In my wild youth, which was as long as it was fecund, I enjoyed a brief and mutually unsatisfactory fling with Marxism. One of the most fearsome methods used by Marxists to direct debate is to retreat into the world of “ism”’s, where, rather than engage in discussion of the relevant point, opponents are branded with the prevailing pejorative ‘ism’ of the day.
While its probably too late for Marxists to change, it’s rather disturbing when more mainstream political figures fall into the same habits. A recent example of this came when Labour MP Peter Hain, speaking on The Week in Westminster on Radio 4, described the coalition government as “neo-Liberal”. As a former Chair of the Young Liberals, Hain should understand the tenets of Liberalism a little better than that. And as a man who served in Labour Cabinets during the Iraq war, he should be familiar with Neo-Liberalism, as that war was cloaked in the ideology of ‘Liberal Interventionism”, a worldview which is at the core of Neo-Liberalism. In reality, there are no neo-Liberals in the Liberal Democrats, and only a handful among the Tories, while Labour, from Blair to the present day, practice neo-Liberalism with the fervour with which they once practiced Socialism.
Put simply, Neo-liberalism is the world view which argues that the biggest obstacle preventing man from living in a Liberal society is man himself. The differs from the traditional, classical Liberal view usually advocated by Liberal Democrats which argues that large institutions, and vested interests, ranging from the State, to big business and special interest groups are the barriers obstructing the path to a truly Liberal society. The social Liberal tradition enhances this by emphasising that both institutions and individuals have the capacity to cause harm to wider society, and so the state must step in to supply safeguards. Liberals of all stripes adhere generally to the view that society is enhanced when the means of production: Land, Labour, Capital and Enterprise, have the freedom to operate regardless of borders, race or religion.
That’s why it’s inaccurate to describe Tories as neo-Liberals. In their historic guise as defenders of protectionism, in their Thatcherite guise preaching an industrial policy which relies of ‘picking winners’ or in their contemporary Eurosceptism, and as opponents of mass immigration, the Conservative party have always had a worldview which is the very opposite of neo-Liberalism. The closest to a neo-Liberal in the Tory party is Kenneth Clarke, and he is perhaps more popular among Lib Dems than his own side.
The neo-Liberal economic ideology combines “Light touch regulation” with “post neo-classical endogenous growth theory”, both theories which the Tories would enjoy, but combined with a pro-Europe stance. These theories argue that man interfering in markets makes those markets less efficient and less Liberal. Classical economic Liberals posit the view that the government must act to protect the market, ensuring that none of the various vested interests become too powerful.
In social policy terms Neo-Liberals repeat their prognosis that the greatest obstacle to Liberal outcomes is Man. Labour try to deliver a Liberal social policy by enhancing the power of the state and its institutions. This manifests itself in the culture of centrally imposed targets, increased regulation and the ever expanding nanny state. Classical Liberals, in contrast, believe that truly socially liberal outcomes can only be achieved when the state sets only the broadest parameters, then allows individuals and relevant practitioners decide how best to proceed. This mantra was best defined by JS Mill, with his ‘harm principal”. Tories don’t traditionally want socially Liberal outcomes and generally use the state to prevent them occurring. So the next time Peter Hain or similar cast their gaze across the political spectrum to deploy the fashionable ‘ism’ of the day, perhaps they would be best served by first glancing in the mirror.
* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election
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43 Comments
David, I occasionally do this (describe people using isms). Am I suddenly a M(m)arxist?
And, I’ve been a Liberal for probably longer than you’ve been alive (although I am sure you can tell me whether I am correct in that assumption or not?)
Interesting article.
The coalition is a complex animal that is partly made of traditional right wing conservatives, those against Gay marriage, anti EEC, bring back hanging and national service types. These are the ones, I think the Liberal Democrats advise that they are saving us from. It is apparent though that the traditional right wing view does not reflect the majority of the country’s views which in matters of personal relationships and liberty issues are generally liberal.
In this the Gay marriage vote approval largely reflects the views of the majority of the country.
The Conservatives have Social Liberals such as Cameron and Osbourne.
The economic theorists that drives the Conservatives is from the Chicago school of economists, such as Friedman and such. (https://en.wikipedia.org/wiki/Chicago_school_of_economics ). This manifests itself in Cameron’s and Osbourne’s desire to outsource and privatise every aspect of government provision. This includes the historic relationship with the police and provision of prisons, the majority NHS provision, schools and so on. The degree that the Conservatives can manage this is limited to their lack of a majority, existing situtations and dependence on the Liberal Democrats to get their policies through.
