Opinion: What moves me to go to Glasgow? Challenging Osborne’s Plan A

I used to teach economics and in my retirement I have had the opportunity to follow closely the macro events of the last five years. The overwhelming weight of evidence is that the Osborne Plan A (expansionary fiscal consolidation) has been a disaster. Any objective analysis leads to this compelling conclusion – and Liberal Democrats should give up being “uberloyal” to the leadership and act in a dispassionate and evidence-informed manner.

You don’t have to take just my word for it. I can highly recommend Paul Krugman’s book End This Depression Now! and Mark Blyth’s recent publication Austerity – the History of a Dangerous Idea. To these I can add an article by Martin Wolf, chief economics commentator of the Financial Times in the New York Review of Books, How Austerity Has Failed:

“Austerity has failed. It has turned a nascent recovery into stagnation”.

Of the government’s failure to borrow and spend in a Keynesian fashion Wolf writes: “…this has helped cause a lamentably weak recovery that is very likely to leave long-lasting scars. It was a huge mistake”.

“Plan A” or “Osborneomics” was a gamble based on a wing-and-a-prayer hope that cutting government expenditure would create confidence within the private sector (consumers and firms) to go out and spend. However, what Plan A overlooked was the fact that government spending represents income to consumers and firms. For three years all three sectors (firms, consumers and government) have cut back on spending plans resulting in a lack of demand. The UK economy has been stuck in the longest recession for 150 years and Gross Domestic Product has yet to recover to where it was in 2008. In consequence, in the last three years the cumulative loss of GDP has been put at 6% – a figure produced by respected Oxford Professor, Simon Wren-Lewis in his article, How much has austerity cost (so far)? This 6% loss amounts to £3,500 for the average UK household.

By contrast, President Obama and his US team engaged from the start in a Keynesian-style reflationary package. The US federal budget deficit has declined more dramatically in the past three years than at any time in post-war history. The Congressional Budget Office projects that the federal budget deficit will fall to 2.1% of economic output by 2015, an astonishing turnaround from the 10.1% figure four years ago. By the same year, Britain’s deficit will still be at 6.0% of GDP.

What do I propose to do about this? Well, in the first instance get myself to Glasgow as a voting delegate and support any effort to modify the Conference Motion F19, “Strengthening the UK Economy” that’s being debated on Monday, 16th September. The leadership has to be challenged – and challenged strongly – on this one.

* John Cole joined the Yong Liberals in 1961 and was Lib Dem parliamentary candidate for Shipley in both the 1992 and 1997 general elections. From 1997 he was a Lib Dem councillor on Bradford Metropolitan District Council, retiring (undefeated) in 2012.

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  • Why do you think a conference vote will influence the leadership?

  • Simon McGrath 24th Aug '13 - 10:43am

    “Of the government’s failure to borrow and spend in a Keynesian fashion”
    What on earth is borrowing and spending an additional £500bn over the course of this Parliament if not Keynesian?

  • david thorpe 24th Aug '13 - 11:25am

    two things strike me as odd about this piecve

    1. the author appears to want to challenge a en economic policy that is demonstrably working in all its aims, growth is hapoening, a dsouble dip recessuion was avoided, employmeny is up, and the fac t that for the fist time since 1992 all 16 of the sectors which comprise the manufafturers indiex are up…..that shows a balanced economic recovery..

    2. the author a former economcis teacher appears unaware that we have had a massive economic stimulus in this country-it pyulled us out of th recession and happened towards the tail end of the last labour governemnt…..he should get his keynesian text book and move onto the next xhpaters-the one which talks about how the best way to achieve a sustained growing economy is to run a balanced budget over time…..

    Lib dems shoukld be shouting from the rooftops about opiur achievements as part of this govbernment in turning the economy around…and how we were the opnly party to corewctly call the last one-we have been making the right calls foir a decade and more-lets shout about it-not whinge about it!

  • Meanwhile the economy is growing at 0.7% per quarter (almost 3% per year) and could be accelerating.

    Plus there is plenty of evidence that the economy stagnated in 2011 and 2012 for a whole host of other reasons, not the least of which were:

    1) Massive consumer indebtedness built up in the run up to the financial crisis, taking away a source of growth for two thirds of the economy – NOTHING TO DO WITH UK FISCAL POLICY;
    2) The Eurozone crisis killing the UK’s export growth – NOTHING TO DO WITH UK FISCAL POLICY;
    3) Collapsing North Sea oil and gas output – NOTHING TO DO WITH UK FISCAL POLICY;
    4) High oil, food and other commodity prices, killing consumer demand by cutting real incomes – NOTHING TO DO WITH UK FISCAL POLICY;

    Put together, all these effects have been far more important than the UK’s very slow (1% point of GDP a year) fiscal consolidation.

    I’m surprised and disappointed that someone who taught economics could have allowed himself to fall into the trap of making the ceteris paribus assumption – assuming that all other things remain equal. As explained above, other things did not remain equal. There were in fact massive negative external and internal pressures on the UK economy which thankfully are abating.

