Looking forward and rejecting recriminations, what the country needs now is a New Deal. What the party needs now, within the Coalition and after the deal-breaking of the last few weeks, is also a new deal.
As might have been expected, the economy is flat lining. The bounce that the optimists thought would spontaneously follow a period of recession has not occurred. We are on the verge of a round of public expenditure cuts that will further depress the economy and destroy the life chances of millions.
The justification for accepting deeper and earlier cuts to public expenditure said more about an ideology of a smaller state than a realistic assessment of the inscrutable bond markets.
But it says something when the twin pillars of the establishment, the Governor of the Bank of England and Cabinet Secretary, have in the first case almost single-handed fought off neo-con calls for interest rate rises and in the second already privately begun to counsel a Plan B on public expenditure.
Firms that have hung on to labour are at the point of shedding it. Private sector investment remains subdued. Construction took a huge hit in the last few months.
Those who wish to give generously of their skill and commitment to the Welfare State are demoralised, depressed, weighed down by bureaucracy, and increasingly withdrawing the open-handedness and dedication that was a cornerstone of public service.
Human, social and economic capital is being wasted, misdirected and, in the public and voluntary sectors, scorned.
It is a mean and illiberal society that is being formed, where the lawyer chases the ambulance, the banker sniggers at the very idea of a duty of care and the doctor is tempted to profit from his patient.
The harmful legacy we are actually handing down to our grandchildren is not that of debt but of a smaller, weaker economy; a poorer, more obsolete infrastructure; and a culture that mitigates against service and venerates self-seeking acquisition.
But if we listen carefully to Mervin King and Gus O’Donnell and those who tend to speak publicly for them, like Jonathan Portes, until recently the Chief Economist at the Cabinet Office, we have the opportunity to achieve from the ruins an economic renaissance that could bring in its vigour a cultural and social reformation.
Our government debt is longer dated than most other countries, and the demand for our new debt is strong and competitive. The scope for the monetization of some of our future borrowing requirement is considerable given the weakness of monetary growth. The case for monetary and fiscal easing is as great as the need for it.
The time is right for a government-led programme of investment in green based technologies, in housing to rent or buy in shared ownership, in transport, in electronic communications, in on-the-job training and apprenticeships, in job creation for those being forced off benefits, in education from Sure Start, through schools, FE, HE to adult and the Third Age.
Plan B will come as night follows day. If we do not press for it now, then, when it is forced on the government, as it was for Heath and Barber in the 1972 U-turn, it will be Cameron and Osborne who direct it and take the credit for it.
But the politics of it? As members of a coalition, this will require a campaign facing out to the British people and another facing in to our coalition partners. Only when the harsh facts of economic stagnation and the orchestrated demands of our fellow citizens, led by our activists, forces the Conservative leadership into agreement will change be agreed and New Deal programmes in the areas listed above begin.
Just as Liberal Democrats are beginning to communicate a truer identity over health policy, so an even sharper and more authentic identity can be created and shared with the British people when we start campaigning for a radical approach to economic policy and begin to communicate a vision of hope for our country, as, in 1932, FDR pledged a ‘New Deal’ for the people of the United States.
As in the 1930s, fear stalks the land and paralyses the agents of recovery, but the public are eager for the hope and vitality that comes from a sense of shared mission. They are ready to rally round a movement committed to rebuilding the country. They are looking for a programme that demolishes the brutal Britain that rewards greed and selfishness, and reconstructs it from the rubble.
They are looking to join a campaign for renewal. Renewal of the social bonds and ties of mutuality that energize communities; renewal of the skills and confidence that multiply life chances; renewal of the business practices that replace sharp practice with a duty of care; renewal of a state that helps the needy to find their way back to self-sufficiency; renewal of our civic spaces as engines of mutual regard and environmental diversity; renewal of the economy away from growth at any cost to one that makes markets the servants of the people, free and fare; renewal of an internationalism that aids where it can and keeps out of where it is not wanted and not helpful.
