Some time ago a TV ad reported the bemusement amongst Martians at human behaviour with mashed potato. They fell over themselves laughing at how we humans grow potatoes in the ground, collect them, peel them, boil them in water, cut them up and then smash them to pieces before eating them. Very bizarre behaviour! Martians began to worry whether humans were sane or not.
Now the Martian press is equally dumbfounded at reports coming from planet Earth that humans are cutting their own production economies because they say they don’t have enough money.
Martians always thought that humans made this ‘virtual’ money themselves without any effort, so are puzzled at this self inflicted injury humans are practising. Apparently this behaviour has started most strongly in the tiny island surprisingly called ‘Great’ Britain which has only 60 million inhabitants out of nearly 7 billion total earthlings, but there are reports that other parts of planet Earth may do the same.
Martians are not the only ones to be amazed by this behaviour. Some humans are bemused too. On the face of it, it seems that if all the real resources, including people, are available to produce goods and services, why should lack of money stop them? How has this come about?
Way back, human economies were very simple. People grew food, made clothes, and built homes without needing money because they lived locally and didn’t exchange much. Then when they started to specialise in what each person did ‘for a living’, they needed to swap what each other had produced. So they started to barter. But the problem was in deciding how much every product was worth of every other product. Often whole numbers of each product didn’t have matching values for this barter, and a huge number of barter points were needed to cover the increasing number of products. So money was invented.
All that mattered was that the amount of money made available by banks was strictly related to the amount of output of goods and services, and then kept proportional to this output. If too much money was circulated then its value would fall and price inflation would result. Different countries issued their own national money, and the rate of exchange between these currencies was equal to any difference in productivity between any two countries’ real economies.
But people began to worry that money was too virtual, and that it needed to be backed up by something else to have any value. They chose gold. Central banks held gold in their vaults as a guarantee for the money in circulation in the economy. The UK suspended this gold standard in 1914 to allow it to print sufficient money to fund the war effort, and returned to it in 1925 at a dollar exchange rate which did not reflect the UK/US productivity ratio.
Then came depression. By the 1930s people were out of work, and contrary to some free market thinking, this was not of their choice, but involuntary. It took Keynes to point out that it was not that their wage expectations were too high and that they could if they wanted price themselves into lower paid work, but that their potential demand was not being signalled to the production economy. Money was not flowing sufficiently to make their demand effective.
Keynes argued against the gold standard since other variables in the real economy should determine the amount of money in circulation. If insufficient money is circulated, deflation will result unnecessarily. But the gold standard was only eventually abandoned by Richard Nixon in 1971, again to fund a war.
Now in 2010 we face a situation where the UK government is reducing GDP by some 8.7% in public expenditure cuts and tax and pension contribution increases, with multiplier effects from the loss of 500,000 public sector jobs. Real resources and real people are being unemployed because of the government’s financial deficit. Money is dictating reality. The Martians are right ; we have gone mad.
We need to re-convince ourselves of the totally virtual nature of money.
Take the simple example of a babysitting circle which invents its own currency. Say 10 parents/couples start the circle. To make it fair, they define one credit unit to be worth one hour’s babysitting. To simplify further, each parent/couple has decided that they can only offer one babysitting session each month, ie 12 a year, and that this should be for a maximum of 4 hours per session. The maximum transaction value of this babysitting economy is therefore 480 credit units per annum or 40 per month.
We further assume the Lib Dem nirvana of an equal income economy, so that each parent/couple gets the same babysitting expenditure budget and the same wage rate for babysitting. The administrator of the circle therefore issues each parent/couple with 48 credit units each year, or at the rate of 4 per month.
This is the currency. It isn’t issued in hard tokens but simply on a babysitting circle spreadsheet. It is entirely virtual. But it runs the babysitting economy. It’s also circular in that parent/couples then re-spend the units they have been paid. Some could build up surpluses and some go into debt by not babysitting much, but that is not the main point for this particular discussion.
What is important is that the administrator does not need to incur debt by selling babysitting bonds into some market to fund the system’s currency issue. Neither does the administrator need any gold in any vaults to guarantee the currency.
