Economic crises, and the C19 pandemic certainly is one, have a habit of initiating a major change in economic orthodoxy.
Arguable examples include mercantilism after the collapse of the feudal system, Adam Smith after two long pan-European wars, end of the Gold Standard post-WW1, Keynes after the Great Depression and WW2, ‘market reforms’ after the 1973-5 recession & crash, and the ‘Washington Consensus’ after the collapse of communism 1989-91. Then came the 2008 financial crisis, which was still unresolved when C19 hit. To a great extent, each crisis arose from the ‘flaws’ in each new orthodoxy.
Each of these changes was highly controversial at the time, at first, and even subject to ridicule. But it is easy to forget that the emerging new ideas were aimed at particular problems perceived at the time, where the prevailing orthodoxy no longer had perceived relevance for the problems faced. The new ideas that endured above others did so in that context.
We appear to have reached that point now. But it’s very messy.
In the UK the post-2008 orthodoxy we are probably leaving behind had already become something of a hybrid. Austerity in public spending aimed at partial debt reduction, was still there, but reductions in regulations had gone. Monetisation/Quantitative Easing had been introduced to purchase bank ‘assets’ (derivative securities). These bank assets had initially been the cause of the 2008 crash, as their value evaporated. However, the asset purchases still continued twelve years later, keeping interest rates artificially low, but leaving international markets awash with cash; evidenced by a rise in international share prices, to two to four times what they used to be, relative to company profits. Culprits’ reward.
Up until Brexit, this was the hybrid orthodoxy.
After Brexit there were further changes away from the Washington Consensus. The UK government explained that stimulative state spending was needed to cushion the effects of Brexit. Whilst it was more theory than practice, the government nevertheless signalled a change of heart, especially on capital spending.
One result was that the government, before the COVID-19 crisis in 2019, had aggregate debt over 85% of GDP, narrowly defined, and over 100% of GDP taking into account other liabilities. The ONS has said that the UK is on course for aggregate debt to GDP of over 110% (narrowly defined) by the end of the fiscal year. This would be 3.3 times total annual tax revenues. Compare with Italy where equivalent figures would be 151% projected and 3.5 times tax revenues (IMF), before EU bailout. UK debt at 3.3 times annual tax revenues, makes the UK economy and Sterling very sensitive to international financial market conditions; and full EU exit is only 6 months away.
The scope for a further UK expansionary policy without significant countervailing downsides maybe limited, given the Brexit ‘hit’ , falling tax revenues and the absence of EU bailout. One can only guess, but tolerance for UK expansionary policies in international markets might end at around a further 5% of GDP over 2-3 years or less, assuming more than half spent on ‘investment’ in infrastructure.
Under such circumstances remedies outside orthodoxy will be at a premium.
Clearly, so-called ‘structural’ reforms aimed at non-elite growth cost little but can be more effective than financial stimulae. But what reforms ?
There might be no alternative to tackling structural reforms which have been on the cards for decades but due to vested interests have never been properly pursued; banking reforms, especially against cartelisation, improving the quality of regulation, opening up state procurement, decentralisation, selling unused state land, recasting R&D support, broadening equity markets, plugging huge skills & training gaps, improving technology dissemination and so on…. issues related to the UK’s relative low productivity.
There are other new emphases waiting in the wings that could become new orthodoxies. Many, however, run up against fiscal headroom or inflation problems, leading to falls in Sterling. Those that do not are more likely to endure, and make it into the post-COVID-19 era.
* Paul Reynolds works with multilateral organisations as an independent adviser on international relations, economics, and senior governance.
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46 Comments
On 19th November, just over six months ago, (the full text is on LDV), Ed Davey announced :
“The Resolution Foundation have proposed a new fiscal rule for day-to-day spending – that a Government should target a structural surplus in current spending equal to 1% of national income over a Parliament.
And their rule retains sensible flexibility, allowing spending up to minus 1% of national income – if there’s a downturn and forecasts turn out wide of the mark.
Liberal Democrats will adopt that fiscal rule – and our spending plans meet it, with current account surpluses in every year of our five year costings. We embrace fiscal responsibility.The others opt for fiscal risk”.
Mmmmmm, implicit austerity.
Is that still the Liberal Democrat position, or has it been superseded by a ‘new economic orthodoxy’ ?