Interestingly at the last elections, the scale and scope of the Conservative plans were hidden to the electorate at the election, and they largely tried to placate and reassure. The electorate have never really had the opportunity to vote on the mass outsourcing that the Conservatives are putting in place.
Cameron correctly identifies that the important thing is the economic set up. He combined with Nick Clegg and Danny Alexander to get these positions through. The Liberal Democrats are made up of more ‘left’ leaning non ‘neo’ economic liberals. The Cameron / Clegg view is the dominate economic view. Cameron correctly identified that the Conservative right wing focus on the ‘personal’ prevented him putting his and Osbourne’s radical economic project through.
In terms of the key points of this government on an economic view, I think it is fair to describe the policy as ‘neo’ liberal as for the key institutions that affect people’s lives are being taken away from public provision and given to private providers. The Coalition may not be be exactly as in an economic text book but in real economic life, what is ?
Unfortunatley, this change is not one which was widely discussed at the last election, considered or debated. The implications of the changes and whether it is a good thing was not fully explored. It is debatable whether the outsourcing of everything has the support of the electorate. Maybe at the next election it will be.
One of the challenges in Conservative / Liberal Democrat fights for Liberal Democrats is persuading , non ‘neo’ economic liberal democrats or Labour / left supporters to support an MP who have been part of a government that is pursuing these policies. East leigh is the start of this process.
I enjoyed the article from David Thorpe in any case, thanks David for that. Debate is a good thing.
David,
The neo-liberal label is not very helpful, but essentially the Quad + David Laws + Chris Hulne in choosing the ‘austerity route’ both as a communications strategy and as an expression for the accelerated deficit reduction policy were following Austrian School economics.
A brilliant post by Britmouse; http://uneconomical.wordpress.com/2013/02/08/all-that-matters-is-nominal-gdp-fiscal-policy-edition/ analyses the wisdom or otherwise of this decision.
This fair minded commentator reminds us that, ‘Those who cry that fiscal policy was “unsustainable” in 2008 are really making an absurd claim based on the presumption that the observed path of NGDP was the only possible path we could have followed. That’s wrong. Brown/Darling fiscal spending plans were neither cause of the crisis, nor the cause of the deficit (at least its unusual magnitude). ‘
The adoption of ‘austerity’ as a mantra was as much about pinning blame on Labour as it was about economic theory. This positioning of the Coalition in relation to its opponent has done huge and unnecessary damage to the UK economy over the last three years – as history will later confirm.
The Quad including Laws are looking seriously at changing economic policy – their delay is down to trying to find a narrative for the necessary change. That is putting their political egos and reputations before the good of the country.
Earlier this week Japan confirmed its change in economic policy when the Governor of the Bank of Japan ”offered’ to resign earlier than the end of his term. The market reacted with a 3% rise!
Just consider how quickly the UK economy would recover if the Quad changed the Bank of England’s mandate. It will happen, but every day that change is delayed is a black day for the citizens of the UK and another nail in the coffins of our steadfast campaigners.
This is a good and thought provoking article. But surely, most governments probably don’t see themselves as neo-liberal, right up until the very day, that they undertake something… neo-liberal. But what troubles me most about neo-liberals (in denial), is their use of labels as a way of ‘shape-shifting’ their intentions, and justifying their neo-liberal solution to a problem.
Margaret Thatcher in 1984 spoke of striking miners as ” the enemy within….and dangerous to liberty”. That simple message of re-classification, was all that was needed, to give the police unfettered rule, to do whatever they felt necessary to crush the striking miners. (and thus restore liberty for us all?)
Fast forward to today, and how easy would it be, to endorse a similar government re-classification of (say), persistent protesters at a fraking site.?
“… they are our enemies, denying our nations rightful access to energy … and are thus terrorists within..”
Once a closet neo-liberal sees you as ‘an obstacle to the common good’, and is minded to re-classify you as a terrorist, a whole new swath of barely used legislation would rain down on you. But of course this is all just fantasy. Such things, simply couldn’t happen here, under the ever watchful eye of liberals, in an open, transparent, tolerant, Liberal Britain.
I knew this was going to be all rhetoric when your first sentence was near boilerplate hippie punching.
“Put simply, Neo-liberalism is the world view which argues that the biggest obstacle preventing man from living in a Liberal society is man himself.”
NO, it isn’t. You’re just making stuff up.