If productivity increases and each parent/couple finds it is able to offer 2 babysitting sessions a month, or if more parent/couples join the circle, then the currency in circulation needs to be increased and this can also be done virtually, at a stroke. It makes no sense to limit the amount of real babysitting going on in this economy because the administrator has concocted an accounting deficit with the system’s credit units.
Turning back to the real total economy, Perhaps the following questions might help focus the point. Which of the following statements is do we consider correct ? –
1 the amount of money in circulation has to be backed by gold in the central bank’s vaults?
2 the amount of money in circulation has to be backed by debt held by the government from selling bonds in the bond market?
3 the amount of money in circulation has to be backed by units of real output of goods and services?
The first answer was implemented under the Gold Standard. It was not necessary and hindered economic expansion, especially when this was needed for war.
The world economy has operated very successfully without any Gold Standard since 1971. The second answer is the current view. Governments implement ‘quantitative easing’ by selling government bonds, incurring debt, and circulating the money. Incurring such debt in order to issue currency to fund full employment GDP is also unnecessary.
Because money is virtual, the third answer, and only the third answer is correct. Money has to be backed only by real output of goods and services, ie by real productivity. Once we accept this, we can issue sufficient money to take up all resources, including people into employment, available to the economy. We can fund full employment GDP which was exactly Keynes’ core economic argument and political point.
GDP does not have to be cut by 8.7% because of a financial deficit. The only jobs we should get rid of are any which do not contribute to productivity, and we must not confuse these proper efficiency moves with GDP cuts. We must only be certain not to issue money in excess of measures of real output, because in this case, (but only in this case), inflation will result.
Finally, we need to get this money into consumers’ hands to spend, not into banks’ accounts to sit idle. The best way to do this is through a citizen’s income. It can and will work. We can avoid real economic cuts due to simple financial deficits, and we can avoid being deservedly mocked by the Martians.
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Whoniversaries 14 June
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23 Comments
It is perfectly true that money is virtual, only a unit used to conveniently compare the values of real goods and services. But not all your conclusions are justified.
Currently the government is consuming more real goods (e.g. aircraft carriers) and services (e.g. the work done by nurses) than it is taking away from the public through the tax system (a 20% income tax effectively siphons off 20% of the goods and services we individuals produce, for example). The deficit is not an illusion just because the money it is measured in is virtual.
Another problem is that indexing money supply to real output (incidentally one of the policy recommendations of the monetarist school, now largely rejected because it leaves too little flexibility in the face of economic shocks) means that money supply has to fall when real output falls. Not all recessions are caused by monetary tightening. In our case a slowdown in consumption would have to have happened sooner or later simply because households were getting overindebted and the house price bubble would have burst eventually, causing a real fall in demand entirely independent of monetary policy. The financial crisis simply brought it forward and made it more sudden and brutal.
What sort of system are you proposing for indexing the money supply to real output? How do you intend to deal with the problem that the banking multiplier between narrow money (notes issued by the Bank of England) and broad money (the total money supply) fluctuates with banks’ risk appetite? (I’m not saying that that second problem is solved by the current system, it’s just that at least central banks have the flexibility to flood banks with extra cash to counteract a shrinking multiplier.)
I don’t want to get started on the economic theory in this odd, but strangely fascinating piece, but there was one phrase that leaped out at me and send my eyebrows wiggling furiously in bemusement: the claim that there is a ‘Lib Dem nirvana of an equal income economy’! What the whattting what? Since when? How is an equal income economy remotely liberal as an idea? When has it been a Lib Dem principle, policy or ideal? Answer: never. I certainly don’t want an economy where effort and merit is never rewarded and failure or laziness never punished – that seems to be the implication of the piece though.
Given the idiosyncratic précis of Lib Dem ideals, I’m a little scared of subjecting the rest of the piece to serious scrutiny.
The deficit is not virtual. Government has been spending £4 for every £3 it earned The extra pound was borrowed adding to a national debt that will cross £1,000,000,000,000.00 before the end of the year. Government is cutting expendature to match its income so that the rate of debt increase slows. The 19% cuts in the CSR reduce spending to £3.24 for every £3 raised in taxes. Tax increases make up the difference.
Tell me again why matching your outgoings to your incomings confuses martians?
