Liberal Democrats gather in Brighton this weekend, with Mike Thornton’s victory still fresh in our minds as evidence of our enduring tenacity as a campaigning force. But what will the people of Eastleigh, and places like it up and down the country, want to see a party of government discussing at this critical juncture? With the main conference agenda looking bland, the issues that matter most to voters are likely to feature on the fringe and in the guise of emergency motions – the state of the economy more so than any.
Figures published recently demonstrate that the health of the UK economy is deteriorating, along with the government’s finances. With a difficult budget imminent, and a Spending Review to follow, now is the time for our party to show how we feel macro-economic policy should change in response to the continued depression.
With no platform speech in the main agenda, Vince Cable will present a major speech on the economy entitled “How we get growing again – the road to 2015” at the Social Liberal Forum fringe meeting on Friday evening (details here). According to recent reports, Vince, and a number of other Ministers are anxious not to see further spending cuts to their already-stretched budgets – no doubt he will touch on that issue, among many others, at the fringe.
The Social Liberal Forum is also backing an emergency motion on the economy, seeking a change of course in macro-economic policy that would “not only reduce the structural deficit in the budget but take radical action to get growth going again with a bold Plan A+…”
There are likely to be a number of emergency motions tabled in Brighton. Without question, the most salient matter facing voters is the dire situation of the economy; so the most important issue for our party needs to be our plan for economic growth. People’s livelihoods and tomorrow’s prosperity depend on the decisions we make today. Debates on the rule of law, press regulation and competition in the NHS are undoubtedly worth having, and I for one would be happy to see much of the current agenda replaced with substantive discussion on all those things. Above all else, however, is the clear sense that we have some way to travel if we want a distinctive, independent position on the economy in 2015, and that the road must begin in Brighton.
* Prateek Buch is Director of the Social Liberal Forum and serves on the Liberal Democrat Federal Policy Committee
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36 Comments
Prateek, here’s our economic policy: http://www.newstatesman.com/economics/economics/2013/03/when-facts-change-should-i-change-my-mind
I believe this to be the most significant article or speech on the economy by a serving politician since Lloyd George.
It proposes a eclectic approach – revising the Bank of England’s target to include growth as well as inflation, it advocates the purchase of commercial bonds/social housing bonds as well as gilts to increase the supply of money and the velocity of exchange (the hot potato effect). It prefers this latter route to borrowing, but if that is not acceptable its looks carefully at the balance between the effect of more government borrowing on both the size of the national debt AND the size of GDP. i.e. it could lower the Debt to GDP ratio in a fashion favourable to the markets.
All radicals should back it as the blueprint for Liberal Democrat economic policy.
Osborne won’t like it, because he couldn’t advocate it without admitting the errors of 2010 and more importantly of 2011 when monetary tightening caused the second ‘dip’.
Sadly, Nick Clegg appears not to be able to support it, because it takes us back to 2009 and early 2010 (before the Manchester debate) when Cable ‘s experience and knowledge cast a dark shadow over the Leader’s inexperience and poor judgment.
An interesting paper from the LSE growth commission Investing for Prosperity. is aimed at addressing longngstanding structural weaknesses in the economy, all stated to be rooted in a failure to achieve stable planning, strategic vision and a political consensus on the right policy framework to support growth.
Key recommendations of the ‘Manifesto for Growth’include:
Human Resources:
• Improving teacher quality through expanding the intake of teachers and engaging in more rigorous selection.
• Creating a ‘flexible ecology’ of schools, by which we mean more autonomous primary and secondary schools, greater parental choice and easier growth for successful schools and their sponsors.
• Linking targets, inspections and rewards more effectively to hold schools to account for the outcomes of disadvantaged pupils.
Infrastructure:
• An Infrastructure Strategy Board to provide independent expert advice to parliament to guide strategic priorities.
• An Infrastructure Planning Commission to support the implementation of those priorities with more powers to share the gains from infrastructure investment by more generously compensating those who stand to lose from new developments.
• An Infrastructure Bank to facilitate the provision of finance, to bring in expertise and to work with the private sector to share,
Finance for private investment and innovation:
• Increasing competition in retail banking.
• Having the proposed Business Bank make young and innovative firms its top priority.