Your article might make some points, but I’ll never know, I didn’t bother to finish reading it.
Bill, the post you link to if I read it right suggests that it is possible to be as expansionary as you like with monetary policy. Exactly what monetary policy this would be isn’t mentioned.
I have my doubts.
Thought provoking article Dave , and justifiable criticism of Peter Hain’s remarks.
Bill Le Breton – Mark Carney’s appearance before the cross-party Treasury select committee, gives a good indication of what to expect in the way of “flexible inflation targeting” from this summer: Mark Carney signals Bank of England economic policy shakeup
Joe Otten, thanks for reading that link. Britmouse’s work is the best example of Market Monetarism as applied to the UK. Have a good look through his pieces. Have you ever heard of Chuck Norris? The Chuck Norris effect was at work when the Japanese market gained 3% on the *news* that the tight money Gov of the Bank of Japan was going early.
It is the expectations that matter even more than the actual policy. It is important to realise that we have not yet tried loose monetary policy. 0.5% nominal rates are not in themselves loose, nor is QE that everyone knows will one day be reversed.
Joe B, did you notice that Carney included the words ‘so far’ when talking of Flexible Inflation Targeting. He was also careful to point out that under the present target regime he is one of nine. Also, that Adam Posen talked of the MPC taking an ‘oath of allegiance’ to the present targeting regime – They are all waiting for the Quad to make its decision on that regime.
Jack Timms, I’d really like to know why you think that the Tories are Friedmanites? Friedman in 1993 told Japan that it needed to do QE and more QE and more QE – that the low rates and the zero growth in money GDP (NGDP) were signs that monetary policy had been too tight and was still too tight. He said that he thought everyone had learnt that that had been the cause of the Great Depression and that loose monetary policy (even with rates at 15%) was the cause of the Great Inflation.
Friedman would be saying the same to the UK policy makers today. The average 2% growth in NGDP since the crisis began and the low policy rate (for the past is it four years now? ) are signs that monetary policy has been too tight.
Conservative Economics and the economics of Laws, Huhne (in the negotiations in May 2010), Alexander and Clegg (note not Cable) owes its weird logic to the Austrian School not to Friedman and Chicago of his era.
Joe B – that article missed the vital description by Carney of flexible inflation targeting (FIT)as “the most effective monetary policy framework implemented thus far.” THUS FAR. Those are two golden words. And that is why he was employed.
He goes on to say that it looks like FIT has great trouble dealing with the Zero Lower Bound.
Bill Le Breton. You say “Just consider how quickly the UK economy would recover if the Quad changed the Bank of England’s mandate”. I am not arguing against a change in tack, just that you are far too optimistic in thinking that it will produce a sudden upturn.
Bill, yes I agree that expectations matter. But when optimistic expectations become detached from the underlying fundamentals of reality, that is called a bubble. It seems wonderful for a time, but then it bursts, and this is where we are.
Of course it can work the other way and maybe we are all too pessimistic at the moment, but still I am going to be wary of any solution that involves persuading people who really ought to be grounded that things are better than they are.
I am also naturally suspicious of arguments that suggest the economic strength of a nation is principally a result of pulling some macro lever hard enough. Sure, sometimes levers need to be pulled harder than they are pulled. But if things were in general this simple, some country will have tried it and become incredibly rich.
The idea that each macro intervention has an upside and a downside, and that the real skill lies in weighing these up just seems to me a much more plausible model of reality.
Stephen – and Japan since mid-November? And the US since Fed went for dual mandate? There is plenty of evidence of what lossening monetary policy can do at the zero lower bound.
I’d only be over optimistic if monetary policy wasn’t tight now … and don’t forget we have had just 2% growth in NGDP (ie in aggregate demand) since 2008 and 0.5% policy rate at the Bank of England since March 2009.
Joe, where’s the bubble??? What you appear to be saying is let’s go on with virtually zero real growth in the economy and just 2% growth in money GDP (nominal GDP) just in case we start a bubble in … what five years time?
Income is 15% below the trend rate … Taxes revenues are 15% below the trend rate. That’s why public services *appear* unsustainable, that’s why aggregate demand is so low that no-one/no firms are investing. THat is why the more the coalition tries to cut the deficit, the higher the deficit becomes. That is just what happened in Japan. That is just what happened in the Great Depression.
We are a long way from worrying about bubbles. What we have is a SLUMP. A five year slump and Japan, before November, showed you could go on for twenty years in a slump like that.
