Opinion: Why austerity is the wrong answer to debt

Austerity policy continues to be embraced by the UK coalition government as well as by governments across the world. This is causing predictable political unrest with large demonstrations and riots in Spain and Greece. The pain to UK households is substantial and set to increase. This is clearly socially undesirable, but more importantly is based on a technically incorrect analysis of the current economic crisis.

It is fashionable and great sport to blame bankers for the crisis, to say that the developed world has ‘lived beyond its means’ and that we ‘cannot afford’ economic growth and therefore must cut our economic output until we have reduced and eradicated the debt associated with growth.

This is all based on a monetarist accounting understanding of the economy. It is easy to understand but is too simplistic. It ascribes to bankers powers to disrupt the whole worldwide economy which is far beyond the reality of their role. They don’t know whether to be flattered or aggrieved.

The real roots of the crisis lie elsewhere, in more technical issues. The underlying factor causing the crisis is the demonstrable divergence between productivity and real wages. In advanced automated economies, technology allows ever increasing output with less and less labour content. The result is that the real wage, and therefore the consumer income component of GDP reduces, and becomes insufficient to purchase the burgeoning output of goods and services available. As Bob Crow, the RMT union leader put it in his ‘Lunch with the Financial Times’ interview in March last year, ‘if you have robots build cars, how are robots going to buy them?’.

We don’t face a crisis in supplying goods and services, but we face a crisis of deficient demand in the economy. It is a Keynesian crisis with a Keynesian solution.  This diagnostic is supported by leading academic economists such as the Nobel economics laureate Robert Solow of MIT who in a recent book points out that the ultimate scenario of huge output with very low employment would require a universal consumer income credit to sustain demand in such an economy. The other substantial point to emerge from this analysis is that debt becomes inevitable, cannot be eradicated, and has to be managed by new financial instruments.

In this diagnostic, funding the gap between GDP output and consumer income by consumer credit is predictably unsustainable, as it has become. But cutting economic output to reduce debt is equally nonsensical, allowing the tail to wag the dog. We need a new policy based around a citizen’s income not funded from government debt, but from a funding multiplier set for a government financial institution. This requires a renewed understanding of the role of money in the economy. In reality, commercial banks create such virtual money every day.

This radical alternative diagnostic and policy is set out more fully in my paper ‘Why Austerity is the Wrong Answer to Debt’ which you can download here.

 

* Geoff Crocker is a professional economist writing on technology at www.philosophyoftechnology.com; a contributor to Basic Income Earth Network, www.basicincome.org; and runs ‘The Case for Basic Income’ at www.ubi.org.

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32 Comments

  • This is probably the biggest nonsense fantasy post I’ve read in a long time…

    As productivity increases prices decrease for the consumer and previously unaffordable items become reality for the poor. If we believe your analysis then the increases in productivity from the industrial revolution would have made food more expensive and less available. We all know the opposite occurred.

  • Richard Dean 11th Sep '12 - 5:05pm

    Austerity has many forms, but the one seemingly favoured by Greece and Spain looks like the wrong answer to me. It’s driving the tax take down, and so is damaging those governments’ abilities to repay debt.

    IMHO what is needed is a re-structuring of the economies and of the expectations of citizens, while keeping everyone working. Unfortunately it seems that many governments don’t have either the skills or the courage to do this.

  • Tony Greaves 11th Sep '12 - 5:50pm

    “This is not about “cutting our economic output” as he so rashly claims, this is about attempting to balance the tax take and the spending outlay of the state so that we’re not borrowing 10% of our GDP every year and driving up our national debt. ”

    But it just happenes to ha ve the effect of “cutting the economic output”. It’s based really on the daft idea that the level of GDP is a constant.

    Tony Greaves

  • The core issues: “divergence between productivity and real wages” and “if you have robots build cars, how are robots going to buy them?”

    The growth in the economy has not resulted in a general corresponding increase in wages, and better productivity has often resulted in job losses, not increased employment.

