Opinion: Increasing Spending on British Stuff

The Federal Conference Committee this week selected for debate this autumn a motion on Strengthening the UK Economy ghost written for the leader by his special advisers.

It calls on the Coalition to do seven things. The first six are laudable but the seventh: “(to) monitor closely the progress of the Bank of England against its refocused mandate in order to ensure that monetary policy is focussed on aiding growth” is a missed opportunity.

This is a time when Liberal Democrats could and should express an alternative to the Conservative/Treasury policy referred to above which Osborne announced in the Budget.

The policy allows the Bank to wander from the strict path of 2% inflation (now therefore metaphorically and literally exclusively the Balls policy) and to give discretion to the Monetary Policy Committee to issue forward guidance on why and for how long it will deviate from the strict target.

It is this new discretionary approach which the SPADS are, on behalf of the Leader, asking Conference to ‘monitor’, instead of campaigning immediately for a rule based on a target for Gross Domestic Product measured in pounds (or Nominal Income) which I understand Liberal Reform had advocated in its proposed motion and which I think the Social Liberal Forum might also have supported.

I wish those SPADS followed the reasoning of Chris Giles of the Financial Times (£).

Giles emphasises that the discretionary approach of ‘forward guidance’ must necessarily have some way of measuring the slack in the economy, and concludes that, “Sadly, measures of UK slack are erratic at the moment. There is no possible way to be polite: all are useless for the task of guidance.”

He reviews and dismisses in turn: “Inflation – the ultimate measure – is forecast to be above the 2 per cent target for the next two years, suggesting no slack, which no sensible person believes. Unemployment is no better as a measure. Its relationship to the rest of the economy has broken down since 2008, so following the Fed’s guidance would involve linking policy to a variable we do not understand. That makes no sense.”

“The output gap cannot be observed and a range of cyclical indicators, once preferred as markers of slack by the Office for Budget Responsibility, have behaved so strangely that they provide no help either. Since we have no idea whether the pre-crisis trend of output was sustainable, the gap between real or nominal output today and a continuation of pre-crisis trends is also useless.” As ever, Giles is frank but fair. So, where can we in the UK look for an objective measure that would underpin forward guidance and allow markets to know when they can expect and rely on monetary stimulus or monetary tightening?

Telling it the way it is, Giles writes, “The economy has been chronically short of growth in spending on British stuff.” That’s growth in Nominal Gross Domestic Product. This is why a sensible and distinctively Liberal Democrat policy – not Balls and not Jeffery – would be to champion loose monetary policy “until spending on UK-produced goods and services has risen to an annual rate of at least 4.5 per cent for two years.”

Would the FCC accept an amendment?

* Bill le Breton is a former Chair and President of ALDC and a member of the 1997 and 2001 General Election teams

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19 Comments

  • Bill :
    I appreciate that what I’m about to say is not particularly upbeat, but it has to be said, and hopefully, sufficient numbers will eventually get their head around it, and start the very necessary process of adapting to it, but the (very unpopular), message is that :
    Growth Is Not Coming Back.
    In the timeframe 2004 to 2008, the world changed in ways not yet understood. But the bottom line message, is that growth, and GDP, nominal or otherwise, ceased to function, and we are now in a completely different economic landscape. Loose monetary policy, is just confetti thrown into the wind to no avail. Where we are now, will require some deep (and different), thinking and some profound policy changes to adapt to the new reality of a flat line economy. It won’t be easy, but it will have to be addressed. If you (or anyone else), disagree, please give very detailed and specific examples of where this growth renaissance will come from? What is this British stuff, we must all make, and purchase that will put a fire under the UK economy?

  • Ed Maxfield 8th Jul '13 - 10:39pm

    Hang on a minute, Bill. My grasp of the finer points of macro economic policy is a bit shaky at the best of times but what you seem to be saying here is that this is a good liberal policy on the basis that we can measure it.

    Surely the other measures are no use when it comes to showing the impact of UK government policy because increasingly UK government is not master of the fate of the UK economy. Capital spending in China and India has as much impact on UK prices as anything done by HMG, no?

    Spending on ‘British stuff’ (by UK citizens or globally, I am not quite clear which) is just as far beyond the reach of UK government policy unless it pulls up the drawbridge on the international economy, isnt it? If inflation is imported then people will have less disposable income to spend on stuff of all sorts, for example.

    Wouldnt a distinctively liberal economic policy be one that rejected the primacy of government intervention and instead said our first priority is that none shall be enslaved by poverty or ignorance; beyond that, as far as is possible, we trust people to make their own decisions about how, when and where to spend the product of their labour?