• Encouraging a long-term investment perspective through regulatory changes (for example, over equity voting rights) and tax reforms (for example, reducing the bias towards debt finance
Evidence based Policy:
• creating an independent National Growth Council to review relevant evidence and to recommend growth-enhancing policy reforms that could be subject to rigorous evaluation.
Bill, I wonder if you may have linked to the wrong article? That one is not a policy statement at all, it’s more of a ramble. It doesn’t propose the things you say, it mentions them only.
But it certainly does touch on a few relevant subjects. One is “There is, however, no global problem of aggregate demand. World trade grew by almost 14 per cent in 2010, 5 per cent in 2011 and perhaps 3 per cent in 2012”. That’s a slowdown, of course, but why is this trading nation not participating? Cable writes “The pound devalued by over 20 per cent in real, trade-weighted terms in 2008/2009 and has remained roughly in that position.” So even a 20% devaluation hasn’t worked. Perhaps we should join the Eurozone after all!
I think it is good that Cable is beginning to understand risk, which he turns to at the end. However, it appears however that he has not yet understood fully. He writes “By taking risk off the private-sector balance sheet, we encourage it to find new investments. This is surely sensible”. This seems to suggest that he thinks the risk will disappear, when in fact it just gets transferred from the probate sector to government, and therefore to a possible further reduction in our credit rating.
Prateek is correct. We need a practical economic policy. I wonder actually what voters understand by the phrase “the economy” and “economic policy”? I suspect an economic policy might be conceptualized as “how to get rich fast!”. Vince’s ramble may be one of several possible starting points, but we’ve a long way to go yet to an actual realistic policy.
It’s good to see some decent amongst The Lib Dem’s. As a non economist all I notice is that i if you reduce the ability of wages to rise and the value of the currency at the same time people spend less. In theory, a devalued pound should boost exports, but it presumes that we produce things that other counties want.
My view is that whilst the economy is important, a bigger question is what kind of country do you want to live in and how do you make your internal market stronger, when your global market has retracted
Jonathan Portes sets out a series of very practical proposals and recommendations as we approach the March budget. Budget 2013: time for an investment-led growth agenda concluding “With the new governor, the March Budget, the IMF’s belated but welcome recognition of the need for fiscal stimulus, and the almost complete consensus among economists that the UK needs more investment, there is now an opportunity for the policy-making establishment to change course. We would all be better off if they took it.”
I re-offer my previous analysis and proposed solution to the economy at https://www.libdemvoice.org/opinion-51-32053.html. We clearly need to reflate demand to meet potential output. We have to break the accountancy view of the economy that it is primarily monetary, andthat books must be balanced.
If we really did have a machine that could be plugged into the earth to produce our £1.4trn GDP without any labour, then the Bank of England would have to distribute 1.4trn vouchers to the population to hand in for goods and services. Those vouchers would be scrapped and re-issued the next year. The GDP would be 100% ‘deficit financed’ and it wouldn’t matter. This (in exaggerated form) is the role of money. it is virtual. It’s the GDP which is real. Fund demand and don’t get concerned with deficits. It’s what’s happening in reality anyway.
As I have said elsewhere, anyone who thinks the performance of the economy is down to fiscal policy alone knows nothing about economics.
While a fiscal stimulus can have some benefit, the fact is that there are far bigger factors totally outside the government’s control that are determining the UK economy’s fate. Unless these change, all these ideas about turning round the economy with a bit of stimulus are destined to fail. I don’t believe that even with a major investment over the past couple of years we would have been growing at more than 0.5-1.0% annually.
RC, you should argue your point rather than making the all too frequent claim that people other than you don’t know anything about economics
Thanks Bill – no doubt Vince will expand on his New Statesman essay in tonight’s speech! I agree that it is a weighty, signifcant contribution. I enjoyed your LDV article btw, as ever!!
the key is that Vince is calling for a mixed approach – eclectic, as Bill puts it. SLF has done so for well over 18 months now – RC mischaracterises (somebody’s, presumably mine but maybe Vince’s>) arguments as calling for recovery through fiscal policy alone. Rubbish. We are calling for fiscal policy to be one of the many tools deployed to address both aggregate demand under today’s economic framework, and to address the flaws in that framekwork to build future prosperity. If that is hard to understand I am happy to explain at lenght when not preparing for a major conference 🙂
JoeB – the LSE Commission makes some interesting proposals, many of which would not doubt be effective. As for Mr. Portes, I suggest that he is appointed as a Treasury adviser as soon as possible – will never happen under Osborne, but if a certain MP for Twickenham were to be Chancellor…
The Ashcroft polling suggests that it is a net advantage to us to express a distinct Liberal Democrat economic policy and be seen to campaign for that in the open.