    You don’t have to believe that fiscal consolidation is beneficial (it is not, it is painful) to believe that sometimes it is a regrettable necessity. That is the difference between us and the Tories. They actually rejoice in cuts. We do not.

    However, to fall into the trap of saying that austerity is not even necessary is to indulge in the kind of wishful thinking that many Labour supporters are guilty of.

    It had to happen, it is happening, the economy is growing now, so let’s just move on from this debate. It is now over, so let’s forget it and not fight yesterday’s hypothetical battles.

  • The more I consider this article, the more I am struck by the spectacularly poor parallel between the UK and the US.

    1) The US started with a deficit that was smaller than that of the UK;
    2) The US has seen an energy-related boost from fracking while the UK has seen North Sea oil and gas output plummet;
    3) The US has barely been exposed to the Eurozone crisis, while the UK has been in the front line hitting exports and business confidence, with knock on effects on investment;
    4) Of course cutting back the government deficit has a cost to GDP growth. By definition, fiscal retrenchment at any stage in the economic cycle reduces demand in the economy. To describe growth brought about by extra borrowing and government spending as being cost free (ignoring the cost of that debt for later generations) defies belief.

  • @ RC
    The four things you list are causes of the economy stagnating but the whole point of carrying out Keynesian investment is to mitigate the effects of these problems and stimulate demand.

    There is no evidence that there ever was a structural deficit and therefore there was no need for “fiscal consolidation”.

    @ Simon McGrath
    While you may see running a deficit as being carrying out Keynesian policies I believe it matters if the deficit is increasing aggregate demand enough and over the last few years this is clearly not the case or we would have had growth rates of about 3% pa.

    @ John Cole
    I see this motion as being about what we can try to achieve in the next two years of coalition government and therefore we have to work within the flawed coalition agreement. However this should not mean we just accept the motion as written but try to include within it our policies passed over the last 3 years. I suggest these could include those set out in “Giving Young People a Future”, and from our policy paper “Decent Homes for All” bringing the Public Sector Net Debt (PSND) into line with the definitions of other EU countries, providing finance to Housing Associations with the aim of bringing the number of houses built back to their historical averages financed by increasing the money supply with Quantitative Easing, stimulate a major programme of house building which will lead to 300,000 new homes being built each year.

  • RC You make some really excellent points on the additional non-fiscal problems of the UK economy and the differences to the USA.

  • @George Potter,
    thats 0.7% per quarter, ie 2.8% per year, in line with long-term trends for mature Economies, on the edge of Recovery.

  • Bill le Breton 25th Aug '13 - 2:01pm

    Not so fast Paul. Let’s look at the actual data – I give a link below.

    There was something even more interesting in the figures published by the Office of National Statistics referred to by several commentators above.

    RC, Matthew and others, you might like to know that: Although growth in real GDP was revised to the seasonally adjusted annualized figure of 2.9%, the growth in nominal or money terms was just 1.7%. As RC will confirm this implies that the economy was experiencing DEFLATION – the deflator published by ONS was MINUS 1.1%.

    This explains why, when lay journalists and commentators above see an election winning recovery setting in, the Bank of England and other economists are less sanguine. These figures are the reason why the Bank last week said it believed unemployment may remain stubbornly high (over 7%) as far out as 2016.

    The Leader may yet come to regret not using his conference motion on the economy to press his coalition partners and the Bank of England further on NGDP level targeting and using the necessary monetary stimulus to reach NGDP growth of 5% (rather than Q2 figure of just 1.7%),

    Such monetary stimulus could finance a large scale housing programme and reduce unemployment to at least 6% with greater urgency.

    Note that the 1 Million Jobs campaign has gone silent on creating more jobs (other than much welcome apprenticeships) The monetary stimulus needed to raise NGDP from a very weak 1.7% to the long term trend rate of 5% would create the next million jobs and turn us from a party campaigning on the past to one campaigning for the future.

    And again before the Austrians and austerians write before thinking: I am not talking here about fiscal stimulus. It is the Bank of England that always determines the level of aggregate demand (NGDP) in the economy.

    Press release here http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2013/index.html from where you can also access the data.

  • @ George Potter

    “Youth unemployment is at levels which would have been unthinkable 40 years ago. Real wages have continued to fall.”

    This has little to do with levels of demand for labour in the economy and everything to do with:

    1) A major problem with employability among the UK’s young people. This is the brick wall up against which Nick Clegg’s Youth Contract is coming. Many have neither the hard nor soft skills to be effective in the workplace;
    2) A rapid influx of more employable workers from the rest of the EU. Of course if you have an unlimited supply of labour, as in any market, if you increase demand then the price will fail to rise. This is exactly the reason why wages aren’t rising.

    As for infrastructure investment, there are plenty of projects that are going ahead. The main problem is that so far, business investment has been weak in the private sector. That will not be solved by fiscal policy, but by a recovery in sustainable, profitable output growth.

  • I have heard John Cole’s arguments before.

