manufacturing has been outsourced to China and other low wage economies. One consequence of this has been a general price defaltion in manufactured goods imported from these countries offset by corresponding price increases in domestic goods and services including housing and energy costs.

    Similarly, the retained profits of this increased global trade may be reinvested in expanding overeas production facilities at the expense pf domestic production exacerbating an already wide trade gap and balance of payments deficit.. Might this be a reason why we do not see the productivity gains of recent years translating into increases in real income? If so, is a monetary funded citizens income a sustainable solution to what is a trading competiveness issue?

    On the second point, we have seen aggragate disposable incomes grow in excess of GDP in the last quarter U.K. Economy Shrinks Less Than Estimated, Incomes Rise. Perhaps not a long tern trend, but certainly one that may be a feature during a long period of low growth and wage catch-up. If this trend continues for an extended period of time, is it not the case that we should expect to see a steady decline in the level of consumer credit required to purchase excess output?

  • Geoff Crocker 11th Dec '12 - 8:38pm


    Yes I agree with both these points. However GDP does include an (exports – imports) term so increasing domestic income to purchase it shouldn’t be a problem? The big issue is when China gets hold of the Keynesian point and increases its domestic consumer spend, diverting its exports to home consumption. Then the element of GDP/income gap in the UK economy due to this factor will presumably drop. Whether technology led productivity or capitalist wage depression will fully take up the difference is the question.

    I agree that lower growth with rising incomes will reduce the credit component of expenditure, but this is already greatly reduced. Ultimately low growth must constrain income growth?

    If only we could jointly take over NIESR or some such outfit and get them working on our agenda 🙂

  • Jonathan Webber 12th Dec '12 - 8:56am

    Messrs Bourke & Crocker: My Post was designed to highlight a few points (your debate rages above my head I’m afraid) and it’s quite possible I’ve chosen the wrong forum in which to do it:

    First, that among the gloom of an Autumn Statement there are chinks of light – the drive to increase export and international trade through increased government support is one such.

    Second, Liberal Democrats are the major drivers behind this – and it’s an example, once again, of where we make a measurable difference in the Coalition government.

    Third, the business community, especially SMEs, are a natural listening constituency and one we should be addressing, especially digital/knowledge based entrepreneurs and more especially those engaged in international trade.


  • Geoff Crocker 12th Dec '12 - 11:00am

    Mr Webber

    Fine but you might like to respond to my comment on your post?

  • Jonathan Webber,

    firstly congratulations on your selection as a list candidate for the West Midlands European region elections. In addition to your responsibilities as Director of International Trade & Development at the Birmingham Chamber of Commerce, runing UKTI in Birmingham & Solihull and West Midlands Lib Dem Regional Chair, you must be a very busy man.

    If you can find time, I would be interested in hearing more about the FCO ‘prosperity’ initiative. Perhaps you could submit an article to this site with your thoughts on the impact it is having in your region and nationally.

    I agree with your view that “the business community, especially SMEs, are a natural listening constituency and one we should be addressing, especially digital/knowledge based entrepreneurs and more especially those engaged in international trade.”

    PS: Good news today on the unemployment figures.

  • Liberal Eye 12th Dec '12 - 4:36pm

    An interesting post and discussion but I must take issue with a throwaway point made at the beginning – “There is nothing wrong with the real supply side economy”. I think there is lots wrong with it.

    For instance training. It seems every time the economy needs more plumbers or whatever we have to import them from Poland while armies of un- and underemployed cannot find work. If we had a properly functioning supply side unemployed would retrain into shortage skills as required, albeit with some time lag. Then there is the notorious difficultiy smaller SMEs have in finding capital. That’s a pretty huge problem in itself. Then again there is the way manufacturing has been allowed to wither in favour of finance. It is certainly true that it’s going the way of agriculture before it and employing steadily less people but, like agriculture, that tells us little about it’s importance – for instance that innnovation is strongly linked to manufacturing; having a brilliant idea is of little value unless you can marry it to an ability to manufacture. Or, to put it another way, many innovations come about only because of new manufacturing techniques. Also I suspect that the supply side has become more and more focussed on rent extraction, clearly so for the finance sector, but going far beyond that.

    For the rest I agree with Joe Bourke that the trade issue is vital and while I like the idea of a citizens’ income I don’t see how it can work in a context of persistent trade deficits which mean that, however you slice it, someone else is accumulating claims on the UK which we have no visible means of paying – ie living beyond our means.

  • Geoff Crocker 12th Dec '12 - 5:17pm

    Liberal Eye

    OK, by definition there are shortcomings in the real supply side of the economy, some of which you identify. But my brief point was that, for the purposes of resolving the crisis, its not a real supply problem but a funded effective demand problem.

    SME finance is also part of this financial problem. QE and increased bank reserve requirements cancelled each other out in a zero sum game policy. We do have some brilliant technology supply in the UK as PeterMarsh of the FT pointed out at a recent conference. Rolls Royce and Renishaw are two examples here in the S West.

    You don’t accept my proposal for a citizen income, but we are not living beyond our means if we are consuming within our GDP. What other solution do you propose for the crisis?

  • Liberal Eye 12th Dec '12 - 7:18pm

    There are indeed some outstanding companies. My worry is that they survive DESPITE the system which, taken as a whole, is pretty dysfunctional.

    Agreed that we aren’t living beyond out means if we consume within our GDP – that some people have more than enough and others not nearly enough is a distributional issue and a cizitens’ income is certainly one way to fix this so I am not opposed per se but I do think we need to understand the factors driveing the inequality. It may be that if we change those the problem will largely go away. Didn’t Keynes say something about creating employment if you want to fix the budget?

    But … if we run a persistent trade deficit someone has to finance it and it can’t be done by monetising it in the way a domestic deficit can.