Let us therefore look at something that we should as a party and not just as a leadership be campaigning on. This is the most critical decision likely to be taken between now and the General Election, yet there will not be a whisper about it at Conference – the regime/rules set for the Bank of England’s regulation of monetary policy.
The FT article describes the Chancellor’s probable change in the regime and lists three options under consideration. In a Coalition that includes our views on these.
According to the FT: “Options include giving the monetary policy committee greater time to bring inflation back to the 2 per cent target, giving the BoE a Federal Reserve-style dual mandate to target both employment and inflation, and even targeting cash spending in the economy rather than inflation.”
It has been my opinion for nearly three years now that the third option – cash spending in the economy i.e. NGDP targeting – is the one that we should have been driving forward on. RC regards me as a simpleton in these matters and I am happy to allow time to tell whether he is right.
But simple or not, I have warned throughout that I think that a cash target will be the eventual choice (and that it will bring the kind of recovery we are seeing in Japan – stock market 50% up since the policy was announced by the then leader of the opposition). As it stands the credit for making that choice will go entirely to the Conservatives, because of our silence on the matter. See how that works out in the Ashcroft polling.
Geoff will say that monetary policy can’t help us. So, if it can do neither good nor harm, why not try it – wholeheartedly – as the FED is doing. We need open ended QE with the purchases covering bonds that have been issued commercially to fund infrastructure policy. That is not far from Geoff’s point that we have to raise nominal income. So, yes monetary and fiscal stimulus in one shot, with a target for cash spending in the economy as the rule based regulator telling us when to stop. The funding of the PSBR is where fiscal and monetary policy meet. Fund the PSBR through commercial bank lending to the Government (ie not gilts) and you have an increase in the money supply that is spent immediately and not hoarded AND if you use it for legacy project funding, we and our grandchildren benefit.
This is of course in essence the proscription contained in Cable’s full article.
@Geoff Crocker
I have argued my point repeatedly on this site. But I will argue it again, at the risk of repetition. The economy has numerous different factors acting on it, of which fiscal policy is only one. Among them are:
1) Falling UK oil and gas production;
2) Massive household indebtedness of £1.5 trillion which means households are saving to pay this down;
3) High oil, food and other commodity prices, determined by international markets;
4) The Eurozone crisis, which has caused our exports to most of Europe to nosedive and has caused massive uncertainty about business investment.
Any one of these factors alone has taken tens of billions of pounds of demand out of the economy. In comparison, a few billions of pounds of stimulus, or even twenty billion, is not going to create significant growth when these other factors are having a negative effect.
The whole debate seems to be conducted around the misconception that fiscal policy alone can determine economic performance. That is what I mean about ignorance about economics: the inability to view things in the larger context and excessive concentration on one factor when others are more important.
Bill
I disagree that ‘Geoff will say that monetary policy can’t help us’
Geoff 🙂
After yesterday’s headlines, shouldn’t that be money tree policy?
I’ll get my coat.
RC
If you are weary about repeating your point then why bother? You persist in you rhetoric about others’ ‘ignorance of economics’. It’s a tautology and not a viable argument since your criterion for their supposed ignorance is whether they agree with you. You simply don’t know how competent as economists others might or might not be, (We might propose that no-one is regarded as competent in economics unless they have read Keynes’ General Theory’ as a minimum).
Your 4 factors are acknowledged. The first and third are the more irresistible and will have lasting impact. We need policy which addresses them. But in stating your other two factors you don’t recognise the core fact that between 2001 and 2007 real GDP grew by 19.5% and consumer income by only 11.5% leading to unsustainable debt. The reason for this and something I have argued repeatedly on this site but at the risk of repetition will argue again is set out at https://www.libdemvoice.org/opinion-51-32053.html
I am puzzled by Geoff Crockers’s Perpetual GDP Machine. If we let debt rise ad infinitum, our interest payments will rise too. Eventually the Machine will simply be servicing those payments, and there will be nothing left for our people.
I suspect the problem is that money isn’t virtual at all, it’s an expression of GDP. Letting debt rise means letting GDP fall relative to GDC (Gross Domestic Consumption), leading to the eventual need for more GDP and/or less GDC so as to settle the debt.