@Bill le Breton — I’m probably missing something, but that Britmouse article you link to seems to depend on the assumption that the rate of NGDP growth (and someday someone’s going to give me a hint as to why that’s more important than ‘real’ GDP) of 1997–2008 is somehow the proper rate, as if continuous boom was the normal and natural way of things. Is there any good reason for believing that? What would the picture look like if we chose a less amenable date range to base our expectations on?
I find it odd that the author thinks that being pro-European is part of the neo-liberal definition. What if you are a US neo-liberal?
Some people try to define neo-liberalism in very narrow terms in order to claim that this government is not neo-liberal. My definition is that a neo-liberal has an ideological belief that market forces are self correcting in a way that society invariable benefits, and as a result regulation is either not required, or self regulation will suffice. By the author’s own admission, deregulation is an important part of the neo-liberal make up, and that is certainly what this government is doing, despite the enormous failures in light touch regulation in relation to the banks, the media and more recently the horse meat substitution of beef.
On the latter scandal it is worth bearing in mind that the incentives for the food industry to make this substitution were market forces. Horse meat is cheaper than beef, and if you can trick consumers into thinking it is beef then you can make bigger profits. If that is not bad enough, there are concerns that antibiotics that have been injected into horses are now in the food chain with unpredictable results. Fortunately the risk of harm to humans is low, but the main point is that these risks are not controllable when market forces are allowed to let rip.
What I see from the government is an ideological assault on regulation. What I would like to see is evidence based policies. I favour sweeping away regulations if the evidence is that they are not required. I am in favour of more regulation where there is no other way of stopping institutions from “moral hazard” actions.
Now you can call the current frenzy for deregulation neo-liberalism as I do, or you can call it something else. In my opinion the essential point is that it is fundamentally wrong and we should have no truck with it.
As far as Peter Hain is concerned, when he was a Young Liberal, and in fact when I was in the 1980s, we defined Liberalism in a completely different way to those who are still inspired by the Orange Book today. We were social liberals and consider the free market fundamentalism we see today as illiberal.
Geoffrey – you were right then, you are right now.
@Geoffrey Payne, replacing beef with horsemeat is also the kind of thing that can happen in a planned economy. Actually when the only way to get ahead is to cheat, then cheating happens even more.
Morning Malcolm – a quick stab at why NGDP and not RGDP. Because generally the world functions on nominal or money values.
A business person thinks in terms of expected revenues and doesn’t adjust for inflation. What is the value of the goods I’ll sell this month/year? Should I restock? Buy and new machine? Hire a new member of staff?
Ditto workers. Ask someone whether they would like a 1% cut in their wage in an economy of 1% inflation or a 1% rise in a world of 4% inflation and experience tells us they would opt for the latter (making themselves 1% ‘poorer’ in real terms). It is called the money illusion and it is why prices and wages are sticky and why the market doesn’t clear efficiently. Why sometimes we get inflation and sometimes unemployment rises, when the classical theory suggests it would immediately hit equilibrium.
The period up to around 2006/7 was called the Great Moderation. UK and other western economies had a long period of 2% inflation and 2.5% growth. People got used to a world of 4.5% growth in NGDP. (and inflation was pretty accurately measured by CPI)
Certainty, stability are good things for economic actors.
Expectations of NGDP growth did rise above that trend around 2006/7. Signalling that monetary policy was too loose. Why? Because the inflation measure, CPI, the Bank of England used didn’t pick up that inflation – much of it asset price inflation.
Have a look at the NGDP growth over those years and you will see it rising above the benign NGDP trend level. An NGDP target would have told the Bank to communicate that it would tighten. Do you as an individual or business want to commit to borrowing knowing rates are about to rise? No. The very threat (if you believe it) that rates will rise reduces the pressures on the economy and makes the rate rise unnecessary. (Chuck Norris effect)
Then, around 2008, while the Bank’s eyes focused on commodity price rises, businesses and consumers started expecting a fall in NGDP. Again, looking at the wrong target the Bank kept rates at 5.5% at a time when the nominal economy plunged 8% in a year!
Recall – Bank rate did not get to 0.5% until March 2009. When was Lehmans??? When was Northern Rock !!!!! This was derelict central banking – and it wasn’t confined to the UK.
The relatively high interest rates of 2008 (at a time when firms started deleveraging and asset prices [that secured loans] were plunging, dictated expectations of further declines. Those expectations have remained entrenched ever since? Caution: I may lose my job – cut back. I may lose my market, don’t invest.