I think the martians were laughing at us a while back, when government and authorities sat back and encouraged the banking system to generate a huge overhang of money in circulation that, to point 3 in your article, was not “backed by units of real output of goods and services” and so generated huge unmerited inflation in stock prices, house prices and prices of other assets. The then chancellor’s assertion of ‘no more boom and bust’ was an especially priceless fall-off-your-chair moment in the martian observatory.
However I suspect they’re now weeping as they watch us trying to find our way through the denouement. We have to let real output catch up with the debt that’s been issued, while treading a tightrope between the risk of deflation on the one hand that wipes out lending and production capacity; or inflation on the other hand that wipes out the value of savings and investments.
@Colin Green: We’re also lowering our income. To take the family analogy the coalition loves, there’s a difference between cutting back on unproductive luxuries and cutting back on items that increase your income- sell your work uniform to pay off your debts, for example. Nice one, you’ve met your target for this week, but now you can’t go to work next week and you’ve lost your income. Oops.
You cut, the tax receipts fall, so you have to cut more, and tax receipts fall more, etc. You lower GDP and smaller deficits become more problematic. And there are plenty of costs that in the long run provide value for money- most problems have to faced eventually, and if you don’t spend to help them when you can you’ll find yourself spending more when the time comes the issue can’t be avoided.
Here, what is rapidly becoming my new favourite link- http://www.politics.co.uk/news/economy-and-finance/backfiring-cuts-might-slow-deficit-reduction–$21384971.htm
‘Harsh spending cuts could prove counterproductive to dealing with the deficit by lowering Treasury tax revenues, a thinktank has warned.
The National Institute for Economic and Social Research (Niesr) suggested the economy could be hit by the plans contained in today’s comprehensive spending review, contrary to ministers’ expectations.
It suggested the government may only be able to reduce the deficit to 3.6% of GDP by 2014/15.
This falls far short of its 2.1% target, in today’s money approximately £28 billion’
We failed to cut our economy here, and have runaway global warming. We live underground cos it’s 450 C outside.
@Mike (The Labour one) – interesting that the Niesr’s director has said that “Britain’s long boom under Labour was based on unsustainable consumption” and that “the budget deficit has to be closed at some point … You cannot put it off forever on the grounds that the economy might never be able to stand it”.
Steve Cooke,
Did I read that correctly, you want failure “punished”, you want laziness “punished”? Why? Do you want to create an entirely risk averse society in which nobody chances a new idea for fear of punishment for their failures and those without power, ambition, expensive desires or inherent predilictions for work and effort become slaves to the righteous who enjoy their work and are hungry for expensive tastes or inherently predisposed to greater effort?
The benefit of an ‘equal income economy’, if I understand it correctly, is that it directly rewards effort on the basis that it is time related rather than productivity or market power related. It is at the core of liberal notions of justice based on the reward or lack of reward determined solely by autonomous free choice.
What exactly is your justification for rewarding merit? Why should my natural talents be rewarded and your lack of them punished? Does this not ultimately lead to the present capitalist system where effort, productivity and personal choices are almost insignificant in financial rewards with power in the market place the determinant of income?
At present the economic system’s reward for effort and merit are tenuous at best. We live in a predominantly market economy. Market economies always reward power. Not effort. (a significant reason why the reforms of the NHS should not be market based, unless of course illness is to be redesignated as a currency).
The notion that the ‘lazy’ are not entitled to their low maintainance lifestyle choice and should be punished is utterly illiberal in every way. As is the notion that inherent capabilities should be rewarded over and above those who lack them. If marketable merit is sufficient justification for reward then effort cannot recieve its just reward as it is relegated to inconsequence by those with marketable merits exercising their power to take a greater share of reward than is justified.
You are probaly right about it never having been a Lib Dem policy or principle I am not a student of Lib Dem history. It is however a strong element of liberal thought and principles. Not for the first time I am made aware that the Liberal Democrat relationship with liberalism is somewhat overstated.
@JRC: I think your confusing effort with results. If I produce 100 widgets for a day’s work, should I get paid the same amount as someone who produces 50 identical widgets in a day’s work (assuming equal working time)?
“The power of the market” is the aggregate of all our decisions about what we prefer to consume. In what way is that more arbitrary than saying that one hour’s work is worth the same regardless of what and how much someone produces? At least Marx’s slogan “to each according to his need…” has some conception that we are not all identical. I fail to see what’s liberal about rewarding time spent rather than actual productivity.