Which seems to be where we are now, except that, unfortunately, fewer and fewer customers want our GDP, owing to the Savings/Debt Paradox. Demand based in debt eventually ends, and we are there now.
The title of this article includes the well worn phrase “It’s the economy, stupid!” Another timely phrase to remember as we approach the 2015 elections is ‘Keep it simple’.
I think it is well understood that fiscal policy alone is not a panacea for sustained economic – just look at Japan’s efforts to resuscitate their economy over two lost decades. Inflating stock markets with ultra-loose money policies is not an economic recovery – both the Dow Jones and FTSE are at historic highs while economic growth remains subdued or flat and unemployment remains at unacceptable levels. The very reason the Bank of England was given independence was to avoid the temptation for Chancellors to artificially reflate the economy in the run-uo to elections only to suffer the inevitable downturn after the election.
Samuel Briitan has put forward the best proposals I have yet seen for a coomon sense approach to management of the public finances, long-term infrastructure investment and cyclical demand management. The harmful myth of the balanced budget
“I suggest a threefold division of the national budget. The first would be normal current expenditure, such as spending on teachers or soldiers, which would be always covered by revenue. The second would be a capital budget some of which governments could borrow, but strictly at market rates of interest.
The third section would be a stabilisation fund which would inject purchasing power when depression threatens and remove it during periods of inflationary pressure. It would not be confined to the traditional public works but could include any types of public spending and also tax remissions. This approach would help to distinguish economic arguments about fiscal stimuli from political arguments about the size of the state.
This third section could best be financed at zero or low interest rates by advances from the central bank, as it would be a respectable form of the helicopter drop. The threefold division could perhaps be policed by a body such as the Office for Budget Responsibility. And in the background there needs to be a national policy goal such as a nominal GDP objective. Nit-pick these ideas as you like, they are more promising than everlasting austerity and slump.”
No need to be puzzled Richard. You just circulate money without it creating any debt to anyone. Why should it? But yes it has to be limited to real output GDP.
Not so simple, Geoff. In the real world, money serves several purposes, including
> as a way of distributing goods and services – GDP – since people with more money get more than people with less
> as a way that individuals can control how much GDP they get, through working (or wheeler-dealing) less or more to get less or more money to buy bits of GDP with
> as a way individuals and companies can delay or bring forward their consumption, by saving or borrowing
The GC Perpetual GDP Machine only does the first of these, and presumably only in the sense of a centralized distribution network in which who-gets-what is determined by the distributors. But the problem we face is to do with the second and third of these purposes of money. So the machine s not an accurate or even relevant intellectual concept, let alone a practical idea at all
Joe,
I’m concerned about people pedlling this myth that budgets don’t need to be balanced. If we get in too much debt our interest rates will go up and if they think we are just going to print the money to pay it off then the interest rates will just go up further. It’s also cruel on people on fixed incomes.
Can you explain in simple terms what you are advocating? I’ve read the Samuel Brittan article but it doesn’t make sense to me.
Eddie,
Samuel Brtttan is advocating the financing of public spending in three ways:
1. A balanced budget for current spending under normal conditions of full employment i.e. (around a 5% structural unemployment rate).
2. The excess of spending on capital investments over and above depreciation and sales of assets should be funded by borrowing. If capital spending is less than depreciation and sales , then the proceeds of assets sales should be used to pay down national debt.
3. The third element is a stabilisation fund to manage cyclical fluctuations in demand and the money-supply. The government has the power via the Bank of England to increase or reduce the amount of money in the economy that is made available to purchase goods and services. During recessions the government can call on this stabilisation fund to meet the funding requirements of automatic stabilisers (i.e. temporary reduction in tax receipts and increased welfare support payments) and/or other fiscal stimulus As the economy begins to overheat and wage inflationary pressures rise, the government would withdraw money from the economy to dampen demand by using the net gains from increased tax receipts and lower welfare spending and/or fiscal tightening measures to repay the stabilisation fund.
I see. I broadly agree with points 1 and 2. Point 3 seems to be something similar to what we are doing now, just not to the same extent. I just worry that the temptation to leave the excess money in the economy would be too great, or that the cycles would become too long. It is good to see some thinking outside the box anyway and people actually caring about the vulnerable.