The attraction of a Central Bank that says, right we shall do everything in our power until NGDP reaches 4.5% and politicians that put as much conviction into supporting that (as they did talking about austerity in 2010) is that this will set new expectations … of recovery. And, there’s the measure; the target. say 4.5% NGDP. [Set up a futures market in NGDP and you have a daily estimate of where the market thinks NGDP is going]
Now, make it a level target. That is, explain that if we get to 5.5%, the Bank will tug it back to 3.5% next year and then resume at 4.5% the year after and people will know exactly where they are: they know the income they will have to back loans, they will know the revenues they will have to cover new stock, new machines/ new staff.
I hope that quick sketch helps.
Of course, to accept that we need NGDP level targeting now (a concept 40 years old) will require certain people accepting that they were wrong in the Noughties and very wrong since 2010.
Geoffrey – I am sure in the 80s, 70s or 60s, “we” (ie Liberals who considered ourselves radical, whether Young or not, would not have used the term “Social Liberal”, because at that time, although “neoliberal” might have been in academic use for a style of freewheeling capitalism, it was still accepted that liberalism, economically, would have involved redistribution to allow more people freedom. As someone who would have favoured the continuation of a mixed economy onwards from the 70s, I am sure I could have easily been described as an economic liberal at that time, especially when combined with ideas of worker ownership etc. Friedman style ideas would not have had any traction whatever as liberal (certainly not Liberal) ideas.
@Tim13, I don’t ever remember a time when the term “Social Liberal” did not include a belief in worker cooperatives. What you describe yourself as believing is roughly what I believed in as well, both then and now.
Bill,
you’re massively over-simplifying by relying on monetary policy alone as the decisive factor in economics.
Monetary policy cannot, and should not be decided independently of the network of interdependent policies adopted by a government, each which have their own financial implications.
For example, the level of infrastructure spending and the rise in personal allowances pushed for by LibDems will impact any nominal demand levels irrespective of any separate targetting measures – these actions aren’t just good for the economy, they have tangible results and are socially desirable too.
Try canvassing public opinion on the subject, monetary policy is obscure elitism which doesn’t fire the popular imagination.
Of course business people adjust for inflation, it is nonsense to say otherwise.
Big businesses, like Tesco or BP, have the ability to pay for experts to make predictions about what inflation will be and what growth will be, and those experts will function equally well under inflation targeting or NGDP targeting – as long as they know what kind of targeting it is, they’ll cope.
Small businesses, like mine, haven’t got a clue about how NGDP will affect demand for their products or services, so NGDP targeting is no help at all. Even if we can predict what will happen to our business sector, we still can’t predict what will happen to our access to a small part of it. But we do know that, if inflation is held at a certain value, we can at least predict what our costs will be for any particular business development proposal.
So if small businesses are to be the engine of recovery, inflation targeting would seem to be the better way forward.
The real problem is perhaps, not with the targeting method, but with the target.
A low inflation target means that there is a low risk of losing money by not spending it. At 2% inflation, any business investment opportunity with more than a 2% risk of failure is not worth pursuing, from a purely monetary viewpoint.
If inflation was targeted at a higher value, businesses with cash mountains would presumably see a different risk in not spending. At 5% guaranteed losses on mountains through inflation, opportunities in the risk range 2 to 5% presumably become attractive.
I agree with Geoffrey on this.
Richard,
For a small business, think of NGDP as being national income in money terms. If you were convinced that the income of your customers (be it B to B or B to C) was set to rise by 5% in the coming year would you restock your inventories/have a go at that new project/employ one more member of staff??? But if you expected their incomes to remain static, what would you do?
Oranjepan, it is more simplistic to rely on the same economic policy that has produced the longest slump in history. You don’t know that loosening monetary policy until NGDP rises to say 5% for say four quarters won’t work, because it hasn’t been tried. We have had overly tight monetary conditions – and just 2% growth in NGDP for nearly three years.
Richard
Just seen your comment on inflation and the hot potato effect. You are right, expecting inflation to rise would reduce the demand for money to hold – it would increase the velocity of exchange – it would increase aggregated demand (which is M times V in the equation of exchange or NGDP).
That is the advantage of an NGDP target over and above an inflation target -. In the short run (and Friedman would agree with this) increasing the M*V side of the equation can increase real output (Y) without necessarily increasing the price level (P). Again, using the equation of exchange: M*V=P*Y
The expected higher expenditure you describe in your second para from firms frightened of their cash value eroding is anticipated by firms increasing their output.