    Keynes was writing at a time of unprecedented deflation, and when government spending was less than 20% of GDP. Hardly the conditions that existed in 2010, when government expenditure had gone through the roof, debt was at unprecedented levels (both public and private) and inflation was still too high. I have reread the General Theory and studied more of Keynes’s writing about debt ( which he abhorred) and am not convinced by John’s arguments that responding to the 2010 banking crash and the appallingly high debts with solutions designed for a 1930s style crash were either sensible or likely to have solved the problem.

    The problem that the government has is not in committing capital resources to a wide range of infrastructure projects, but in actually making them happen. It is delivery that needs to be tackled, not policy.

  • @ Bill le Breton

    “The Leader may yet come to regret not using his conference motion on the economy to press his coalition partners and the Bank of England further on NGDP level targeting and using the necessary monetary stimulus to reach NGDP growth of 5% (rather than Q2 figure of just 1.7%),
    “Such monetary stimulus could finance a large scale housing programme and reduce unemployment to at least 6% with greater urgency.”
    We passed the Policy Paper “Decent Homes for All” and so our policy is:
    To bring the Public Sector Net Debt (PSND) into line with the definitions of other EU countries;
    To provide finance to Housing Associations by increasing the money supply with Quantitative Easing.

    With regard to increasing the money supply to increase growth I found the speech of Lord Adair Turner at the INET Conference very useful in understand this idea http://www.positivemoney.org/2013/04/adair-turners-keynote-speech-at-inet-conference/.

    @ RC
    I believe that today’s youth are no more lacking in skills than the youth of the 1970’s. The difference is that governments in the 1970’s were working to get full employment while current governments no longer do. The report of the Institute for Public Policy Research looks at government policy with regard to employment as well as other things – http://www.ippr.org/publication/55/11002/a-job-for-everyone-what-should-full-employment-mean-in-21st-century-britain?

    I agree that the influx of workers from the rest of the EU does increase the supply of labour and this will have an effect on the number of UK workers who are unemployed.

  • @George potter
    You are simply wrong about infrastructure. I’m not a fan of Osbourn, but he has clearly demonstrated that he understands the difference between infrastructure spending (Regional Growth Fund, HS2, social housing, green investment bank, cross rail 2, cycling infrastructure etc) and current spending

    The government is committing millions if not billions to infrastructure projects. The problem is actually getting the money spent. It may be that projects are much more complex than in the past but there are huge delays in starting worthwhile projects. That’s the real problem and the one which our ministers should be vocal about.

  • John Carlisle 27th Aug '13 - 7:38am

    The government is not COMMITTING money to infrastructure projects or housing, that is the problem. It is just talking about it. We could have built over 300,000 houses by now if we had an implementation plan and an implementer (as Macmillan was in the 1950’s). The LibDems should have demanded that plan and resourcing; but they do not understand the “how” of getting things done. There is a great deal of money in the construction community, billions infact, but if orders are not issued it will not be spent.
    Local infrastructure maintenance and improvement is where the money can be invested quickly and to the direct benefit of the community, including low skill jobs. But the government turned the tap off and engaged in a variety of employment schemes, which did not result in jobs but in training. Give the youngsters real jobs that include training instead of handing over millions to Emma Harrisons of this world to engage them in faux work.

  • @ Richard Flowers
    I am not sure there is much point in replying to you because on two other articles you failed to respond to my comments.

    There is a difference between a deficit and a structural deficit. You have believed the Tory-Lib Dem lie. Investments and any extra welfare payments caused by the recession need to be removed and any loss of revenue caused by the recession need to be taken into account to discover if there is a structural deficit.

    Bill le Breton posted on this site 28th July writing, “Simon Wren-Lewis, Professor of Economics at Oxford and a force for calm thought in difficult times (states), “before the recession hit the debt to GDP ratio was slightly lower than when (Labour) took office. Of course debt rose subsequently as a result of the recession’. Here are the figures he quotes, ‘The current balance (which excludes investment spending) was -0.5% of GDP in 2006/7 and 2007/8, which is hardly a large number. Public sector net borrowing, which does include investment, was around 2.5% of GDP, which seems larger, but here zero is not the appropriate reference point. A sustainable deficit is one that leaves debt to GDP constant: to take some round numbers, if the debt to GDP ratio is to be sustained at 40%, and nominal GDP grows by 5%, we need net borrowing of 2% of GDP. So an actual deficit of 2.5% again does not seem that excessive’.”

    I believe that Simon Wren-Lewis also states that the Labour government continued to generate a surplus on the current account budget until the year 2003-04.

    Even in terms of your own statement you are incorrect. Growth was better 1997-2000 than 2001-2007 and the Labour government ran a budget surplus until 2001 and it was only with a worsening economic outlook that it run deficits. I would say that any so called “boom” that continued to have over a million unemployed was not a boom compared to the 1950’s and 60’s. With over a million unemployed there was still spare capacity in the economy and aggregate demand was not at its maximum level.

    You used the term “the biggest boom in history” yet again. So maybe this time you will answer my questions that I referred to above – Was it the biggest boom because economic growth was faster than it was ever in the past? Was it the biggest boom because the number of unemployed fell to its lowest point in history? Was it because while economic growth was poor it was continuous for more years than in history?

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