…’… selling unused state land, ..’…
On this occasion you’ll have to forgive me for picking out a single part of a much wider consideration, but with the benefit of historic precedent, this one would worry me.
John Major has rightly gone down in UK Political history as an exceptionally poor PM. Post Cold War and post Gulf War 1991, his Government had next to no interest in the subjective matter of Defence spending. After the death of John Smith, this was also joined in parallel contempt by the New Labour project. Blair, in interview with Paxo gave a dismissive one-liner on Defence. ‘It will not be a priority’, he shrugged. (No, my contribution is not about Defence spending).
All the same, I never cease to be surprised that the scandal of the disposal of Defence assets and estate at criminally poor levels of return to the taxpayer early nineties has never really been studied. The Government of the day couldn’t get rid of the stuff fast enough and eventually Ken Clarke publically highlighted he thought the land in particular, wasn’t being sold fast enough. This was the time of ‘negative equity’ after the crash in house prices and Clarke’s idiotic intervention similarly produced a dive in the value of MoD land and land assets.
By all means, sell land which, as a common wealth, belongs to the Taxpayer, but solely on the grounds of market value. That it must not be the Exchequer which holds remit of the valuation of that taxpayer-owned land. That the land is valued by at least three reputable auditors concurrently prior to sale and I would suggest it must be the highest of the audited values that any respective land is offered at. As the old joke goes, Land has value. They don’t make it any more.
I’d want to see a Government treat it as such.
There are indeed long-standing structural problems in the UK economy that have not been addressed since the stagflation of the 1970s.
Josh Ryan-Collins explains in a recent article
https://www.theguardian.com/commentisfree/2020/may/26/banks-uk-recover-coronavirus
“Currently in the UK, only about £1 in every £10 lent by British banks goes to non-financial firms. Most credit flows into existing property and supports financial trading of one kind or another. Similar patterns are evident in many other advanced economies. As yet, there is little sign of industrial strategy being linked to coronavirus finance.”
“The good news is we can look to the post-second world war period for a playbook on how to do it. After 1945, advanced economies faced an epic recovery challenge, with public debts even higher than those predicted to arise this year (the UK’s debt-to-GDP ratio reached almost 250% in 1947). Finance played a key role in the recovery and “golden age” that followed. But central banks did not just create new money. They worked closely with governments to ensure the money was directed to the right parts of the economy.”
“Credit guidance” policies were employed to steer bank lending into priority sectors – including exports, manufacturing, housing and transport infrastructure – and away from more speculative sectors. State-owned development banks channelled both government and household savings into infrastructure and innovative high-growth sectors. Financial rents – profits from interest, speculation and capital gains – were minimised via the imposition of capital controls which restricted speculative foreign inflows and the maintenance of low rates of interest on government debt. These low rates enabled aggressive government spending programmes, which enabled full employment.
In western economies, these policies supported job growth, corporate investment, industrial transformation and modernisation to such an extent that the period become known as the “golden age” of capitalism. By keeping nominal growth (ie, GDP plus inflation) above the rate of interest on government debts, such policies also effectively deflated away the public and private debt piles that had built up.”
PS: selling unused state land that could be used for public housing would be a big mistake. The housing crisis has to be addressed.
David Raw,
this is the resolution foundation paper on fiscal rules https://www.resolutionfoundation.org/publications/totally-net-worth-it/
that proposes:
– A Net Worth Objective: to deliver an improvement in public sector net worth as a share of GDP over five years. This would incentivise prudent investment decisions to address the long-term challenges facing the UK.
– A Structural Current Balance Target: to achieve a cyclically-adjusted public sector current balance of 1 per cent of GDP (and no less than -1 per cent) over five years. This require the government to keep receipts and day-to-day spending in broad balance but would also allow it the to borrow to invest; and
– A Debt Interest Ceiling: to ensure the proportion of revenue spent on debt interest does not exceed 10 per cent. This would ensure that the overall debt burden remains sustainable at all times by taking account of not only the level of debt but also what it costs to service.
– An ‘escape clause’: to recognise the need for more active fiscal policy given the constraints on monetary policy, the net worth and structural current balance targets would be suspended if the economic outlook deteriorates significantly. These rules would be reinstated as the economy recovers ensuring a credible fiscal framework even if downside risks crystallise.”