Our campaign must start today. It must rise from the membership, be articulated by conference representatives, campaigners and councillors, by MEPs, AMs, MSPs and backbenchers, planned by our spokespeople in the Houses of Parliament and taken forward in the private counsels of our Ministers and Secretaries of State.
We must seize this moment, however dark, to campaign for it now, within and outside the parliaments and councils of our countries. It is what the vast majority of the membership believes in. It is, after all, what the vast majority of our activists, members and elected representatives came into politics to achieve – a New Deal.
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Tory policies backed by Lib Dems fail UK
This isn’t news, on the contrary, it was expected.
Mutuality and social bonds are not created by state fiat and spending. The latter crowds out the former. Mutualism is the happy thing that happens voluntarily, state action is coercive, inevitably.
Serious question: if you just want to go on an epic spending splurge, consequences be damned (and the people who have to pay it off be damned) why don’t you just vote Labour? What’s the difference between a LD spending splurge and a Labour one?
Why would the tories make concessions to the lib dems? They are even stronger now and lib dems are down in the dumps and are in no position to bargain.
At least I understood the angle this piece had until here: “…renewal of the economy away from growth at any cost…”
This is not to say that any party advocates growth at any cost. None do. But the line up to this argument was that more borrowing would equal more growth and this would be good.
But perhaps it is that more borrowing would lead to less growth, and that would be good. The government is right about the consequences of borrowing, but the opposition policy (though barely different) is the right one because it would lead to less growth.
I think moving away from growth is a huge mistake. And on a practical point I don’t see how those who wish to move away from growth can possibly support an increasing national debt. Surely you have to balance the budget and start paying off the capital much faster than the fiercest monetary hawk.
“The justification for accepting deeper and earlier cuts to public expenditure said more about an ideology of a smaller state than a realistic assessment of the inscrutable bond markets.”
I remain determined that public expenditure be dragged back to to ~37% of GDP, because to do otherwise will depress the long-term economic growth that keep wealth at a level high enough to permit the very services you claim you want to protect.
While I like the idea of a New Deal and I read that Vince Cable was still a Keynesian economist, I feel our problem is we didn’t really have an economic policy last year and so have gone along with “there is no alternative to balancing the budget”.
In the late 1920’s we rejected the consensus of this economic thinking and we need to consider how we can manage rejecting it now.
The question that needs to be answered is, how do you fund public expenditure without upsetting the bond markets?
Is it possible to divide public spending into sections? Can we remove the cost of the increased unemployment from the calculation? Can we state that certain expenditure is capital and so shouldn’t count toward the deficit? Can we class back to work programmes as investment and not count these either?
Nick has spoken about us making sure we don’t return to Thatcherism. I feel that the coalition government is pursuing the same policies today as Thatcher did then and we need to work out how we can stop doing it. Can the government spend money and the private sector grow as the same time? Does it have to be choice between public sector growth or private sector growth?
There appears to be spare capacity in the construction industry, so can the government invest in the construction of social housing to take up some of this spare capacity?
Can we get the government to provide help to the unemployed and long term sick to get them back to work that is tailored to their needs and lasts for as long as necessary and is not driven by just removing them from the figures short term?
Can we get the government to invest in green technologies and industries?
What a bunch of rubbish. If you want a massive investment in new housing why do you think it would be better for the government to Plan this? Just neuter the blooming planning laws and let the private sector get on with it.
Why do you think the government is any good at planning investment in “green based technologies”, whatever that means? So far the government has mostly “invested” in subsidies for rich landowners.to buy wasteful solar panels. Great work for the vested interests.
Plan B is to have the Bank ease monetary policy further. Those who do not understand the power of monetary policy should be forcibly prevented from borrowing to “invest”, and saddling my children with even higher taxes.