A stabilization fund would only be possible if a small number of countries did it, because of the savings paradox. If every major country started to save, the consequent reduction in consumption would induce a recession which would be exactly sufficient to wipe out the value of the savings.
See for example page 53 of the book “Macroeconomics – a European Perspective” by Olivier Blanchard, Alessia Amighini, and Francesco Giavazzi, a standard undergraduate-level text published by Prentice-Hall FT, and endorsed by Charles Bean of the Bank of England
Eddie,
Samuel Brittan voices similar concerns and it is why he ends his piece with:
“The threefold division could perhaps be policed by a body such as the Office for Budget Responsibility. And in the background there needs to be a national policy goal such as a nominal GDP objective. Nit-pick these ideas as you like, they are more promising than everlasting austerity and slump.”
Stabilisation is the word.
A reflationary stimulus may seem attractive, but any government intervention must be sustainable – otherwise it will simply add unwanted fresh volatility into the equation.
When we joined the coalition we didn’t commit to a growth policy, we committed to regaining stability and reforming the fundamentals.
So to reverse tack now and provoke a new cycle of boom and bust just isn’t credible. We must make incremental improvements.
Stabilization is an impossible word.
Imagine we have saved £300 billion for a rainy day. That’s a lot of hospitals we haven’t built, a lot of schools that are underfunded, a lot of suffering that people on inadequate welfare have been put through. All these people will want part of that £300 billion, and will elect whatever government gives it to them.
It’s also a lot of demand that hasn’t been demanded. Will we not have caused a recession in order save the £300 billion? And anyway, is this anything other than cloud-cuckoo-thinking in the context of our present situation, where our big problem is debt and its consequence, reduced demand?
In effect, our ability to borrow when necessary is equivalent to a stabilization fund without the accompanying issues. Right now, we’ve used almost as much of that fund as we can afford, indeed, rather more. Which is why we need to be thinking of some other, more realistic solution.
Richard,
‘we’ can’t ‘save’ £300bn because it’s not the state’s money, it belongs to tax-payers.
When I was out on the recent ‘Fair Tax’ day, the most common reason give by people who said they don’t want fair taxes, was that they want fewer taxes.
It’s not just demand that hasn’t been demanded, it’s also supply that can’t be supplied.
Growth is a measurement of our ability to reach a better balance, though it’s inevitable that any transition will take much adjustment.
We’re working on simplifying the tax system, and can point to various successes on that front, and we’re working on simplifying the benefits system.
I completely agree that many if not most of the financial tools available, and it’s interesting that people are starting to wake up to the possibility of negative interest rates as a way to kick-start economic activity.
Until Black Wednesday raising interest rates was the constant response to problems, since then the pressure on the ‘independent’ MPC has been consistently to lower rates. But in truth the weakness in UK investment is a direct response to the fact that Britain is a global player, and profits are often easier and greater abroad. UK banks can afford to hoard cashpiles because they know if they wait they will get a better deal.
So the question is not if, but when will interest rates rise if we want them to exercise their balances and invest?
On reflection, it’s worth adding that interest rates reached 15% on Black Wednesday under the tories, and fell to 0.5% at the depth of Labour’s crisis. Surely it’d be better to get these harmful swings under control with a more liberal approach to monetary policy.
“the most common reason give by people who said they don’t want fair taxes, was that they want fewer taxes. It’s not just demand that hasn’t been demanded, it’s also supply that can’t be supplied.”
Quite. As many Lib-dem’s know – and more should know – the exchequer has never managed to part the electorate with more than 38% of GDP on any sustained basis.
There simply isn’t collective acceptance of government as the agent of communal good in this country, and that is not going to change, so asking the electorate for any great increase in (tax-funded) spending is a no-go.
Worse, given the traditional aloof contempt we hold our political class in any party asking for the a blank cheque for contingent spending on an enormous scale without immediate reference to an existing problem is party political suicide right now.
Pass me revolver and tumbler of scotch!
Orangepan,
I think you make two important points above “Stabilisation is the word|” and “it’s worth adding that interest rates reached 15% on Black Wednesday under the tories, and fell to 0.5% at the depth of Labour’s crisis. Surely it’d be better to get these harmful swings under control with a more liberal approach to monetary policy.”