If I know what inflation will be, then I can know what my costs will be. If I only know what the national income is going to be, I have no guide either about my cost increases or about demand in my niche.
I am a businessman, and it looks like Friedman the economist hasn’t got a clue about how small businesses make decisions. Broadly speaking, I am looking for this:
Demand less inflation
because this tells me whether I will be better or worse off, and if I know inflation then I at least know part of the equation. Friedman is looking at this
Demand plus inflation
which tells me nothing about the two individually.
Tim 13. In the 70s we had persistently high inflation even though we had high rates of interest. Friedman argued at the time that this was because monetary policy was too loose. In those days the budget deficit was largely funded by the Government borrowing from the banking sector in a way that led to the creation of deposits – directly increasing the money supply.
So, Friedman’s policy to bring down both inflation and interest rates by tightening monetary policy involved reducing the Public Sector Borrowing Requirement. The Liberal Party, under David Steele opposed this and, when Labour lost in 1979, they too opposed this policy (which they had in fact initiated under Callaghan).
That does not mean that Friedman would be arguing today, with nominal GDP at just 2% on average since 2010 and interest rates 0.5% since March 2009, that monetary policy needs to be tightened. And this is where Jack Timms above also misreads Monetarism (and the Chicago School). Quite the reverse! Monetarism sees the present situation as being one where monetary policy has to be loosened further by either or both increasing the supply of money or increasing the velocity of exchange.
Liberal and Labour ‘prejudice’ against monetarism as they saw it operate in the 1970/80s is as great a folly as the economic liberals today advocating the Austrian School’s prescription of severe budget cuts and the forced liquidation of firms which, if national income returned to former sustainable levels, would return to economic viability.
Friedman (or the modern Market Monetarists) offer Liberals a distinctive way forward, very much in line with our fundamental principles.
And actually, he was right in the late 70s and we, with our prices and incomes policies, were wrong.
In my wild youth, which was as long as it was fecund, I enjoyed a brief and mutually unsatisfactory fling with Marxism.
Ah, that explains a lot. You like simplistic economic theories, so you’ve jumped from the one that was fashionable in the 1980 to the one that is fashionable now. Arguing with extreme free market people now feels very much like arguing with Trots in the 1980s, same mentality, just a change of fashion in the details.,
I might be using two different definitions of demand, yes, but what I need to estimate to start with is
> my costs
> how much product I will be able to sell
> at what price
Then I need to estimate how uncertain these estimates are, and how other investment opportunities compare (including a bank deposit)
the adam smith quote to back up my contention that classical libersal favour intervention is the one which refers to there never being a meeting of businessmen-even for the purposes of leisure-before which the talk doenst turn to matters which will be of detriment to general public
and not everyone who uses isms is a marxist-but its a traditon began on the far left-and using them is not always wriong-but using them in place of a valid argument isd
@ bill le breton
the austrian school doenst believe in fiscal stimulus-britian had one of thsoe under gordon brown and are following the keynesia principal that after stimulus comes cuts-
the austrians oppose central bank indepdence-indeed they oppose central banks-and austrian school economists would also deeply dissapovropve of QE-as again they dont believe in the state manufacturing ‘money’-so the coalition are a good dealf rom the austrain school
David – that is what I am saying. Remind me, you’re against Q.E. aren’t you? You don’t believe in fiscal stimulus do you? You believe in accelerated fiscal reduction? You have written articles here saying that. You are an Austrian aren’t you?
@ matthew
I agree arguing with extreme free market people is like arguing with marxists-however both this article and every other article I have ever written shows that I am not an advocate of ‘extreme’ free ,arkets-as an economic Liberal I know they dont work-and believe in government intervention
@ bill le breton
I believe in the traditional keynesian model-first you have a stimulus then you follow that with austerity-thats what is happening in Britain-The stimulus happened under the borwn government-thats why the last bit of the brown government and the first bit of the coalition governmenty had compartively healthy growth and too high inflation. Thats waht should happen after a stilumus because stimulus works-but after thwee stimulus-the government retrenches its spending to allow the pirvate sector to repalce it-thats classic keynes-and thats why labour wnet into the last eleciton promising fisdcal contraction.