    However on the bright side, we are much closer to achieving the ideals that science and technology have been striving for – a more comfortable life with more leisure time, and less back-breaking, tedious work. We just need to adjust our financial systems to keep up with progress.

    The citizens income is an idea who’s time has come.

  • David Allen 11th Sep '12 - 6:17pm

    “Finally, it’s no good saying that we need to become Keynesians now; the time for that was in 2001, when the last government decided it was easier to give people what they wanted on deficit spending than it was to transfer the full costs of extra spending onto the taxpayer – as is the sensible, and Keynesian, thing to do. A 3% surplus between 2001 and 2008 would have gotten us far more room to spend like maniacs on whatever fripperies and boondoggles the author has in mind.”

    That’s what anti-Keynesians often say, and it does sound superficially like a strong argument. It’s you guys who didn’t make a prudent surplus in 2001-2008, they say. Nobody should listen to you guys, because you got it wrong in 2001-2008.

    Actually, who did get it wrong in 2001-2008? Well, Brown did. So did Cameron, who approved of the high spending, and indeed toyed with making the (future) debt problem even worse by cutting taxes as well. If some Keynesians got it wrong, rather a lot of non-Keynesians made equal mistakes. So, let’s not go around saying that we should block our ears to what Keynesians say, just because of past misdemeanours that didn’t even happen!

    Furthermore, what else do anti-Keynesians say? They tend to go on at great length about the difference between debt and deficit, don’t they? They argue that it is wrong to take comfort from the fact that the total debt accumulated (including, of course, 2001-2008) is not too terrible. No, one must concentrate on deficit, on what is happening right now, here in 2012. Ignore the past, which was not too bad: take fright about the present, because it is dreadful.

    Er, hang on. Something doesn’t add up.

    What the austerity merchants are saying is that, if we think we were too profligate in the past, then that proves we should go for austerity now. And then they’re saying that, if we think that we weren’t terribly profligate in the past, why then, that also proves that we should go for austerity now.

    Nice try guys.

  • Erm … David Allen. That post makes no sense.

    The difference between debt and deficit is massively important. As the debt grows, so does the deficit because our interest bill goes up. If we balanced the books tomorrow (£120bn spending cut) we’d still be shelling out a massive £48bn per annum on interest. And the books won’t be balanced for another 5 years.

    Keynes advocated paying down debt in the good times to leave room for growth in the bad. Brown and Balls ignored that advice and built a debt fueled bubble.

  • @tabman because Labour were too scared to tax.

  • We do need to be careful that cutting the deficit/debt does not lead to “cutting our economic output”.

    When public spending stimulates 43% of our economy, cutting it sharply could lead to recession. Oh look…

  • Paul Reynolds 11th Sep '12 - 7:24pm

    This article raises interesting questions in relation to the current economic crisis and proposes new remedies. However it is so unconventional in its (neokeynsian) analysis for the sake of bevity it suffers from the use of concepts which unfamiliar to most economists. The author’s paper elaborates on this kind oc Keynsianism, but it still needs much further explanation. I hope we will hear more from this author on this variant of Keynesianism.

  • Andrew Suffield 11th Sep '12 - 11:02pm

    The current government’s policy is to spend more, year on year, and to run a higher deficit in order to fund billions of pounds of stimulus spending. That is the unarguable reality of the budget figures. I am not aware of any definition of “austerity” which describes this policy.

    Oddly enough, that’s what the authors of all these articles about “how to fix the economy” keep saying the government should be doing…

  • I can’t remember reading anything that insulter the intelligence of the reader quite as much as this. The straw man is so transparent it is embarrassing.

    The Paragraph:
    “It is fashionable and great sport to blame bankers for the crisis, to say that the developed world has ‘lived beyond its means’ and that we ‘cannot afford’ economic growth and therefore must cut our economic output until we have reduced and eradicated the debt associated with growth.”

    Is a perfect example of why, if you will rely on straw men to justify your arguments, you need to construct them at least with a little credibility.

    I don’t see anyone who isn’t already looking to agree with the authors suggestion (or even many who are) being won over by such vacuous arguments.