In our efforts to develop a policy platform that can deliver a stronger economy and fairer society we cannot ignore the combined distributional effects of coalition policy on equality and in particular the most vulnerable bottom income decile.
The effects on standard of living of a good policy, the raising of the personal tax allowance threshold over and above inflation, has been substantially eroded by VAT increases, welfare reforms and the bringing of large numbers of middle-income earners into the 40% tax rate band.
Another good policy, the triple lock on state pensions has similarly been eroded by the collapse of interest earnings on savings, the erosion of capital by inflation and the record low income levels achievable from the purchase of annuities.
The benefits of the pupil premum are easly dissipated when they simply replace special needs funding for non-english speakers and similar type funding that as been the subject of cuts.
The current imperative and a necessary prerequisite to stabilisation is to eliminate the structural deficit in current spending – estimated at between 3 to 4% of GDP. This will require both a increase in tax receipts through a focus on reduction of exemptions, reliefs and aggressive avoidance and continued spending restraint including welfare and public service pensions.
However, just as Jim Callaghan noted many years ago, you cant spend your way out of recession. The flip side of this is you cannot cut your way out either . Current spending (including depreciation on assets) has to be brought into line with tax receipts primarily by a focus on economic growth.
There is no reason why public borrowing for capital investment should adversely effect interest rates. Intelligent investments in delivering the national economic infrastructure plan over the next ten years can serve the dual aim of demonstrating to bond markets a committment to long term growth and aiding in restoring demand and confidence to the private sector.
With respect to a Liberal approach to monetary policy , I do not believe we will find that in yet more quantative easing which has both significant adverse distrubitional effects exacerbating inequality and what increasingly appears to be diminishing returns.
The money supply depends not just on monetary base, but also velocity of circulation. In the liquidity trap of 2008-2012, the Bank of England sterilised quantitative easing through the banking sector by buying government bonds from financial institutions i.e. simulataneouly injeting cash to the banking sector but withdrawing slightly less liquid bonds. The stated aim was to bring down long-term interest rates but a corollary effect that banks were able to and did purchase newly issued government bonds to finance the deficit.
To get money moving through the economy and increase the velocity of circulation the Bank needs to expand the range of assets it is prepared to acquire, as former MPC member Adam Posen recommends to include infrastructure and housing association bonds.
At some point in the future, we don’t kow when, interest rates will need to return to more normal levels. To avoid what may be a disastrous confluence of events in a UK that continues to have one of the most heavily indebted private sectors in the world, we will have to have reestablished a stable economy that is not overly reliant on consumer debt.
Samuel Brittans proposals for a balanced current budget, increases in public sector borrowing restricted to the financing of longer term capital investments and a monetary cyclical stabilisation fund , independent of the treasury, offer a good place to get to as we grapple with eliminating the structural deficit over the next several years.
Jedi,
‘fewer taxes’ is not the same thing as ‘lower taxes’.
People would have more trust in the tax system and would be prepared to pay slightly more if it weren’t so damned complicated that only the wealthy can afford to take advantage.
Reducing complexity also means reducing waste caused by complexity, which frees up funds for more effective spending, giving a double boost to tax-payers.
Joe,
the structural deficit partly reflects the lack of confidence in our tax system, as budget results do not meet political need.
The good policies you mention have not been eroded, though their immediate effects may have, and you shouldn’t underestimate that this does put the economy on a sounder footing by starting to rebuild public confidence.
The greatest imperative is to unfreeze inward private investment and fill the gap which the state cannot fill.
So I’m arguing against more QE and for an interest rate rise – for example, since 2008 when interest rates dropped to 0.5%, borrowers with a £100,000 mortgage are over £2,400 better off every year. However, savers with £100,000 in Cash Isas or fixed-rate bonds are over £2,750 a year worse off.
In other words, excessively low interest rates make credit cheaper to make credit more affordable, but in doing so it reduces the money supply and discourages saving. Lower savings levels require low borrowing rates to maintain a sustainable economy, which in turn increases overall indebtedness and creates the first inequality trap.
It is the reverse of the problem in the early 90s when excessively high interest rates encouraged saving and discouraged private investment, to the detriment of economic opportunity for those with modest means – the second inequality trap. After ’97 the state intervened on the NHS, Higher Education and other areas, but this could only be a temporary stop-gap, and Labour didn’t undertake the necessary reforms as they got distracted by ‘legacy’ ambitions and the trappings of power.