Their most recent paper on the macroeconomic outlook for the UK https://www.resolutionfoundation.org/publications/the-macroeconomic-policy-outlook-q2-2020/ notes;
“It is helpful to think about the impact of the pandemic in three phases: lockdown, reopening and normalising”
“Focussing on the impact on demand and supply effects is too simplistic in this crisis”
“The impact of the crisis is skewed towards those on lower incomes”
“There appears to have been a big increase in saving already, but there is a risk that much more could follow, leading to a much weaker recovery”
“The scale of the hit to the economy and labour market is unprecedented. But that hit is not confined to the supply side. And, crucially, the disproportionate impact on those on lower incomes reinforces the need to provide large-scale support. “
@Paul,
“Washington Consensus” = Neoliberalism !
Incidentally there was never any consensus about that. Only amongst those who were so self important that they considered their views to be the only ones to matter. The flaws in that did, as you say, lead to the 2008 GFC. That should have been the end of it but the neoliberals just laid low for a while and came out again when they thought it was safe to do so. They still are spruiking the same phoney remedies. More Private debt good. More Public sector debt bad. They now want to blow up the private debt bubble even more by having negative interest rates.
“The scope for a further UK expansionary policy without significant countervailing downsides maybe limited, given the Brexit ‘hit’”
The Brexit issue is neither here nor there compared with the effect of the Covid-19 induced shutdown. There’s no point having an expansionary policy if supply can’t increase because the factories are closed and workers are self isolating at home. That’s just going to produce an unacceptably high level of inflation.
“..the UK is on course for aggregate debt to GDP of over 110%…..by the end of the fiscal year. This would be 3.3 times total annual tax revenues. Compare with Italy where equivalent figures would be 151% projected and 3.5 times tax revenues (IMF), before EU bailout.”
Some 40% of the debt, after the QE program, is owned by the BoE, so does that count? Italy isn’t a currency issuer so can’t implement its own QE and so can’t pull off that trick. Japan is in to QE big time with a 260% debt to GDP ratio. So something like 6 or 7 times tax revenues? They don’t seem to be doing too badly.
Cuba, on the other hand, has very a low debt ratio of 18% of GDP. Who says socialist economics means high Govt debts? Maybe we should copy them 🙂
https://tradingeconomics.com/country-list/government-debt-to-gdp
Nouriel Roubini (Dr Doom) gained some prominence after correctly forecasting the financial crisis. He has expressed his views and it doesn’t make pretty reading https://www.theguardian.com/business/2020/apr/29/ten-reasons-why-greater-depression-for-the-2020s-is-inevitable-covid “Ten reasons why a ‘Greater Depression’ for the 2020s is inevitable” concluding;
“These 10 risks, already looming large before Covid-19 struck, now threaten to fuel a perfect storm that sweeps the entire global economy into a decade of despair. By the 2030s, technology and more competent political leadership may be able to reduce, resolve, or minimise many of these problems, giving rise to a more inclusive, cooperative, and stable international order. But any happy ending assumes that we find a way to survive the coming Greater Depression.”
Let’s hope he is not right this time around or if he is we get more competent political leadership in the major economies of the world.
@Joe Bourke Thank you, Joe, but I know very well what the Resolution Foundation are saying. The key phrase is : ‘a Government should target a structural surplus in current spending equal to 1% of national income over a Parliament’.
This is the 2019 sophisticated version of Gladstonian retrenchment and the counting of candle ends. In other words, austerity.
There is no significant effort to tackle inequality and poverty. No wonder Mr Davey admitted to me that he had not read the Alston UN Report on Poverty in the UK when I presented him with a copy last September.
Two questions remain.
1. Is this official Liberal Democrat policy and who authorised it as such ?
2. In what way is it appropriate in the current Covid situation ?
David Raw,
this is the FT comment on the last Libdem manifesto https://www.ft.com/content/b1f66762-0b96-11ea-bb52-34c8d9dc6d84
“…the manifesto confirms the Lib Dems are now a borrow, tax and spend party with some large and surprising pledges. ”
The party wants to tax and spend in a big way. The Lib Dems want to increase annual day-to-day public spending by £63bn in cash terms in 2024-25.
The Lib Dems aim to balance the current budget — the difference between government tax receipts and day-to-day spending.
This implies therefore that taxes would have to rise by £63bn by 2024-25, in a move that would raise the tax burden by 2.4 percentage points to 39.6 per cent of national income.