  • Matthew Green 12th Sep '12 - 9:32am

    I think the article does highlight a real problem – the excess of saving in the private sector against investment largely because too much income is being hoarded by the very wealthy or by the businesses. It is a secular trend that makes managing the current crisis more difficult. It has almost nothing to do with the debate on austerity as the policy to handle the current crisis.

    Evidence that we in the UK, US and other developed economies (not including Germany and Japan though) were living beyond our means pre-crisis comes from big trade deficits – we were bingeing on cheap developing world imports in a fundamentally unsustainable dynamic. The argument for austerity is that anything else simply takes us back into this unsustainable pattern.

    The real public policy significance of the argument is not on austerity, but on long-term tax policy. One anwer to wealth hoarding is to tax companies and the wealthy more harshly.

  • Geoff Crocker 12th Sep '12 - 10:14am

    Well, so far plenty of contempt in the above posts, but not one single intellectual point to challenge the claim of my article that the divergence between productivity and real wages is the underlying cause of the crisis.

    My article is ‘nonsense fantasy’ (Thomas Long), apparently I have never heard of the Asian or Eurozone financial crises and am advocating ‘fripperies and boondoggles?’(Tim Oliver). I don’t realise that over-stimulation of the economy leads to inflation (Edward Thompson), or that productivity has raised standards of living since the industrial revolution (again Thomas Long). Wow! Perhaps I should rejoice in such intellectual infamy.

    I am genuinely puzzled at the claim that the position I lampoon at the beginning of the article is a straw man. The view that the crisis was caused by banks lending too much, that we have therefore accumulated a huge debt burden which we must repay, and that we cannot afford economic activity is surely the standard view? The Chancellor’s last budget speech includes several such exact references, as do speeches from Vince Cable and others, as do the daily screaming press headlines, and every Newsnight interview on the subject. The challenge that my arguments are ‘vacuous’ should refer to the longer paper which the article offers a link to – the arguments in this may be debated (which I’d welcome), but are carefully researched and can hardly be called vacuous.

    But for those like Psi who think that their intelligence is being insulted, when in fact it is being challenged, and to reply to Paul Reynolds to whom I’m grateful for a polite reflective comment, I’ll try again to simplify the argument.

    It is I claim indisputable fact that

    1 IF productivity grows faster than real wages, (and if dividends or other elements of consumer income do not grow to match this gap), then there will be a deficiency of demand in the economy
    2 Data for the UK economy (presented in my fuller paper) shows that this did in fact happen in 2007

    The interpretation I then offer is that

    1 The economic crisis is therefore one of deficient demand
    2 Debt is inevitable in a high technology economy and we need new ways to manage it
    3 The 2007 gap between increased output and flat consumer income caused by this was made up by £55bn new consumer debt and increased government debt
    4 This proved unsustainable
    5 Austerity policy aiming to reduce debt by reducing output and consumption was adopted

    But my view is that this austerity policy is based on the wrong analysis (the straw man I am accused of who is sadly all too real), and that the only ultimate way of ensuring sufficient demand in a high technology, high productivity economy, is a universal consumer credit, or citizen’s income, funded by a bank through its lending multiples and not added to government debt.

    Any better?

  • An article that touches on the most important subject in the world but a topic that is rarely touched on in LDV: un(der)employment. Amongst other reasons, technological advances are resulting in a “hollowing-out” of the jobs market. Millions now face a bleak life of unemployment or underemployment. The result is a life of a basic existence for millions with little or no opportunity to ever improve their lot. Citizens income seems to be one of the best ways to try to ameliorate the horrific effects of this destructive problem.

  • Geoff
    Can you flesh out with a more practical example your view of the ‘citizen’s income’, and where it differs from the proverbial helicopter drop of money into the streets?

  • @Geoff Crocker & @Ed Shepherd
    deficient demand and underemployment/unemployment is NOT the product of a knowledge economy where a “divergence between productivity and real wages” is apparent.