Tory policy was to rise interest rates at every setback, Labour policy was to continually reduce interest rates. Their knee-jerk opposition to each other prevented them from addressing underlying inequality and they were seduced by their initial success at reversing the previousl failures.
So, excessively high and excessively low interest rates both cause standards of living to be undermined, albeit by different combinations of inflation and depreciation which outpace growth.
And this means any successful growth policy must include an interest rates policy
However the established political orthodoxy about the BoE’s independence on monetary policy means that discussions on growth must exclude mention of interest rates.
This cannot last. The MPC is not in anyone’s realm of understanding ‘independent’, and it continues to block growth by keeping interest rates within it’s sole preseve – especially while this is causing it to fail on inflation.
Personally, I’m in favour of a de-centralised Interest Rates Mechanism replace the discredited MPC, where flexibility compensates for geographic disparities in investment and saving. I’d like to see regions have limited control to vary interest rates by up to 100 basis points, provided they keep within a central range, which would also create momentum for regional economic stimulus as limited regional bond and gilt markets are opened up.
I think there is huge potential growth in regional markets, not least because this is where the greatest inequality exists!
Rather than having one-way pressure to raise or drop a rate, the mere existence of varying powers will create divergent pressure to reduce demand for monetary intervention and thereby build the confidence and stability from which lasting growth will stem.
Government must get away from the bad habit of picking winners, all we want is a strategic direction for a robust and responsive regulatory system.
I don’t think a liberal monetary policy necessarily means ‘loose’, it should mean above all reformist.
Richard, less you think you have dismissed my perpetual GDP machine thought experiment, (I didn’t notice your post replying to mine) let me point out that in the thought experiment , there would be no work, nullifying your 2nd point. And as in reality, rescheduling of production and consumption only happens when society forgoes current consumption to invest in new capacity to raise future consumption. But in this case, GDP increases in investment as much as it loses in consumption. I challenge your statement that this thought experiment is not a viable intellectual construct, and even as a practical solution it is already partly the case now. Automation is reducing the labour and wage content of output, leading to deficient demand. This is how between 2001 and 2007 real GDP could grow by 19.5% whilst real disposable income grew by only 11.5%, causing the deficiency in demand which led to excess borrowing.
Apologies for not replying earlier. I continue to believe that the Geoff Crocker Perpetual GDP Machine Thought Experiment represents an irrelevant intellectual model, because it has removed too many features of reality.
My second point is, precisely, that work controls GDP in reality, but not in the Thought Experiment. Creating work, creating GDP, and creating demand are all essentially the same process in reality, but not in the Thought Experiment.
My third point is that, as Keynes and others have known for decades, the reality is that GDP requires investment, which requires that consumption be foregone. The Thought Experiment has remove this important constraint.
Richard
Through automation, increased output is available with less, in some cases very little, work. This lowers the income element of output. As Bob Crow said, if you have robots build cars, who is going to buy them?. There is no dodge of reality here – this is reality. It’s the reduced wage element of output that caused the crisis. The thought experiment has not removed the investment/consumption decision – the GDP machine is the result of investment and can be used to create more capital goods, eg a bigger GDP machine.
“People would have more trust in the tax system and would be prepared to pay slightly more if it weren’t so damned complicated that only the wealthy can afford to take advantage.
Reducing complexity also means reducing waste caused by complexity, which frees up funds for more effective spending, giving a double boost to tax-payers.”
Its funny how the coalition focused on simplification of planning regulations which impact very few businesses and appart from developers only impacts them at specific times ie. they want to build new premises rather than buy/rent existing premises, rather than on the taxation system that all businesses have to deal with practically every month…
@ Orangepan – “People would have more trust in the tax system and would be prepared to pay slightly more if it weren’t so damned complicated that only the wealthy can afford to take advantage.”
That is an interesting notion, and might be true, but I cannot see a plethora of evidence that this assertion is an established fact. I am all for simplifying taxation, it is a worthy goal in its own right, but I remain delighted that the coalition plan is to return spending to the same level as taxation, i.e. ~38% of GDP.
@ Roland – you will have missed this then?
http://www.hm-treasury.gov.uk/ots.htm
@jedibeeftrix
Thanks for the link, however I haven’t seen anyone from the government stand up and suggest that every 1000 pages of tax policy etc. be reduced to 50 as per the planning regulatons…