Torsten Bell, director of the Resolution Foundation, an independent think-tank, said the Lib Dems’ proposed spending rise represented “a very significant increase in the size of the state, funded by higher taxes on a par with those of Jeremy Corbyn in the 2017 election”.
“There is no doubt that education is Ms Swinson’s big priority. From a big increase in childcare funding to new personal accounts for skills training, this new spending amounts to more than £33bn a year by 2024-25. That is more than half the additional spending that the Lib Dems propose.”
“Boosting social security is the other large Lib Dem spending item, at almost £10bn a year. ”
“The Lib Dems would raise £18bn a year by 2024-25 by adding 1p to all income tax rates and increasing corporation tax to 20 per cent.”
The resolution foundation fiscal rules include an ‘escape clause’: to recognise the need for more active fiscal policy given the constraints on monetary policy, the net worth and structural current balance targets would be suspended if the economic outlook deteriorates significantly. These rules would be reinstated as the economy recovers ensuring a credible fiscal framework even if downside risks crystallise.”
As the foundation notes in its most recent report “It is helpful to think about the impact of the pandemic in three phases: lockdown, reopening and normalising”
Lockdown requires direct financial support to viable firms and the self-employed to retain jobs and stay in business; and to local authorities to maintain services. Reopening requires maintaining phased support as firms and self-employed endeavour to restablish operations and local authorities reopen and restart facilities. Normalisation will require dealing with the longer-term investment required to rebuild economic capacity and improve the quality of public services in an environmentally sustainable fashion while maintaining confidence in the public finances; the stability of sterling and UK financial markets.
It may take a while but the evidence seems to suggest that, much as promulgated here, there will be a return to an ‘old style normal’ led by GDP, Banking and Finance etc aimed at supporting bigger businesses allowing the rich to get richer and the poor get what is thought suitable for them. (That last point is not suggested here.)
All suggestions of a ‘new normal’ will, in the short term be pushed aside in that endeavour. In the mean time Climate change, Global awareness of how good life could (should?) be will galvanise those marginalised and those who demand the status quo be returned to that normal. Our preamble to our constitution seems to suggest that our current ideas of what normal should be needs to be revised and a new inclusive vision built to take us forward in, what think, will need to be a very different direction. Eventually. Without that new vision I fear conflict is not far away. Doughnut economics has a lot to commend it.
” “Ten reasons why a ‘Greater Depression’ for the 2020s is inevitable”
It looks like this article was written before the Covid-19 outbreak started and has subsequently been modified to take this into account. Nouriel Roubini has written:
“These 10 risks, already looming large before Covid-19 struck..”
But the effect of Covid-19 on the economy is very real and it does change everything. This is the real problem. There was nothing that was going to turn over the apple cart previously. There was nothing inevitable about any “greater depression”. Just like there was no reason why the 30’s depression should have happened. You can’t say it was due to the Spanish flu! The cost of that was WW2 and 60 million deaths.
NR might want to read up on Mosler’s Law which states that:
“… no financial crisis is so deep that a sufficiently large fiscal adjustment cannot deal with it.”
Having quoted this I might just suggest that it should be “no normal financial crisis”. The Covid 19 virus does remove the normality.
https://en.wikipedia.org/wiki/Warren_Mosler#Mosler's_Law
Keep plugging away, David Raw.
You can’t tell Brentford supporters anything, Tony.
David Raw,
it is true you can’t tell Brentford supporters anything, not even other Brentford supporters can.
The recent Libdem manifesto would see public spending rise to 42% of GDP. public spending as a % of GDP has averaged around 40% for much of post-war history, regardless of who has been in power at any given time. When politicians and journalists praise the Scandanavian model they rarely bother to note the higher rates of tax and prudent management of public finances that support the Nordic model. As Charles Kennedy used to say “you don’t get owt for nowt”. Running on policies of a penny on Income Tax for education and a 50p top rate was the precursor to LibDem electoral success in 1997, 2001 and 2005.
Higher levels of tax and spending alone, however, don’t bring prosperity. As Paul Reynold’s notes in his article, Italy has entered this crisis heavily indebted (a legacy of its pre-euro borrowing binge). Italian youngsters cannot find jobs because of high labour taxes which exist in order to pay pensions for the parents, who then have to support the unemployed children.