I just think you are plain wrong here, Bill. If you look at underlying labour market indicators like hours worked, they are in steep recovery. Unemployment is falling and private sector job creation is way faster than public sector job losses. All the main surveys from Markit to CBI etc. suggest that 1) Manufacturing is booming; 2) the Services sector is still growing and, in fact, new orders are at a record level according to Markit 3) The ONS construction figures are volatile, and often really wide of the mark and have been for some time. Even NIESR accepts that the economy is now growing at 0.4% a year. Not great, but once established it will give business the confidence to go ahead and invest.
The problem is, economic stats are like an impressionist picture – the picture only reveals itself once you are some distance away. This is little help at the moment, but in hindsight I think you will end up having to eat a whole load of humble pie about your analysis.
Correction 0.4% a quarter, 1.6% a year.
In general I agree with this piece. Certainly it would pay political dividends. However, we will benefit us nothing if we have a spending spree that ends up leaving us in a worse position with our national finances than we began with.
That said, I would certainly be supportive of a new deal following these rough lines.
“If you just want to go on an epic spending splurge… why don’t you just vote Labour?”
Because this shouldn’t be about a splurge in consumption – either Tory consumption (excessive private spending e.g. on holidays, cars, fashion kitchens etc) or Labour consumption (building schools and hospitals with PFI). It should be green investment to safeguard our economy in the future – a reason for borrowing that bankers will understand.
“How do you fund public expenditure without upsetting the bond markets?”
See above, and also, much of what is needed does not have to be public expenditure. It can also mean e.g. changes in planning rules to encourage private investment in zero-carbon house building.
Robert – 0.4% last quarter, making up for the -0.5% the quarter before. We are flat over 6 months, and still 4% below our peak, whereas the US and Germany have hit their previous peaks already. We are 2 years off.
I was clear that I was not advocating a massive investment in social housing; I was advocating taking up some of the spare capacity not all of it. If I remember my Keynesian theory correctly there is a multiplier which I would hope would work to take up some of the spare capacity not taken up by government spending. Also it needs to be planned in such a way that when the private construction increases government construction decreases. As a good liberal I believe that planning laws are a good thing and planning unregulated is a bad thing. As Conrad Russell said liberalism is about controlling power.
As Liberals we believe in green technologies and that we could be market leaders in green industries. So maybe investing in them is wrong we should be pursuing policies to grow the green sector in this country. If the government has got the policy wrong then we should be trying to get it changed. Could the government not do more to help individuals and the renting sector have more insulation and alternative power production at a micro level?
I thought that our monetary policy was eased as far as it would go and there is nothing more than can be done. However could the government as the major share holders in some banks get them to ease their criteria for loans which would increase the money supply?
Thank you for your contributions.
The Economics:
Fear of debt is understandable but not rational. There isn’t a company in the land that doesn’t have debt. That is how major enterprises are achieved and it is the flow from these enterprises that repays debt and produces benefits for our children and their children. We live in the houses, go to the schools, ride on the railways that our grandparents and their governments borrowed to build. We repay their debts and its interest gratefully, Just Another.
Also debt creates money, literally. And the money supply figures are stagnant in real terms and therefore negative in nominal terms, Robert. That doesn’t look good for recovery in the months ahead, Tim. It points to deflation.
Down the road of austerity a Japanese future of persistent stagnation awaits us and I don’t think our society with its internal tensions and different cultural attitudes could cope with this in the way the Japanese have. It is a dark future, Jedi, and one where mutuality, Jock, will be stifled more by desperate self-concern than government intrusion.
The Government doesn’t always have to borrow from the bond market, Almeric. It can literally just write cheques. This creates money. But unlike in the 1970s it creates money at a time when in net terms both banks and private sector companies don’t want to risk lending/borrowing. Monetary policy is as much about influencing the quantity of money as it is about interest rates.
However, once this engine of fiscal and monetary stimulus starts it is addictive, which is why I warn that when recovery begins and growth arises we need another ‘god’ than growth to steer by, Joe.