    Bob Crow’s paleo-conservative vision of the labour market does not account for enterprise and the creation of new jobs in new industries, so it doesn’t bear any defence. Service specialisation reduces the impact of primary resources on the economy as people concentrate on higher-value, riskier jobs, satisfying individual demand for social mobility – though of course this places a requirement to raise skill levels or get left behind.

    It is a national success story that total employment in the UK continues to rise as the labour force expands, even during austerity, and we should credit and support the national desire for education improvements to raise personal ambitions (which is why Michael Gove is a disaster).

    The greatest divergence in productivity and wages actually happened during the boom years as emphasis was removed from the physical economy, creating new and higher barriers to entry (eg education, housing), and a definite trend towards centralising those industries occurred.

    Government should not be a driver of the economy, using stimulus and austerity to achieve political ends, rather stimulus and austerity should be used to balance the shifts in the real economy by providing means to overcome or tear down these new barriers.

    Listening to Bob Crow and his tribalist class cronies, you’d think basic literacy and numeracy is a nonsense designed to hold them down and make them look stupid.

  • Bill le Breton 12th Sep '12 - 12:24pm

    Chin up Geoff and welcome to the glorious world of LDV.

    I have always liked the idea of a ‘national dividend’. We are indeed all in it together and no one can get anywhere without being a ‘member’ of our society.

    The citizen’s income seen in this way goes back to the New Liberalism at the start of the last century.

    It is very interesting to see it used as a solution to the Great Recession in the way you propose and I read your paper with interest. Have you seen this: http://www.crfr.ac.uk/spa2009/Jordan%20B%20-%20Citizen's%20Income%20and%20the%20Crash%20-%20credit,%20debt%20and%20citizen's%20income.pdf ?

    I seem to remember reading that the wage level in the US has not increased since the 1970s. The recent ‘mystery’ over GDP stagnation and employment increase is potentially explained in this light.

    As you say, technological developments will only increase the tendency. The old capital/labour balance is returning in favour of capital and just as our New Liberals of the 1890s came forward with thinking for that situation, so we need to do something similar and their ideas are a good place from which to start.

    Here’s the statutory ‘however’ … MV=PY=AD=NGDP is a very useful tool. Monetarism is not always about cutting Government Expenditure (surely that is confusing matters with Austrian Economics). Friedman in today’s situation would be advocating QE a l’outrance (as of course would Keynes). In its aim of advocating stable AD, it is Liberal, socially as well as economically.

    Seeing a citizen’s income as a way of increasing the money supply (at a time when the forces you describe are destroying money) is as valid a way of picturing matters and confirming remedies as GDP = C + I + G + (X – M).

    Can you please explain in greater detail your thinking about how CI would be ‘funded by a bank through its lending multiples and not added to government debt’ ?

  • We don’t really have austerity in the UK – the tory part of the government is actually giving people who earn millions a year a tax cut.
    Even if we were in the middle of a record breaking economic boom, they would still want to cut public services.

  • Geoff Crocker 12th Sep '12 - 10:46pm

    Thanks Ed, John, Richard, Oranjepan, Bill and CP. Bill is right that US real wages have been flat for some considerable time, requiring credit to fund consumer purchase of increasing GDP, hence leading to a credit problem. Economist Tom Palley has critiqued this well. Oranjepan says I am wrong to extend the point to saying that ‘we can’t afford economic activity’ but I still claim that this is a fair rendering of George Osborne’s statements in the last coalition budget speech. In many areas of the UK, government represents up to 70% of regional GDP, so its expenditure is synonymous with economic activity. Macroeconomic analysis always rightly counts government expenditure as a component of GDP.

    My draft view of how a citizen’s income might work can perhaps be exemplified from the 2007 UK economy data analysed in my longer paper. This shows that GDP grew by £55bn more than consumer income, and this £55bn was funded by increased consumer credit which as we all know became inevitably unsustainable. If this same £55bn had been advanced as a citizen’s income with a big incentive to spend it in the current year, then the higher GDP output and associated employment would have been sustained without a debt increase. The funding would have to be limited to the £55bn gap between GDP and consumer income so as not to be inflationary, or like money dropped from a helicopter.