(As an aside, if we took that principle to an extreme then we would deserve less income now than we were in the 1800s because we work less. But the reason we work less now is that we are so much more productive that we are happy to take – and can afford more – leisure time.)
@Steve Cook: Yes. No one is saying the budget deficit does not need to be reduced. There are betters ways and more sensible timetables. Labour shouldn’t have bought into liberalised economics in power, sure. They didn’t create the New Jerusalem. But you don’t cure a cold by cutting off the head.
Your babysitting circle analogy is a good one because it shines the light on the real problem although unintentionally.
I don’t know how they are getting along on Mars, but here on planet Earth our baby sitting circle has become badly unbalanced. The cozy situation of all the parents holding the same number of credits has broken down. Some parents do all the baby sitting and hold lots of credits. Others still enjoy going out but don’t want to do their share of babysitting and have used up all their credits and have been borrowing credits for a long time. The virtuous parents are getting fed up and are not so keen to lend credits to the lazy ones. But the lazy ones are very arrogant and pompous. They can’t understand that they have to earn credits before they can spend them. They insist on going out and are prepared to riot in the streets unless ‘someone’ fixes things for them so they can go back to watching daytime TV and binge drinking. They have even gone round to the person who operates the credit bank and told them it’s all their fault. The baby sitting circle has broken down and won’t operate again until the lazy ones realise that they can’t spend what they haven’t earned and that they have to get off their fat ***** and make something or gorw something and sell it to BUY credits instead of hoping to eternally borrow them.
This may still be a little obtuse for Mr Crocker but I am talking about China and us.
I think Marx’s point was about power relationships, of which property is one. Huge gulfs in inequality (yes I know widened under Labour, just less than it would have without Labour…) create huge gulfs in power. The distinction between economic and political power is an arbitrary one dreamt up by liberal bourgeois who wanted political power like the aristocracy but wanted to retain economic power for themselves against the working class. A truly participatory society would democratise both without distinction. It isn’t about basic strict equality of wealth, it’s the role wealth plays in affecting the factors that govern people’s lives.
You can’t have a democracy without fighting the barriers to participation, like ignorance, poverty, ill health, poor disability provision, poor civil rights, insecurity, etc. And you can’t have a democracy with huge inequalities of power.
Feels good to trot this out once again like the good old days.
“Britain’s long boom under Labour was based on unsustainable consumption”
Let’s face it, the whole capitalist model is unsustainable. We should budget for zero growth and re-distribute employment.
No2AV adverts all over the site by the way. Everyone forgotten about electoral reform here? I don’t remember anything on the dire news about the No campaign outpolling the Yes by a fair margin.
@ JRC
“Did I read that correctly, you want failure “punished”, you want laziness “punished”? Why? Do you want to create an entirely risk averse society in which nobody chances a new idea for fear of punishment for their failures and those without power, ambition, expensive desires or inherent predilictions for work and effort become slaves to the righteous who enjoy their work and are hungry for expensive tastes or inherently predisposed to greater effort?”
I suspect that a society in which everyone’s income is equalised is more likely to create an entirely risk averse society than one in which there are rewards for success and penalties for failure. Perhaps my use of the word ‘punish’ was imprecise – but I certainly don’t think laziness or ineptitude should carry the same reward as hard work and excellence.
“What exactly is your justification for rewarding merit? Why should my natural talents be rewarded and your lack of them punished”
They shouldn’t – however, if there were two people with equal distributions of natural talents and one worked hard and the other did not – justice demands that they receive reward in proportion to their effort.
”Market economies always reward power. Not effort. “
As far as I can see – this is an assertion which cannot be proved (although the truth of the statement can easily be disproved). It may be that current and historical versions of market economies have rewarded power more than they have merit – though I have no doubt that this is subject to challenge.
“The notion that the ‘lazy’ are not entitled to their low maintainance lifestyle choice and should be punished is utterly illiberal in every way. As is the notion that inherent capabilities should be rewarded over and above those who lack them.”
Nobody, least of all me, have claimed this to be true – you have simply read what you wanted into my post.