The politics:
So, with political will, the communication of a sense of common purpose and the creation of a movement for renewal, there is something that can be done. The enterprises that deliver will be mostly those of the private sector, but, Just Another, to start the process, the belief, the commissioners, the contracts will have to be public, and there is nothing fundamentally wrong with that.
The future:
When in a year or two’s time the economy is still stagnant the government will have a conversion, because of the electoral cycle. It will be hasty, ill thought through and short lived; go/stop. We should argue and campaign for it now, because it is the right thing to do and is a message of hope and a rallying point of purpose. By leading a movement for it now there is the chance that it can be done well. That is a very Liberal cause, though not a neoliberal one, Charlotte.
The present:
We are weakened by Thursday’s results, Mac, but we are far from powerless. We need to exercise that power now in a planned and considered fashion. We are on weak ground over Agreement 1 but were are as strong as a year ago on Agreement 2.
Our cabinet members should call their own meeting with the Governor of the Bank of England and the Cabinet Secretary. Just as we had access to these ‘officers’ prior to the Agreement 1, we should use them now to begin formulating a Liberal Democrat Plan B.
With their help and guidance Nick, Vince, Chris and Danny should prepare a draft programme to be put to Policy Committee and then on to the conference this September.
And in the first instance and until the Party has been engage in and thought through matters for future policy, they should withdraw the Chief Secretary from any discussions on Agreement 2 – a significant signal and an essential democratic step towards a New Deal.
the new deal is applied ke=nyesianism, and economic liberalism.
the majority of lib dems membvers would not describe themselves as economic liberals.
The second phase of any keynesian or new deal solution is cuts.
the difficulty this government have had is that, the new deal is a stimulus package, and labour did the stimulus package at the end of their time in office.
the difference was that this time, the stimulus had to be used to stimulate banks, not other sectors of the economy.
so we have had the stimulus element.
secondly, a new deal has a massive inflationary impact on the economy, and inflation is alreday a massive concern. if you have another stimulus, you create more inflation, which damopens growth, and you dont get the social goods benefits, as inflationnmameks the cost of the new deal more expenseive
thirdly, the economy has grown stoutly in the last year.
govcerning for six month cycles, or electoral cycles is what has brotian@(and to an extent the world) in this mess. we need to be better than that
“the doctor is tempted to profit from his patient.”
All GPs’ surgeries are pivate partnerships in which the partners (the Doctors) share profits, contracted to the State to provide healthcare. This has been the situation since the creation of the NHS in 1947.
So – either evil GPs have been profitting from patients for the last 64 years or (heaven forfend) it is perfectly possible for private organisations to deliver healthcare that is the best solution for the patient.
I am not sure that the Parliamentary Party or the Tories would agree to finance part of government spending by just printing the money. Maybe we can get the money from the banks. Could we set lending targets and if they fail to meet them force them to lend the money at 0.5% to the government. Would it be a bit like the reserve requirement and so help control inflation while at the same time providing money for governments to invest?
Wasn’t the cure for stagnation, austerity and recession?
Bill le Breton I don’t think we can negotiate a second coalition agreement we need to work within the existing one and develop it. We have agreed to reduce the structural deficit by reducing spending rather than increasing taxes. This does not exclude the possibility of a plan B, which can include a stimulus package.
So I agree our Policy Committee working with our ministers should put together a plan B for September conference – a New Deal.
Can we have a stimulus package that is not massively inflationary? My suggestion is to target it on social housing and green grants. We need to ensure that any stimulus to these sectors can be met from existing spare capacity. I am also suggesting that the banks in the UK should lend the money to government for this stimulus.
What else would we wish to include? Would we like to increase next year’s tax cut? Should the personal allowance be increased by £1,000 not the £630 already announced? Would we have to raise taxes somewhere else to pay for it because it would affect the structural deficit? Labour brought forward some of its capital projects I am not sure we can do this again.
Thanks again for further comments.
@David mounts the challenge that has to be answered – would another stimulus package be inflationary?