As for QE-its s suuply side economic method-I dotn think they work to any great extent to generate demand-also its entirely the wrong thing to do when inflation is above target
thirdly-my emplouyer runs webinars etc. where we recruit evry senior economists to give their opinions on the day-the last one we had-theree of the most eminent economicsts in britain-one from academia-one from business and one from the civil service all said-they dont know what will happen when QWE is unwound-such uncertainty harms investment decisions.
Bill,
you’re rewriting history if you’re claiming that the current situation represents a slump.
The calamitous unwinding of unsustainable debt mountains has been predicted for decades, and it could easily have wiped out significantly larger portions of the global economy, so the relatively minor contraction followed by stabilisation is a testament both to the difficulties involved in defending an open and integrated world economy, but also to the robustness of a decentralised system – which appears contrary to your argument.
‘Slump’ is also a hugely inaccurate description of what we face, because indicators tell us that we’re still seeing record levels of employment and retail activity, while companies are still making near-record profits.
Economies are rebalancing as activity is being increasingly driven by technology and online factors. The pain is not being spread out evenly because these factors limit equal access, and outdated government systems are stuggling to cope.
We don’t need to turn the clock back to 2007 and store up bigger problems with a massive new stimulus, we need to continue with the plan of gradually managing down the current levels of stimulus so that they can be shared out fairly across society rather than by being hoarded by big companies who are sitting on huge cash piles and still giving outrageous unearned bonuses.
I think the big-brush approach is both too radical and not radical enough. As LibDems we should keep to our argument that the targetted approach is the correct way forwards. Raising personal allowances and investing in infrastructure is a very good start.
Frankly, Bill, I haven’t heard you use the word fairness yet, so I can’t agree with you.
Dave Thorpe is right to point out:
” in the traditional keynesian model-first you have a stimulus then you follow that with austerity-thats what is happening in Britain-The stimulus happened under the borwn government-thats why the last bit of the brown government and the first bit of the coalition governmenty had compartively healthy growth and too high inflation. Thats waht should happen after a stilumus because stimulus works-but after thwee stimulus-the government retrenches its spending to allow the pirvate sector to repalce it-thats classic keynes-and thats why labour wnet into the last eleciton promising fisdcal contraction.”
Although the Labour stimulus was significant, they started cuttng capital expenditure too early and the coalition contnued to make further cuts in the investment sector of the economy.. Vince Cable was quite forthcoming in his comments last year that the coalition underestimated the depth of the contraction thst followed the financial crisis. The damage that followed coupled with the Eurozone crisis and a slow recovery in the US has exacerbated the UK situation. Nick Clegg has recently called for more infrastructure investment.
The employment situation remains poor. Since May-June 2010, there are 172,000 more self-employed part timers (17% increase), but only 130,000 more full time employees (a paltry 0.7% increase). The unemployment rate remains above 8%, an unacceptable level. This is consistent with the absence of GDP growth, indicates that a significant output gapremains and confirms the view that inadequate effective demand is the immediate problem
Domestic demand. may be boosted by borrowing for investment or tax cuts as Orangepan suggests in his comments, but in a climate of fear of a bond vigilante strike, then the Bank of England could do the job by getting innovative with QE i.e more aggressive credit easing measures such as large scale purchases of housing association and infrastructure bonds. The Banks manadate is not currently flexible enough to allows for this and this is where a change to NGDP targeting could prove effective.
Chris Giles, FT economics editor has come out in favour of NGDP:
“Were the UK Treasury to set the BoE a target to hit a path for nominal GDP – the value of spending on goods and services – that rose at 5 per cent a year, many of the problems could be minimised. No one would have to pretend they knew how much slack there was in the economy or the precise supply capacity over the next two years. If supply was growing strongly, inflation would be lower and, if not, it would be higher. But it would be contained in both cases.”
Martin Wolf is also on board with a change in the mandate:
“.. the country needs an ambitious macroeconomic target, but one that also caps inflation. As my colleague Chris Giles notes, the obvious one – in an environment of such uncertainty – is for nominal GDP. In the second quarter of this year, nominal GDP was more than 10 per cent below its pre-crisis trend, despite the big inflation overshoots. If the Bank were told to make up some of the lost ground, together with subsequent growth at up to 5 per cent a year, inflation might overshoot. But there might also be a surprising buoyancy of output and a recovery of at least some of the lost ground on productivity. It would surely be better to try and fail than to be sure of failing, by not trying.”
I think we have gone as far as we should with QE and its distributional distortions. I endorse Orangepans call for a targetted approach of direct investment – but in housing association and appropriate private sector commercial bonds not the gilt market.