    My proposal is that the £55bn (roughly £1,000 per person) would be simply created as virtual money, by a government bank which for example had a deposit of £10bn and a 5.5 lending ratio. My defence of this is that this is exactly how commercial banks create virtual money all the time in the economy. Their liabilities are a multiple of their liquid assets, the exact level of the multiple being controlled by government or central bank. This is of course why a run on any bank would sink it as the system relies entirely on confidence, not on matching monetary balances.

    My further defence comes back to the Bob Crow point which Oranjepan too readily derides. Bob Crow may be a class dinosaur (I remember Rory Bremner taking off Tony Blair by saying that the class war was now over since the middle class had won), but on this point he is correct. In my full paper, as a thought experiment, I point out that in the ultimate case of a totally automated economy with huge output and (nearly) no wages, there would be no alternative to a citizen’s income, or some form of universal credit, or government allocation of purchasing vouchers. We are not in this extreme position yet, but my argument is that we are moving along the spectrum towards it. Ultimately, we therefore have no alternative.

    We are currently chasing our tail trying to reduce inevitable debt. BoE governor Mervyn King recently said that he would never have imagined that the 2007 crisis would still be with us in 2012. The phenomenon is clearly almost universal across the developed world and so is not the fault of some inept government. Isn’t it then reasonable to think outside the box and ask whether the productivity / real wage gap is in fact the cause, and a citizen’s income the only sustainable answer?

  • John Dunn
    Not so many years ago, Citizens’ Income was a Lib Dem policy. I suggest you look back to policy papers of the 90s.

  • Keith Browning 13th Sep '12 - 12:03am

    I recently tracked back over all my P60s for the 35 years of my working life, before I took early retirement four years ago, after a company reorganisation. The graph of my income is spectacular and probably explains all the monetary problems discussed above and why the worlds financial systems are in turmoil.

    I moved from a secondary school teacher into pharma sales and eventually into middle management. There was the odd hiccup but it did not distort the curve unduly. My salaries were generally in line with market rates both in teaching and in business.

    The graph starts with the £84 net I received for my first months teaching in 1973. That was also the first year that newly qualified teachers started on over £1000 per annun – £1008 from memory. After changing to the business world and after ten years total employment I reached the giddy heights of £6000 pa. For the next 20 years the graph showed slow but steady progress towards £25,000 but suddenly in the early 2000’s headed skywards, doubling in only a couple of years. To earn the same money in one year of the ‘noughties’ , doing much the same job, had taken me my first 15 years of work. My last five years of work equated to over 35% of my lifetime income. My first 15 years of work only totalled 7% out of 35 years of work.

    The genie seems to have escaped from the bottle about 2001. How to put it back is the problem.

  • @ Geoff Crocker

    “Well, so far plenty of contempt in the above posts, but not one single intellectual point to challenge the claim of my article that the divergence between productivity and real wages is the underlying cause of the crisis.”

    Then I suggest you take this as a lesson for the future if you want people to engage with your proposed solution you don’t dedicate so much time to setting up such a transparent straw man to pit it against.

    “The Chancellor’s last budget speech includes several such exact references, as do speeches from Vince Cable and others”

    References please? Hansard is online, you can look them up and quote either of them, or public speeches normally have the text published (try their departmental websites). If you are unable to actually quote someone but choose to put words in other peoples mouths then you clearly don’t have faith in your proposed solution to stand on its own.

    “But for those like Psi who think that their intelligence is being insulted, when in fact it is being challenged”

    Well it is not challenging to anyone’s intelligence to lie to them but to tell an obvious lie is insulting to their intelligence. As I said before if you can provide quotes to back up your claims about members of the government saying “we can’t afford economic growth” then I will take back the lie accusation but I think it will stand.