First I don’t think inflation is the problem. People thought inflation was the problem in ’07 and look what happened a year later. Have a look at the qty of notes and coins in circulation. http://www.bankofengland.co.uk/statistics/bankstats/current/index.htm#1
It is stagnant or declining and with present inflation at say 5% that means a real and significant contraction in the monetary base pointing to an L shaped recovery at best, if not a second dip – Japan circa 1992.
Monetary policy is as tight as it was just before the Great Recession from which, as Tim says, we are recovering very weakly. I therefore can’t understand how David can conclude that ‘the economy has grown stoutly in the last year’. It hasn’t and won’t.
The monetary stimulus took the form of QE which has created cash for speculators which they have used to create speculative bubbles in commodities.
I argued at the time that we should have used this willingness to create ‘new money’ for an infrastructure based stimulus package financed by drawing cheques on the Gov’s account at the Bank of England. The case is even stronger now.
Yes, bond holders hate inflation but they also fear weak economies. There will come a time when the markets that we are told want accelerated deficit reduction shy away from the weakness that has followed from the fiscal policy.
@tabman I understand that GP Clinics are private sector and that is why I listed them with such other professionals as lawyers and bankers. It is just that, before the 1980s, professions had codes of conduct and self-regulations set by professional bodies that held to ethics and standards that have been to a greater or lesser extent eroded by market liberalisation to the jeopardy of their clients. Doctors have resisted this tendency better than other professions for whom the old ethics are now no more than fig-leaves e.g. PPI sales. However, when culture moves so steadfastly towards individual acquisitiveness, it is difficult to withstand the social pressures, which is why I carefully wrote ‘tempted’. I do think that health professionals are being tempted with these reforms, though the majority are resisting as evidenced by the BMA today.
@Almeric, it is not the case that there is not likely to be an Agreement 2. Clegg has given Alexander the task of negotiating it with the Conservatives already, and the Centre Forum, acting as a pressure group, is busy drawing up its version sexily named Coalition 2.0. Their work will be extremely influential and neoliberal in direction. It needs to be balanced by input from the democratic institutions of the Party.
Thanks again, everyone.
B
@Bill I agree inflation is unlikely to persist above target, which is why we must be ready to champion further QE. Scott Sumner has written about this at length and is very persuasive.
You advocate for MMT/Neo-Chartalism, and I think you should be up-front about that. The government has in effect had a massive fiscal spending package based on printed money, and the status quo is the result of that. It is not terribly impressive.
Why is inflation so far above target, with demand apparently so weak? The story is surely much more complicated than a simple shortfall in aggregate demand. It is the high deflator which make the (real) GDP growth figures look so bad.
@Amalric:
This is simply not true. The Bank of England is able to further ease monetary policy by doing more “Quantatitive Easing” (buying government bonds). They are constrained from doing so only by meeting the inflation target – more specifically, the expectation that inflation will remain above target in the future.
@JustAnotherVoter. Thanks for returning to this piece.
Although I think we need to create more money I am concerned about QE as a method. It always seemed to be a rather Central Bankerly approach. It created money by the purchase of relatively sophisticated financial assets from relatively sophisticated financial players who, speculating that QE would be inflationary, and to the apparent surprise of the B of E and the Fed, used the cash to buy gold and any other commodities that people seek out during inflationary times; immediately creating an a distorting asset bubble of a different kind.
This has been a calamity which has seen ordinary people’s standard of living fall as surely as if they had been taxed and has led to the continued cautious behaviour that has produced a further bout of money destruction.
I argued a number of times here over a year ago that it would have been better to create money and use it on infrastructure projects that would create an economic, social and cultural legacy, by simply writing cheques on the Government’s account at the B of E. The money going to nurses and builders rather than people who live by market speculation.
Is this MMT/Neo-Chartilism? I simply don’t know. I am not being disingenuous or deliberately not coming clean. All I know is that this method of funding government spending was common place up to the mid-Seventies, but since then Central Bankers, fearful of inflation, have spent thirty odd years exorcising it from the memories of politicians because in those particular circumstances of high levels of inflation it powered inflation even higher.