When this crisis subsides there will be stark political choices to be faced. A couple of lost decades like Japan since the 1990s – or rebuilding a sustainable economy along the lines suggested by Josh-Ryan Collins in his article and tackling the core issue of Land Value Capture.
The question to ask is – Who is going to bear the economic costs of this pandemic? This article by Christine Berry will tell you https://www.theguardian.com/commentisfree/2020/apr/13/britain-coronavirus-bailout-rich-
@ Joseph Bourke @ David Raw
IF the government runs a 1% of GDP surplus this must mean they are taking more money out of the economy than they putting back in. IF the country’s trade remains imbalanced to the extent of 3% of GDP this, again, is more money leaving the economy. So we have 4% more leaving the economy.
Maybe for a year or two we could all borrow more to plug the 4% gap.But it would be 4% lost to the economy every year and not just a one off. Very quickly the economy would crash. Very few people would want to extend their borrowing under such circumstances and would seek to cut back their spending rather than borrow more.
Richard Murphy has been particularly scathing of the Lib Dem manifesto. If the Lib Dems are now a “tax and spend” party, it is only in the sense of wanting to tax too much and spend too little.
@ Joe Bourke
REPORT: BRENTFORD 0-1 TOWN – News – Huddersfield Townwww.htafc.com › news › november › report-brentford-…
2 Nov 2019 – Karlan Grant goal seals another win for the Terriers! Huddersfield Town’s superb run of form continued with arguably the best win of the set …
Those were the days my friend…………………..
I meant to include this link from Richard Murphy’s blog
https://www.taxresearch.org.uk/Blog/2019/11/17/the-libdems-are-promoting-the-most-hard-right-neoliberal-callously-indifferent-economic-agenda-of-any-mainstream-party-in-this-election/
The following is an extract from the article by Christine Berry that Joe quoted with some approval. It’s good to see him moving to the left but my only advice is that he shouldn’t overdo it and end up wanting to join the SWP 🙂
“The left must ruthlessly follow the money and ask in whose pockets it will end up. It must stand alongside those demanding that the big winners in our economic system pay their share: groups such as London Renters’ Union, demanding a true rent freeze. Wetherspoons workers, still fighting to be paid in full. The Jubilee Debt Campaign, calling for personal debt repayments to be frozen and ultimately written off.”
Peter Martin, David Raw, Joe Bourke – I can probably get behind the 1% surplus if it is about increasing spending to say, 47% of GDP and then increasing taxes even more (e.g. to 48% of GDP). Increasing taxes also serve as wealth redistribution and restrain consumption (especially consumption of imports) in addition to raising tax revenues. But if the case is opposite, then forget it.
“IF the country’s trade remains imbalanced to the extent of 3% of GDP this, again, is more money leaving the economy” – then let us pursue an aggressive export strategy subsidized by a dedicated national bank like the German KfW.
However, the whole 1% surplus is unnecessary if the focus is on debt-to-GDP ratio. Canada has proved that you can run modest budget deficit while still maintaining a stable debt-to-GDP ratio.
Joe Bourke – the so-called day-to-day spending will include the *operation* expenses of public health, NHS, police, fire-fighting, the Civil Service, as well as whatever form of state-run investment bank/fund. A 1% surplus is too tight-fisted, and thus Richard Murphy has a point.
Look, if the only focus is maintaining debt-to-GDP ratio, both a balanced budget and a day-to-day budget surplus are absolutely unnecessary, as evidence from Canada suggests.
Joe Bourke – and, politically it would be suicidal to trumpet on balanced budget or budget surplus over the next 5 years, if not the whole upcoming decade.
Peter Martin, Joe Bourke – for now, debt-to-GDP is the optimal criteria, because it gives you flexibility in fiscal policies while still paying lips service towards the international financial system/markets. Unlike an absolutist measure like 1% budget surplus, you can spin around this figure, like debt is falling/debt is stable/debt is rising slower than our peers, like Trudeau has been literally doing over the last 5 years…
If you ask why I keep mentioning Trudeau, I will say that the Canadian Grits is the closest equivalent to our party in the entire world right now.
Lol, I have been proposing a compromise position between Peter Martin’s MMT and Joe Bourke’s orthodox fiscal policies that is currently practiced with moderate success (I mean, Canada lifted over 1 million people out of poverty over the last 4-5 years).
My terrible confession is that my father used to play for Brentford FC. My uncle, his father, played for Fulham. Traitor.