  • Liberal Eye,

    what Keynes said was “take care of employment and the budget will take care of itself” Pretty good advice then and now, in my opinion.

    I think you are right to note that consuming within our GDP does not equate to living within our means, if GDP is being driven by borrowing for consumption – whether private or government consumption. We have run a persistent trade deficit since the 1980’s that only reduces during recessions, when consumption and demand for imports slows down. The trade deficit has typically been financed by inward investment flows including the purchase of UK gilts and securities by overseas investors.

    A persistent trade deficit is a feature of uncompetitiveness and an unbalanced economy, which can lead to lower economic growth and poorer prospects in the long run. If capital / financial flows were to dry up, it would lead to depreciation in the exchange rate and a fall in living standards

  • Geoff,

    I take your point about the need for disposable income to be sufficient to purchase product output. Classical theory teaches that disposable income (demand) and product output (supply) should converge at a point of equilibrium as wages and prices adjust to market signals. Indeed this basic supply/demand axis is the foundation of most economic theory.

    Introducing money, in the form of consumer credit or a helicopter drop citizens income necessarily alters that relationship. It would seem that one of three things would happen:

    1. If extensive credit consumer credit facilities are no longer freely available, wages may increase and prices fall or more likely remain flat until such time as the excess production can be purchased without further increasing the stock of consumer debt.

    2. If loose monetary policy sees a return of freely availble consumer credit, wage increases may continue to lag price increases

    3. If a monetary funded Citizens Income plugs the gap in disposable income, wage increases may also continue to lag price increases.

    To the extent that personal consumption of imports is not funded by personal income derived from export earnings, then it has to be funded by capital inflows/borrowings from our trading partners. Is a significant trade deficit sustainable when consumers are reliant on money printing (as oppossed to overeas borrowings) to acquire the products of overseas producers? Or put another way can import prices stay flat when the home currency may be depreciated relative to the currencies of overseas trading partners?

  • Michael Parsons 17th Dec '12 - 11:21am

    I think your reply to Jo is spot on! But what do you feel about the likelihood that constant deficit nations have no motivation to change as long as they go on getting imports in effect for free? like USA over the last decades? True a debt is always with you, but as long as it is only in paper currency terms it can be devalued away – so the USD has lost over 90% of its purchasing-power since 1971 I believe, while anyone buying Treasury bonds now (pension funds, overseas savers and national debt holders) can only face catastrophic capital loss when interest-rates rise.. Devaluation of the currency reinforces local-cash value of poorly performing export industries and so does not decrease unfortunate specialisation that hasn’t worked out well, so direct intervention is called for.
    So what about adding to the demand-control notions the need for a national development planning system re-allocating resources to meet national needs, not always technologically advanced solutions though? Coal rather than the absurdly loss-making wind-power, for example? Free Higher education rather than student loans? While of course funding research such as that into power from thorium (as UKIP suggests):more on the lines of the French post-war economic miracle? (railways, nuclear, aircraft and space, defence, computers): ” France hasn’t got oil, but |France has ideas”. As well as employment targets.

  • Geoff,

    didn’t Keynes write about the impact of advanced technology on production, conjecturing that within a 100 years with little need for much in the way of work our biggest problem would be what to do with so much leisure time?

  • Bill le Breton 18th Dec '12 - 6:56am

    Geoff, thank you for your comment and link on NGDP targeting above on the 13th which I have only just come across. Literally as well as metaphorically my birthday! 😉

    For those not up to speed with this important speech by the next Governor of the Bank of England you will find the relevant piece two thirds of the way into his general message on Guidance here http://www.bankofcanada.ca/2012/12/speeches/guidance/

    The short message is that there IS an alternative to the economic policies of both front benches. It’s a pity that it is not our economic policy. If the leadership really wanted to position itself outside of the ‘triangle’ – instead of at its insipid centre – it should have been campaigning along the lines it is now being urged to consider by the brightest Central Banker in the world.

    It might just be that the Bank is operating an NGDP target – it is just that it’s the wrong target – one too low by 2 or 3% and one dictated by the Establishment’s disabling pessimism.

    Once we have the *right * NGDP target, recovery may come surprisingly quickly, as we may see in Japan in the next few months. And it could of course see a citizens income as a good means of providing part of the necessary stimulus.

  • Michael Parsons 20th Dec '12 - 10:47am

    Yes: coal? But we need to balance the problems of its fumes (to be controlled ASAP) against the social costs of destroying that industry, raising heating costs by taxing fuels for windmills etc and increasing our import-dependency, not to mention the potential environmental disaster of fracking (also rich in CO2 gas?): I suggest the balance favours coal at present. Thatcher’s battle “against the enemy within” was pretty destructive . and betrayed many.. We need to look at the sociology of economics – the institutional, political/ideological and cultural factors in raising transaction costs.. As for recent economics (esp IEA?) there is a tendency to confuse rationality with omniscience, I feel, not to mention the absurdities of community indifference curves and long-run equilibria , perfect information competition and “rational decision making”etc.

  • Geoff,

    thanks for the link. The concluding paragraph of your review dovetails well with your principal argument in the article above:

    “So the key issue to emerge from reconsidering Keynes’ theme is the technology led delinkage of productivity and real wages, which is responsible for the current crisis. This has led to deficient effective consumer demand for the increased output, a gap initially funded by unsustainable credit. We really have to face the dilemma Solow identifies, and give it the thought he points out has been lacking. Only a universal credit or `citizen’s income’ can overcome the delinkage between productivity enhanced output and falling real wages. This is why the analysis urgently needs to be taken further by professional economists. Otherwise ill-considered current government deficit reduction programmes will continue to chase their tail in a downward spiral.”

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