    I don’t really have time to go in to your argument right now (see how using weak straw men doesn’t help have a constructive discussion) other than to say that you are making the old mistake of taking short term movements and extrapolating out. I initially did wonder what would give someone such a dystopian view of the world, but then I noted that you have worked a lot in Russia, which certainly explains a lot.

  • Geoff : I appreciate your explanation as to why a citizens income would not be like an open ended (and inflationary), helicopter drop of money. that said, I don’t think a £1000 credit to my account is going to radically change my feelings about where the economy is headed.
    Your ideas are no better or worse than many others that are genuine in their desire to aid the economy back into (BAU), Business as Usual.
    However, the past 40 years have been all about bringing economic benefits to the present, and shifting the cost into the future, via credit. On this most people will agree. The disagreement lies in an approach to rectify the problem.
    Options?
    1. Austerity ~ Both governments and individuals have maxed out their credit cards and now have to, pull back, belt tighten, deleverage, cut back etc, until the debt that sits waiting in the future, is paid back.
    2. QE (or similar) ~ Print money, extend credit, etc., because once the economic engine restarts, we will easily pay back those debts from improved production and GDP from a growing economy.
    I realise why you are trying to contain the credit extension to £55bn, but however you do it, extending credit, printing money is a gamble, pure and simple. And who will pay for this gamble?
    It seems the future of the young is being placed on the spin of a roulette wheel. And what if the economic engine doesn’t restart a BAU, like the economists say it will? (After all, 99% of said, economists, were taken completely by surprise by the events of 2008)
    (We), The generation that consumed all of these benefits (boomers), now selfishly expect those onto whom they have shifted the cost (the young), to pay the bill, but it’s not fair, and it’s frankly, not going to happen. Our boomer selfishness will be our downfall.
    The baby boomers have placed the weight of their excesses upon Atlas (the young), and soon they will begin shrugging.
    The answer? Those that have benefited from the fruits of the last 40 years of growth must accept a degree of Austerity. And those who did not benefit, and are trying to make a future for themselves should be allowed a degree of Credit.
    By the way, I’m a boomer.

  • Geoff,
    citizen’s income is an interesting idea, but until questions about the free rider problem are overcome a funding gap is likely to remain.

    I also think you’re being somewhat unfair in your characterisation of my point, though I should’ve backed it up better by counterpointing the anti-state right-wing argument for government austerity promoted by George Osbourne with Vince Cable’s pro-business argument against private-sector austerity, especially including encouraging bank lending.

    Regarding your thought experiment of a fully-automated economy I have to ask you (and Bob Crow), where do tertiary sector industries come into play? Will robots replace care workers? Should children be implanted with chips to upload knowledge, making schooling obsolete? How will decisions about designs and plans etc be arrived at? Should lawyers and hairdressers feel their existence is under threat? I really hope not.

    Furthermore the statement that “we can’t afford economic activity” is totally bogus – rather, a closer approximation would be that ‘we can’t sustain uneconomic activity’.

    Thinking about the abolitionist movement, for example, slavery is, was and will always be morally repugnant, but the decisive contribution to the debate was economic – enhanced freedom enables greater individual contributions to the wealth of the society. Restricted freedom (here: slavery) proves uneconomic, a waste of human potential, and represents a distortion of moral values. We must be where all the different sides of the debate align.

    In a politically-charged atmosphere anyone can be susceptible to an inability to distinguish between a state of ‘austerity’ and a better balance between effectiveness and efficiency, but I’d hope LibDems are capable of walking that tightrope.

    Remember, by making an unqualified argument against ‘austerity’, you’re implicitly supporting the opposite – ‘profligacy’.

    And each is as bad as the other. Just like the partisan representatives on either side.