“You are probaly right about it never having been a Lib Dem policy or principle I am not a student of Lib Dem history. It is however a strong element of liberal thought and principles. Not for the first time I am made aware that the Liberal Democrat relationship with liberalism is somewhat overstated.”
I disagree with your first statement and can think of no strong current of liberal theory that demands equalised incomes. Notwithstanding that I think your understanding of liberalism is flawed, I fail to see how your second statement follows from your first. I’m also highly suspicious of someone who begins with a statement that they have not studied Lib Dem history and proceeds to a statement about the relationship between liberalism and the Liberal Democrats – it does somewhat undermine your credibility!
@older and wiser:
I see what you’re saying and I more or less agree, but I think you only gave the nail a glancing blow …
Some parents do all the baby sitting and hold lots of credits. Others still enjoy going out but don’t want to do their share of babysitting and have used up all their credits and have been borrowing credits for a long time.
This in itself isn’t a problem – lots of LETS schemes allow unlimited debit balances.
The virtuous parents are getting fed up and are not so keen to lend credits to the lazy ones.
The virtuous parents aren’t lending anyone anything – it’s all just numbers on a spreadsheet and they shouldn’t have any reason to care what anyone else’s balance is.
The real issue comes when the virtuous parents decide they’ve worked enough – they’ve babysitted for six months straight and they refuse to do it this week! That’s where the system breaks down and it’s due to a simple matter of scarcity – everyone wants to go out and there are no “babysitting resources” available to accommodate them.
The same thing happens in real life – up to a point everyone could use their credit cards at the supermarket every week and not bother going to work. The problem isn’t the size of everyone’s debt as such – but merely to do with the fact that food is a finite resource and if no one grows or makes more it eventually runs out!
The only way to mitigate this situation is to place a limit on credit availability (including welfare payments). You can play endless games with what individual limits should be, but the total limit must balance against the total available (scarce) resources, or the whole system is on thin ice.
Alternatively find a way to provide unlimited resources and we can all link arms and skip off into the Socialist Utopia 😉
@Mike(The Labour one)
“Here, what is rapidly becoming my new favourite link- http://www.politics.co.uk/news/economy-and-finance/backfiring-cuts-might-slow-deficit-reduction–$21384971.htm”
Mike, I’ve given a more detailed critique of that article in the thread https://www.libdemvoice.org/is-yours-a-party-of-principles-or-scoundrels-21866.html#comment-150083 . I’ll give a briefer response here.
That article is, frankly, terrible journalism. It completely misrepresents what NIESR said in their press conference. There are other, much better, articles on what NIESR said, elsewhere on the internet. But, to get the real picture, much better to listen to it yourself. See http://www.niesr.ac.uk/niesrvideos/pressconference19.10.2010.wmv . The relevant section is about 30 minutes long, and about 1:08 hours in.
Far from implying that the coalition deficit reduction plans were too fast and too deep, NIESR’s acting director Ray Barrell said: “the budget deficit target is exactly what we think they should be aiming for”, and that there is “absolutely no alternative to getting the debt stock down… they should be aiming for around about the current balance by the end of the parliament.”
What he did say is that houses are over-priced, and if they continue to fall, that will lead to slower growth. He also argued for direct taxes to be used to take some of the burden of deficit reduction.
Incidentally, he was quite complementary about the June budget, saying: “Actually, if you look at the last budget, whatever IFS might say, it was a very fair budget in the sense that the tax thresholds were raised which was entirely the right thing to do.”
If anyone doesn’t believe me, have a listen to the press conference yourselves.
You’re being very selective with what you’re looking at, I mean this-
“the budget deficit target is exactly what we think they should be aiming for”
When put alongside the fact that they said the severity of the cuts will cause the government to miss that target by quite a margin is not an endorsement of government policy.
Again with this- “absolutely no alternative to getting the debt stock down… they should be aiming for around about the current balance by the end of the parliament.”
No party advocates *not* getting debt down. The point is that the severity of the cuts is, disregarding the social problems, not the best way to do that. If it’s okay I’ll reply to the points made in the other thread here? It’s just easier than having two of the same-
The OBR numbers do show that the June Budget would reduce the structural deficit further than Darling’s budget, but it doesn’t take into account the Spending Review and its effect on growth.