The IMF which in those days was the main advocate for the control of the money supply had an equation which was called the ‘Money Creation Equation’ or the ‘Domestic Credit Equation’ which seems to have been forgotten entirely. It linked changes in the money supply to the PSBR through the way the PSBR was funded either by non-bank private sector loans to the public sector or by bank loans to the public sector. UK governments from 1974 – 85 used the PSBR and the way it was funded to control the money supply (i.e. in those inflationary days to reduce it, by limiting bank loans to the public sector).
In 2008, as a layman, I just thought that during a time when the private sector was paying down debt and destroying money the government should be creating it by simply reversing the mechanism (ie increasing that part of the PSBR funded by bank lending to the public sector).
Of course you have to be a monetarist to believe this and I must be the only Liberal monetarist on the planet. So my voice is a whisper and an inarticulate one at that. And Central Bankers won’t let the cat out of the bag for fear it would take years to put it back in the bag again.
It would be interesting to know whether Osborne knows the equation, or Huhne and Laws for that matter. Sumner had never heard of it, but that hardly matters as he would not advocate its use, preferring to allow a published NGDP target to get the private sector’s appetite for creating money going.
I don’t think that it will just as I don’t think deficit reduction will do it either, just as it has not in Japan for over the last 20 years. I think that co-ordinated global government action might and, in case Charlotte comes back at me, I believe that is a truly Liberal policy.
Probably when there is no alternative left someone with authority and command will advocate it. I just think it would be good if Liberal Democrats had championed it well before hand.
@Bill I count myself as a liberal and a quasi-monetarist, if that helps! 😉 I think it’s deeply unhelpful to characterize monetary easing as only being of benefit to bankers. QE should not be considered a special case. Monetary policy normally works by the bank swapping gilts for bank reserves.
“Ordinary” people benefit from lower borrowing rates (mortgages); “ordinary” businesses benefit from a weaker pound. Likewise increases in asset prices benefit many people. If commodity prices are being bid up by speculation, commodity producers are benefiting. The money cannot just disappear; the worst case is that it simply turns into central bank reserves.
Interesting to hear of the Credit Equation, I didn’t know about that – will read further, thanks!
An Osborne quote:
so I think he counts as some kind of a monetarist 🙂
@Bill A couple more comments:
Using the PSBR to regulate demand in the 70’s and 80’s is what put classic Keynesianism out of favour for a couple of decades. It basically did not work, because politicians are useless. Central Bankers were doing much better. Until now!
Brown/Darling did initiate a huge boost in infrastructure spending in 2008-10 – the problem is these take a really long time to get going. There is a large bunch of PFI deals only now coming to fruition which were initiated during the recession. The US saw the same problem.
@JAV just a couple of clarifications.
As you write, the PSBR was used to regulate demand in the Keynsian years up to ’74, (when famously the party was over) but from ’74 to ‘85 the PSBR was used to try to regulate the money supply (downwards), first ironically by Callaghan (advised by David Gowland) and Healey. A very different approach.
You also write ‘monetary policy normally works by …’, but isn’t the point that one needs different mechanism when as now the question is whether monetary policy can work in the non-normal situation when rates are virtually zero.
Isn’t QE different to OMO in that created money is used for the purchases? There is a very close correlation between the extent of QE and commodity prices rises. Sure, these may lead in the medium term to increased supply, but in the shorter term the commodity price inflation is as you say making the B of E nervous of further monetary easing. We could do without the spike.
How much better to fund a higher proportion of the PSBR with bank lending which would deliver both a fiscal and a monetary stimulus with the money passing through the customers of the businesses we want to invest in increased output? At the moment we are vainly hoping that an increase in the velocity of money will do that.
I even think our grandchildren would be grateful.
And what a national campaign that could be if people understood the intent and were inspired with a sense of hope and purpose.