  • John Dunn is absolutely right – but I would add that part of “getting our head round” the lack of growth (as currently defined) is to redefine measures in economics, or the priority measures, eg to prioritise reduction in resource use, not increases, to work towards a more equal world, not one which encourages “aspiration” and inequality.

    Can I disagree with your last para, Ed Maxfield. The two halves of your paragraph are a paradox, unless you consider poverty to be some sort of pretty low absolute. What people are concerned about is how they measure up to other people (the closer those others are, the more important it is). The second part of your paragraph seems to be concerned with some sort of wishy washy Cleggist Orange Bookery, with rose coloured specs on that we can turn the clock back to some sort of “enlightened” Victorian early Gladstone-ism” (you will remember Gladstone was the “great hope of the stern unbending Tories). No, we are living in a new world now, and unless we pretty swiftly reverse the economic track from its current neo-Thatcherite track, we’re all in trouble.

  • Bill le Breton 9th Jul '13 - 6:55am

    John, thank you for commenting. I am tempted to say that there have been growth deniers since even before Malthus. As ever we are at a difficult point from which to view the future 😉

    What I am sure of is that recovery has been restrained by over tight monetary policy – the markets know this, hence the period of low interest rates that we have been through and are still going through.

    A late convert to this view is none other than the Chancellor himself who in his Mansion House speech finally abandoned the nonsense that low rates were a sign of confidence when he said, “But if the recovery gathers strength then a steady rise in bond yields across the largest developed countries will be a sign of confidence returning.”

    So, let’s get the appropriate monetary policy by introducing an NGDP level target. Your view might argue for a target of 4% growth instead of my suggestion of 5%. Three years later we might look at matters and say, actually, we can sustain more/less nominal growth.

    The big thing to remember is that low interest rates are NOT a sign of loose monetary policy – they tell us monetary policy has been and remains too tight, and that growth is not expected.

  • Bill le Breton 9th Jul '13 - 7:09am

    Ed, a key thing to appreciate is that we are dealing with nominal quantities. NGDP is the sum total of demand in pounds – that is to say ‘aggregate demand’. The central bank is capable of setting any level of aggregate demand it wishes or which it is instructed to do by Government.

    There is an argument for free banking. Now is not necessarily the time to debate that. In the meantime we have a system in which, see above, the central bank sets the level of aggregate demand and, although, there is a target give to it by Government, the recent modification to the target (which we are urged to support in the Leader’s motion) increases discretion. My assertion is that this discretion is transferring more power to an unelected body – the MPC.

    Far more Liberal to have a rule based approach, which, because it is a level target (variations in one period clawed back in the future), is self-correcting. It is a much clearer piece of communication to citizens and investors than a discretionary system.

    I have enormous belief in the power of UK citizens to build a strong economy – especially if we could get the present incompetent elite off our combined backs.

    One is not instinctively a Liberal. One has to work on it every day, but having this optimism in people to do extraordinary things by working together is a bedrock on which I seek to build my Liberalism.

  • That seventh one is pretty wierd. Wouldn’t it go without saying anyway. Shouldn’t you at least monitor for more nuanced things like regional disparities.

    I think this post starts to suggest following GNP instead of GDP. My advice is to avoid a macro figure if possible and consider what the impacts are on consumption/saving/leverage in low income households and private sector investment in growing areas. I do not believe we will see any growth miracle without unlucking the potential in the weakest economic regions and households

  • John Roffey 9th Jul '13 - 9:03am

    Bill – I am attracted by your ‘optimism in people to do extraordinary things by working together’ which I share. However, isn’t it true that whilst the UK government holds so few controls on the economy – our fate is effectively ‘cast to the wind’ along with the chance of UK citizens working together to achieve extraordinary things?

    Only by being able to restrict the goods and services imported into the country – to allow once great British industries to recover, along with new to be established – can there be any real hope of providing long-term jobs, for the young and unemployed, that pay enough to eliminate or seriously reduce the need for the support – that the Chancellor is so keen to achieve.

    This of course can only be done if we leave the EU.

  • Bill le Breton 9th Jul '13 - 9:22am

    Sfk: Weird? Not really. This issue lays bare the difficulties involved in managing a Coalition. The Budget will have resulted from complex negotiations around a large number individual decisions. Linkage will have been central: “this for you, then, that for us”.

    Among these would have been debate around the need for and nature of any ‘refocusing’ of the mandate given to the Bank of England. The word ‘refocus’ reveals how delicate the matter must have been.