I can’t download the video (or it’ll take over an hour and I probably won’t be at the computer by that time) but I can quote the NIESR directly from the report they put out-
‘The fiscal deficit will fall more slowly than forecast by the Office for Budget Responsibility, to 3.6 per cent of GDP in 2014–15 rather than 2.1 per cent. The overrun arises essentially from lower taxes, for two main reasons. Growth will be slower; with the exception of 2010, we are forecasting slower growth until 2014, especially in 2011 and 2012. As a result GDP will be lower in 2014–15 than the OBR expected, reducing the tax base. Moreover, taxes will be less buoyant, recovering only modestly by 2014–15, with receipts being around 1 per cent below the 38.8 per cent of GDP expected by the OBR.’
‘Fiscal policy may become too tight and in response monetary policy could become too loose. This might entail risks to price stability in the longer term. We suspect that spending cuts will be delayed and their scale reduced as compared to the budget plans. If the cuts were half the size and direct taxes were raised to fill the gap then output growth would be ¼ percentage higher in 2011 and 2012, and the same budget target would be reached in 2015.’
(http://www.niesr.ac.uk/pdf/201010_104023.pdf)
@Mike(The Labour one)
“You’re being very selective with what you’re looking at, I mean this-
‘the budget deficit target is exactly what we think they should be aiming for’
When put alongside the fact that they said the severity of the cuts will cause the government to miss that target by quite a margin is not an endorsement of government policy.”
Except, they didn’t say anything of the sort. Shoddy articles like the one on politics.co.uk really annoy me. Economic policy is confusing enough as it is, without complete misrepresentations of what think tanks are actually saying. And I’m afraid this isn’t an isolated case. I’ve read similar bad journalism in mainstream broadsheets as well, like the Observer.
I’m glad you’ve found the NIESR press release. I recommend listening to the press conference, if you can. The press release gives an incomplete picture of what NIESR are saying. And, for understandable reasons, you won’t want to take my word for it.
If you can’t see the video, have a read of the reuters article:
http://uk.reuters.com/article/idUKTRE69I6JF20101019 It describes why NIESR think tax revenue will be less that predicted. It’s a pretty good article, but it misses out where Ray Barrell admits he might be wrong. It also misses out where he explains how his argument in facour of tax rises is against conventional theory, and is based on more recent thinking. It’s this honesty from Barrell that makes me more inclined to trust him than some other economists.
The Reuters article also misses out the positive things that Barrell said about coalition policy. I’m not complaining, positive statements don’t make good copy. But if you want to get a full picture of what NIESR thinks, you really need to hear them yourself.
“No party advocates *not* getting debt down”
Indeed. But NIESR go further than agree with clearing the deficit. They endorse the pace of deficit reduction, as opposed to the slower Darling plan. On the other hand, they endorse the Darling plan for having a larger tax element.
“The OBR numbers do show that the June Budget would reduce the structural deficit further than Darling’s budget, but it doesn’t take into account the Spending Review and its effect on growth”
The June Budget included a plan for spending cuts. The OBR projections are based on those cuts. So I disagree, the OBR do take into effect the broad impact of the CSR.
Oh dear, this old myth again.
The gold standard was never real in this sense. It was an elaborate sham to increase trust in banks, and a medium in which international trade between governments could occur when record-keeping was insufficient to support a paper economy between governments. The economy of every major nation has for centuries been based on fractional-reserve banking, not the gold standard.
The in 1914 the UK simply stopped permitting the conversion of banknotes into gold. They did not do this to print money. They did this so that they could trade the gold to other nations (mostly the US) for weapons and material to fight the war, because these nations did not want to be paid in Sterling (in the pre-computer age, selling banknotes internationally wasn’t a very safe or reliable way for governments to trade with each other, and anyway, Americans like gold).
They support the pace of getting the deficit down but think that the tactic of using severe cuts will not be able to meet that target.
We don’t need to argue about what the NIESR said, because it’s here-
‘Output growth will slow to 0.5 per cent in the third and become even more subdued in the last three months of the year and through 2011 because of fiscal retrenchment.’
‘If the cuts were half the size and direct taxes were raised to fill the gap then output growth would be ¼ percentage higher in 2011 and 2012, and the same budget target would be reached in 2015.’