Oranjepan, I am not sure where you live, but you might like to look at this comparison of recessions and recoveries published by NIESR, here: http://3.bp.blogspot.com/-IoCXEHyeaOc/UROzgeKhLtI/AAAAAAAAAPo/1uU7BygosHE/s1600/GDP+to+January+2013.jpg
It’s a slump. We may not have soup kitchens, but I suggest you go down to your local charity issuing free food stuff.
I have long argued that when a politician uses the word ‘fairness’ the public interprets it as the opposite. What is wrong with using the word justice?
Joe, those quotes from Giles and Wolf are very helpful in support of NGDP level targeting. Even if the Bank did buy ‘bonds’ issued by Housing Associations it would still be QE. We are agreed, then, that QE should not be confined to gilts. But the first step is to change the targeting regime. We can’t wait for Carney to get his feet under the table. We need to do it now and the Budget speech might be the opportunity – however, if it is, we Liberal Democrats will have wasted the chance of leading on it.
There is no doubt in my mind that had Vince Cable been our leader he would have been leading that campaign, and, I think, would already have delivered it within the Quad.
@ joe bourke
great post-thnaks for the comment.
My worry about NGDP targeting is that a major cause of the current gl;obal crisis has been the belief(neo-liberal) that all growth is good growth.
This comes from a very rational place-notbaly the view of non moneterists that demand increasing is more important in the longer term than inflation remaining stable.
Thats fine. Whats not fine is the idea that creating unsustaianable ‘demand’ bubbles and calling iot gerowth, if a central bank has a gdp target I worry that in order to meet the target they will adopt an ‘all growth is good growth’ mantra’ when the whole purpose of indepdent centrasl banks is that they kick against this idea, politicians dont care what the nature of the growth is-central banks should.
I think the government using the money to buy housing stiock or bonds from housing assocsiations is a great idea-Im not against that-its a demand side measure-QE in its current form is a supply suide measure and economic liberals know they dont work.
Bill,
like I said you’re rewriting history – a comparison between crises pretends that they are unrelated.
Imposing artificial reinflation on an economy just delays the serious business of rebalancing industry and taxation to reflect just social relations (I won’t quibble over words like fairness) and guarantees that you’ll face a renewed crisis a generation later – which is of course popular with politicians who won’t be in office then. But the singular fact remains that a day of reckoning will not be postponed indefinitely, it’s a question of how long and how damning it will be.
I understand the pain of those on the margins who are being squeezed as a consequence of the crisis, but, again, this is the result of not dealing with inequality during the boom years and the restraints placed on social mobility which put people in a vulnerable position to start with.
So the matter is how to deal with the dual pressures of immediate need without responding in a way which will recreate the same problems later on. Debt to pay off debt? It’s a vicious circle which merely gives creditors the power to perpetuate poverty. The evil-doers win when the politics is reduced to bean-counting, economics must not lose it’s moral aspect.
Labour has lost the moral argument and we should not let them off the hook.
I also take issue with your definition of slump – the change from the peak is less important than both the position and the trend. UKGDP is neither at the bottom of the trough or falling, so the national economy is not in a slump.
The arguments about technical recession contradict claims of a slump, and ‘triple-dip’ actually point to stabilisation without reintroducing irresponsible reinflation.
We’re not in a slump and we don’t want a fresh bubble. Stability is the first step.
Finally I’ll state I am unhappy that we have not attained consistent, if modest, growth, but to this I ascribe two causes: the international context, and the lack of confidence shown by critics such as yourself.
Perhaps you could help by getting out of predictions and into something more productive, like manufacturing… maybe then I can sell you some elbow grease!
@ billl le breton
what the government should be doing in monetray policy terms is not increasing themoney the supply-but rather increase the velocity of exchange-QRE is having the opposite effect-because it encourages market particpants to buyassets and hold them-rather than to consume. I want more consumption-and this is best achieved through less QE
David who do they buy these assets from? What do those people do with the money? If the price of those assets rise and they use them to secure borrowing, what happens to the money supply?
Sure we need to raise M and V on the M*V side of the equation of exchange. Exactly so. But again you argue against QE, which you yourself define as a vital part of the approach advocated by the Austrian School. You are an Austrian, so too is Laws and the substantial part of the Coalition’s economic policy is Austrian.
It is time to try market monetarism, as I have argued here since July 2009.
@ bill
buy the assets from banks-who are currently ignoring the volume of poor assets on their books