    I can appreciate that advocating now a change is potentially destabilizing.

    Add to this the belief on the Tory back benches that the tail is wagging the dog (ok, so we think the reverse, but how prejudicial is this to other negotiations imminent or as yet in the future?)

    Add further the potential impact this may have on the reputation for impartiality of the new Governor of the Bank of England, if our support for a particular policy/set of intermediate milestones coincided with his own preference.

    So … perhaps there is a set of words that might mitigate against these difficulties, but which nevertheless expresses our preference and enables us to explain why that preference is fundamentally Liberal, economically and socially.

    The enemy of welfare is stagnation.

    Skf, can you explain the effects of the distinction between GDP and GNP?

  • Bill le Breton 9th Jul '13 - 9:32am

    John, have a look at Richard Cobden. If EU rules reduce the scope for international trade, change those rules. Erect trade barriers at your peril. There is so much more to be gained from international relations than purely economic ones.

    Sure, there are limitations to what an individual government can achieve, but tolerating over tight monetary policy in a slump as the MPC has done since 2007/8 has seriously restricted our ability to recover faster. Remember how slow the MPC was to loosen monetary policy – it took six months to get the policy rate down to 0.5% after the collapse of Lehmans. In that time NGDP shrank by 8%! What the expletive were they doing? Waiting for inflation!

  • Bill :
    Malthus was not wrong, he simply didn’t account for the 250 year fossil fuel ‘sugar rush’, that is now beginning to come to an end. The green revolution used fossil fuels to feed the world, and turn 1billion people into 7 billion people. Those fossil fuels are now becoming ever more expensive to find, access, process, and in turn are hiking up the cost of everything that was (relatively), cheap over the last 70 years (including food).
    The evidence, or litmus test, of the above is the increasing use of bio fuels. Bio fuels are the ‘ironic last gasp’ of that fossil fuel ‘sugar rush’ that I spoke of. Bio fuels, tells us that Malthus was delayed not discredited. Because bio fuels are a binary choice about our agricultural land use. And that binary choice is,~ do I want to drive my Freelander pointlessly up and down the motorway, or do I want to eat.?
    Growth is not the historic norm, but at best, a 400 year (fossil fuel), phenomenon. Pretty soon, when more and more realise that growth is diminishing, we are going to have to sit down, and do some serious ‘triage’ thinking, and as a society, and we will have to decide what is important for social cohesion and wellbeing, and what we are (reluctantly), willing to let go of, because the growth sugar rush is coming to a close.

  • John Roffey 9th Jul '13 - 10:06am

    Bill, the Corn Laws were created to protect the landowning cereal producers in the UK. The EU and global free markets are designed to ensure that the main shareholders of the global corporations – essentially merchants – can maximise their profits at the expense of all but this tiny elite.

    One of the problems that the Party has is its mass of agreed policies with their proponents all vying for attention. Priorities have to be established and for me, and I would guess the vast majority of the electorate, creating an environment whereby there are secure jobs for all that pay enough not to require state support.

    International relations are important, but unless and until our economy is strong our influence on the world stage is meager.

    Our economy will not be strong, unless you are happy for this to be founded on the City of London and the extreme disparity this brings, unless the UK government can control the economy to a far greater extent – this means leaving the EU.

  • John Roffey 9th Jul '13 - 11:16am

    I think an apt expression might be ‘tinkering at the margins’!

  • Bill le Breton 9th Jul '13 - 4:06pm

    Matthew Green writes, “We can play around with monetary policy, but it won’t help much, and may hurt.” John Roffey calls it ‘tinkering at the margins.’

    Over at http://marketmonetarist.com/2013/07/08/the-young-keynes-was-a-monetarist/ Lars Christensen comes to my aid with a quote from Keynes’ A Tract on Monetary Reform.

    From the Preface:

    “We leave Saving to the private investor, and we encourage him to place his savings mainly in titles to money. We leave the responsibility for setting Production in motion to the businessman, who is mainly influenced by the profits which he expects to accrue to himself in terms of money. Those who are not in favour of drastic changes in the existing organisation of society believe that these arrangements being in accord with human nature, have great advantages. But they cannot work properly if the money they assume as a stable measuring rod, is undependable. Unemployment, the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer–all proceed, in large measure, from the instability of the standard of value.

    “It is often supposed that the costs of production are threefold… labor, enterprise, and accumulation. But there is a fourth cost, namely, risk; and the reward of risk-bearing is one of the heaviest, and perhaps the most avoidable, burden on production….[T]he adoption by this country and the world at large of sound monetary principles, would diminish the wastes of Risk, which consume at present too much of our estate.”