It looks like the only positives they can think of are based on the hope that the government either won’t do what it is saying it will, or it won’t be able to. The article I originally linked to is exactly right- we have it there in black and white, with the goal being to reduce the deficit these savage cuts aren’t the right choice. Not only is it wrong that There Is No Alternative but to cut this deep in order to deal with the deficit, it’s not even the easiest or most efficient way. The government is making its cuts despite the deficit.
If you can get hold of it I recommend reading the NIESR’s ‘Fiscal Policy and Government Spending’ article from October which I think is the original journal article the press release and press conference were based around-
‘It is now planned that 80 per cent of the structural budget improvement will come from spending cuts. It is clear that this will slow growth more than raising taxes, as spending multipliers are two to three times larger than tax multipliers’
‘We project that public sector net borrowing will be
around 3.6 per cent of GDP in 2014–5, larger than the
2.1 per cent projected by the OBR. Most of this
difference comes in projections for tax revenues. Our
growth forecast is lower than theirs, and by 2015–6 we
project that the output gap will be 1 per cent larger than
they presume. This will produce weaker revenues and
more transfers to the unemployed, which together might
account for over half a percentage point of the difference
of 1.5 percentage points.2 The rest is likely to be from
differences in the sectoral composition of our forecasts. It
remains our view that house prices are overvalued, and
we expect them to fall in real terms by 1 per cent a year
for the next five years. The OBR projects that house
prices will rise at 4–4.5 per cent a year after 2011, and
that real house prices will be 10 per cent higher in 2015–
6 than they are now. The combination of higher house
prices impacting on stamp duties and strong turnover in
a buoyant housing market could well boost the OBR
projection of tax revenues by ½ a per cent of GDP (or £9
billion) as compared to our forecast. Our projection of
corporation tax receipts is also marginally weaker than
theirs, given GDP, which is probably attributable to
differences in projections of revenues from financial
corporations which made up 25 per cent of corporation
tax revenues before 2008.’
For the NIESR their opinion that house prices are overestimated in the OBR forecast constitutes only a third of the gap.
‘The slower pace of consolidation would entail more
borrowing in the intermediate years and hence more
government interest payments in the last year. However,
output growth would be a ¼ of a percentage point higher
in each of 2011 and 2012, and this would reduce
unemployment and hence the scarring effects discussed
by Bell and Blanchflower in this Review.’
‘This may still happen, as may a more tax-based
consolidation, as the spending-based plans that are in
the pipeline look difficult to implement either fully or as
quickly as desired. Indeed, it would be very wrong to say
that there is no alternative.’
Their best forecasts are those that predict the government will be forced to slow and reduce the cuts. We’ll be in a better position in relation to the deficit if the government fails to cut as deep as it plans, and a much better position socially.
It’s too bad George Osborne said they’ll cut regardless- http://www.telegraph.co.uk/news/newstopics/spending-review/8077541/Spending-review-2010-Theres-no-Plan-B-says-George-Osborne.html
Niklas Smith,
Thanks for the concern but there’s no need to worry I’m not confused between effort and results. The context of my comment was that Steve Cooke had argued that an equal income economy was illiberal. He had claimed that it would imply that effort and merit would go unrewarded. I tried to demonstrate that as I understand it, it implies the opposite. As such effort is the unit of trade up for debate, not productivity. If effort is the measure by which rewards are distributed then a measurement of effort is required. Time is not adequate but it is far better than productivity.
Taking your example of unequal productivity; if you produce 100 widgets per hour and I produce 50 then intuitively you should receive double my salary, by hand or by brain securing the full fruits of our labour.
If effort is the measure for reward though, the example changes. Say that given the same degree of effort you are capable of producing 200 widgets per hour and I am only capable of 50, then given our respective production of 100 and 50, I have given double your effort for half the pay. In order to enjoy the same level of expensive leisure as you under your piecework system, I would have to commit four times your effort and double your time to produce the same 100 widgets. My autonomy is then restricted in a way that yours is not. Thus your piecework system rewards native inequalities and by doing so fails to recognise those inequalities as native implying that all differences are a matter of choice.
Steve Cook,
Equalised incomes may not promote risk taking but punishment of failure certainly would deter it. So whilst equalised income may not promote risk taking in the way that rewarding risk does but it would be unlikely to result in risk aversion.