  • Interesting.
    I don’t think that the problem is just caused by increased automation or that the answer is more emphasis on education. I would suggest that we have handed over great chunks of our productive capability to countries with workers we can pay wages as close to slave labour as we currently find palatable, whilst being dependent on consumer spending to fuel our own economies. In an attempt to compete we have driven down the value of work here and have attempted to fill the gap with credit. The result is retail economies based on paying low wages and consumerism. The expansion of employment is almost more symbolic than necessary as is the expansion in education. What I notice is that an awful lot of jobs now being done by graduates, used to be done by school leavers and other people who never went down the route of higher education. In other words the world hasn’t become so complex that you now need have spent three years studying The Enlightenment to work as a sales rep, we’ve simply decided that’s the basis we will employ people on.
    Furthermore the expansion of technologies such as computers actually, in broad requires less specialist knowledge the more ubiquitous they become. For instance someone working with IT in the 1970s to 1980s almost certainly needed to know how to program the technology. Now computers used by small children, pensioners and hopeless techno incompetents like myself. The point is that the expansion as made the technology idiot friendly.
    Maybe the main reason austerity is the wrong course is that in a post industrial society dependent on us acting like retail peasants we need people to spend more and have more time to spend it. Perhaps it’s time to to accept that a lot of work is absolutely pointless and that in fact we should lower the retirement age, cut the length of the working week and learn to readjust.

  • Liberal Eye 13th Sep '12 - 4:54pm

    I certainly agree that there is a problem of insufficient demand. However, I don’t believe that automation is the primary cause. Sure, it has some effect – Bob Crow’s point – to the extend that the economy is so sclerotic and moribund that it is NOT creating an equivalent number of new jobs in other sectors. Automation after all is nothing new; farming has gone from hero to zero in employment terms in a single long lifetime and similar (though usually less dramatic) trends are inevitable in other sectors.

    So we should be asking ourselves why it is that the economy clearly IS so sclerotic and moribund and how it is that firms struggle to find qualified staff even as education spending soars. It often feels as if industrial policy is little more than trying to persuade foreign firms to set up here (and promising them cheap employees and minimal tax as top incentives). I remain amazed at how little progress LD thinking has made on why the economy doesn’t work better. Perhaps you can help.

    But if not automation, then what? I suggest there were several elements to this, but principally chronic balance of payments deficits, growing inequality and bad banking. Deficits represent a straightforward export of demand which Whitehall is apparently blind to. E.g. that infamous trains case or very recently selling the Ark Royal to a Turkish firm for scrapping (effectively importing scrapping services) when there was a better domestic offer on the table. This is a bizarre decision and needs explaining.

    http://www.bbc.co.uk/news/uk-england-devon-19549220

    Inequality has meant that a few (the ‘1%’) garnered most of the wealth and income leaving the majority struggling. As their income flat-lined (and as many lost well-paid regular work) so demand inevitably faltered – the 1% could never spend enough to compensate for the 99%’s lost spending. The growth of inequality has of course been assiduously promoted by Conservatives (and their fellow travelers) over many years by re-orienting the tax burden to do just that.

    Bad banking in the USA was literally criminal – fraud on an industrial scale. In this country it was also sometimes criminal but mostly just a disguised Ponzi. With a shortage of housing prices will rise to whatever is affordable. Flooding the market with cheap loans with appalling underwriting standards inevitably raised house prices making property lending look like a safe bet so the banks did even more, especially given that banks can create credit at the click of a mouse. This appears to be cost-free but isn’t; it creates growing risk which eventually blews up as we have seen. (Incidentally, I believe there is no longer a reserve requirement in the UK – the multiple of deposits that banks can lend – there is only a capital requirement). The trouble was that the rising cost of interest payments sucked even more demand out of the economy compounding the other demand-side problems. With such easy pickings in property banks lost interest in – even the skills – to do business lending which is more complex compounding the deeper economic problems.

  • Geoff Crocker 14th Oct '12 - 10:40am

    Those who derided my call for a citizen’s income as the only ultimate answer to the debt crisis might take note that, according to Stephanie Flanders at the BBC, none other than Lord Adair Turner of the FSA and a possible next governor of the Bank of England, is now saying virtually the same at http://www.bbc.co.uk/news/business-19925013. Good that Lib Dem Voice got there first and can claim precedence ? 🙂

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Thu 10th Oct 2019