    In a review of this work by Keynes, Brad DeLong http://delong.typepad.com/sdj/2007/03/a_review_of_key.html writes, “The belief that monetary instability–inflation and deflation–is the principal, or at least a principal, cause of other economic evils; the hope that sound monetary principles can be identified and, when identified, would greatly diminish uncertainty and risk; the focus on the job of the public sector being to provide the private economy with a stable measuring-rod and a stable environment–all these are core ideas of whatever we choose to call monetarism.”

    Since 2003 the Bank of England, and other Central Banks, have ensured that the demand for and supply of money has been out of kilter. Between 2003 – 2007 the monetary authorities ensured that the supply of money exceeded demand for money (balances). 2008 – 2013 the demand for money (and other safe assets) have exceeded their supply.

    Result: the ‘wastes of Risk’ that have blighted the global economy for ten years.

    A NGDP level target set at the long term trend rate for 2% inflation and 2.5% real growth (4.5%) is the best way of ensuring that much needed stability. Let’s make it Liberal Democrat policy.

  • John Roffey 9th Jul '13 - 6:29pm

    Bill – Keynes did not live at a time when the oil industry, the global banks, the military industrial complex and other global corporations were trying to create a New World Order – supported by leading western politicians.

    Their policies are not designed to benefit the people – that’s why they don’t!

    If there is to be any chance of this being reversed – powers must be returned to national governments.

  • Bill :
    Vince Cable today, opened a bio fuel plant in Humberside.
    http://www.yorkshirepost.co.uk/news/main-topics/general-news/vince-cable-hails-350m-biofuels-plant-1-5834915
    In the report, Business Secretary Vince Cable said:
    “ENERGY is CRITICAL for the UK’s GROWTH prospects.
    Apart from the fact that bio fuels are a dumb idea, at least Vince gets the crucial connection between energy and growth. Vince understands how important energy is, so why do economists not understand that loose monetary policy and printing fiat confetti, is no substitute for a truck or a JCB, with a full tank of diesel?

  • Bill le Breton 10th Jul '13 - 8:00am

    John D, the biggest driver in business decisions (for example whether or not to buy that new JCB) is the expectation of the level of future aggregate demand [which economists equate to nominal gross domestic product]. It’s the general commercial background – stable? falling? rising? – the market?

    In a currency issuing nation the level of nominal GDP is determined by its central bank. Communication of what path for NGDP the central bank will produce influences those expectations. If credible.

    If the central bank is not believed, if people think ‘alright you are saying that now but when the future arrives you’ll renege on that’, or if it is mute, the opportunity to set the general commercial background is lost.

    A rule that everyone has confidence in and which provides that the Bank of England will set the growth path for NGDP at say 4.5% provides stability, monetary capacity to produce around 2.5% of annual growth in RGDP and induces the confidence of producers to grow the economy, employees to balance saving with spending and reduces risk. (As Keynes the Monetarist quoted above at 4.06 explained.)

    High powered money is not confetti when there is spare capacity – it’s diesel in the tank to borrow your analogy!

  • Bill :
    For 20 years Japan has been struggling with this same ‘Keynesian’, solution to its economic problem. And after 20 years of decline they are now going all out with all their chips on the gambling table with Abenomics, which is essentially Keynesianism on steroids.
    So, why don’t we watch and wait to see how that experiment turns out, before we indulge in the same fantasy economics?
    Not so incidentally, it should be noted that Japan didn’t have any fossil fuel resources of its own, which is very likely a huge factor in their decline. (ahead of everyone else). At least here in the UK, we had the bounty of 30 years of North Sea Oil to keep our punch bowl full, and the good times ‘a rollin’. But our North Sea Oil peaked around 2000. And that is why Vince is opening a nonsensical bio fuel plant, turning food into fuel, to make up for the shortfall in oil. To keep the game of pretend going !
    You can loosen all you like, and you can print £500 trillion, and shove it into every citizens pocket. But if the (affordable!) fuel isn’t there to be had, without this mad bio indulgence to turn every last blade of grass in the UK into ethanol, those business trucks will stop, those JCB’s will come to a halt, and there will be a lot of very unhappy people with 4×4’s sitting idly on their drives.
    Energy (or the lack of, and it’s affordability), is key to the future, not the declining value and confidence in ever expanding fiat paper promises.

  • P.S.
    I asked earlier, about this ‘British stuff’ ; what is was, and how it would aid our growth renaissance?
    I’ve since found the answer.
    http://www.vestguard.co.uk/

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