I don’t think that someone taking issue with your assertion that laziness and failure should be punished is by implication asserting that those traits should be rewarded.
“…if there were two people with equal distributions of natural talents and one worked hard and the other did not – justice demands that they receive reward in proportion to their effort.”
How does this differ from the explanation I gave of what I understand the concept of equal income to mean?
“Market economies reward power. Not effort.” I would be interested to hear of an example where a free market rewards effort over negotiating power.
That the lazy should not be entitled to their low maintenance lifestyle choices is somewhat implied by the notion of punishing laziness. However you did not claim that those with inherent capabilities should receive rewards over and above those without them. I read talent where you actually were talking of merit, my mistake.
If you say current liberal theories do not demand equalised incomes then I concede the point but then I never said they did. I said it was an element of liberal thought. Although that is based on my disclaimer: ‘if I understand it (equal income economy) correctly’. i.e. that it means incomes pro-rata should not be unequal as a result of unearned native or inherited assets and that a system that rewards effort on an equal basis would be more just.
I don’t really understand your final paragraph it seems to be saying that you disagree with me deferring to your greater knowledge of Lib Dem history. Also you seem to be saying that an understanding of liberalism that for the most part is identical with what you have declared to be your own view, aside from your originally declared but later retracted desire to punish laziness and failure, is flawed. You also say that you fail to see how my second thought follows from my first. That will be because the second doesn’t follow the first, they are separate thoughts; the first states that I don’t know whether it is or ever has been a Lib Dem policy, principle or aspiration, the second that I do know that the notion that effort and work should be the relevant reasons for reward rather than native talents and inherited assets is a liberal concept, not the definition of liberalism but an element of liberal thought.
Not having studied the history of the Liberal Democratic Party does not preclude one from an understanding of, or debate about, liberalism.
Dear Geoff, Interesting article, but I am afraid it is flawed. The flaw is here: “if all the real resources, including people, are available to produce goods and services, why should lack of money stop them? How has this come about?” It is not the lack of money that stops them, but rather the paucity of demand.
People can only produce as much goods and services as other people can consume them. If the production and consumption go out of whack, we get either a recession or inflation.
Money does play a role, but not a central role. Before we had central banks and the money supply was tied to artificial measures such as gold reserves, the economies went through cycles of expansion and contraction. Contractions happened because too many goods were being produced for the available money, causing deflation, which in turn suppressed demand causing contraction. However producers, especially small producers like farmers, suffered greatly during deflationary periods. The invention of central banks ended this artificial cycle of expansion/contraction.
Now, to the 20th century. The Great Depression occurred in my opinion because the workers were not paid enough, which kept down the demand while production expanded rapidly. Keynes answered the question by saying that when the people are unable to spend enough, the Government should borrow money and spend it. This was tried, and it worked, but it wasn’t a long term fix. The long-term fix came via the post-war policies of the western Governments: minimum wages, welfare state, wealth redistribution through progressive taxation and unionisation. Through these policies, the Governments forced the society to put more money into the working classes, pushing up consumption and allowing it to catch up with the productive capacities of the society.
Now, in the 21st century, we are back to the same problem, but this time through globalisation. Manufacturing has moved to the emerging economies, which haven’t fully emerged yet and their workers are not paid enough in global terms. So, once again, the production has outstripped the demand and a contraction has resulted. (This contraction was delayed by a decade because people were encouraged to borrow and spend through a financial bubble, but the bubble had to burst eventually, exposing the underlying imbalance.) Some countries tried the Keynesian measure and succeeded. For instance, China and India did stimulus spending and successfully counteracted the downturn. America did it half-heartedly and didn’t get anywhere. `Great’ Britain had the advantage of an overvalued currency, which lost value, stimulating exports. So, Britain lucked out and the economy recovered more quickly than any one expected. Unfortunately, the British electorate elected conservatives to power who are hell-bent on anti-Keynesian meausres which will counteract the fortuitous good luck that Britain has had. The Liberal Democrats, who have surprisingly lost both their liberalism and democracy, not to mention any sense of direction, chose to support the conservatives, putting Britain back in the dumps.
The Martians will still have the last laugh.