Maybe we have to accept that any new economic orthodoxy will be run by machines?
The Turing test attempts to validate the reality behind a dialogue, when a machine gives every impression of being human. What increasingly troubles me is that some dialogue by obvious humans, gives every impression of being a machine?
” What increasingly troubles me is that some dialogue by obvious humans, gives every impression of being a machine”
And sometimes such a machine might be a prejudiced machine – ‘taught’ by prejudiced humans? e.g. facial recognition systems failing to distinguish as well between black faces as between white faces (the human ‘teachers’ being mostly white)?
Peter Martin/Thomas,
as so often the argument starts with a false premise and Richard Murphy must know this. A +/- 1% target for current spending is a balanced budget for day to day spending only. You are still running an overall budget deficit of circa 2 to 3%, but it is financing investment spending, as the Resolution foundation makes clear. The source of that finance is the capital account in the balance of payments. To pay for net imports, foreign investors will reinvest the sterling surplus they accumulate in UK financial securities including government gilts. If foreign capital is borrowed by the government and used to support consumption spending you are, to borrow a phrase from MacMillan, selling the family silver to maintain a lifestyle you cannot afford.
As long as deficit spending is targeted at investment and deficits are less than nominal gdp growth (the total of real growth and inflation) the debt to gdp ratio will decline over time creating some fiscal headroom for when the next fiscal crisis has to be dealt with (about every 10 years on average).
Look at any successful country with a well developed and functioning social security system and you will find sound fiscal management underpins it – whether it is Germany, Sweden, Norway, Denmark, Finland or the Netherlands. All outperform the UK in social provision. There is no secret too it. It is basic financial management – using taxes for day to day spending and borrowing for investment.
Peter Martin,
it is good to see the Labour party adopting the Resolution Foundation proposals and socialists like Christine Berry finally understanding that a country can’t spend its way to prosperity in a system of rentier capitalism based on land monopoly. Perhaps, they will now begin to engage with what Jim Callaghan told them nearly 50 years ago now.
“For too long, perhaps ever since the war, we postponed facing up to fundamental choices and fundamental changes in our society and in our economy. That is what I mean when I say we have been living on borrowed time. For too long this country has been ready to settle for borrowing money abroad to maintain our standards of life, instead of grappling with the fundamental problems of British industry. Governments of both parties have failed to ignite the fires of industrial growth in the ways that countries with very different political and economic philosophies have done. Take Germany; France, Japan – different countries, different philosophies. We are, as you know, still borrowing money. But this time we are not borrowing to pay for yet another short-lived consumer boom of the kind which used to buy success at the polls – or so we were told – but which never bought success in the world’s markets or at the workplace. We are borrowing now partly to pay for our huge investment in the North Sea. We are borrowing, too, because other industrial nations volunteer credits, so that our strategy and our proposals for regenerating British industry need not be thwarted by short-term speculative movements of sterling balances – a load we have still been unable to shed. We are determined that this borrowing will be used to act and to press on with the task of rebuilding a regenerated manufacturing industry. This time we are not going for a consumer boom on borrowed money: we are going to invest it in our future.
The cosy world we were told would go on for ever, where full employment would be guaranteed by a stroke of the Chancellor’s pen, cutting taxes, deficit spending, that cosy world is gone. Yesterday delegates pointed to the first sorry fruits: a high rate of unemployment. The rate of unemployment today – there is no need for me to say this to you – cannot be justified on any grounds, least of all the human dignity of those involved. I did not become a member of our Party, still less did I become the Leader of our Party, to propound shallow analyses and false remedies for fundamental economic and social problems.
When we reject unemployment as an economic instrument – as we do – and when we reject also superficial remedies, as socialists must, then we must ask ourselves unflinchingly what is the cause of high unemployment. Quite simply and unequivocally, it is caused by paying ourselves more than the value of what we produce. There are no scapegoats. This is as true in a mixed economy under a Labour Government as it is under capitalism or under communism. It is an absolute fact of life which no Government, be it left or right, can alter.
We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step. Higher inflation followed by higher unemployment. We have just escaped from the highest rate of inflation this country has known; we have not yet escaped from the consequences: high unemployment.”
That is the history of the last 20 years. Each time we did this the twin evils of unemployment and inflation have hit hardest those least able to stand them. Not those with the strongest bargaining power, no, it has not hit those. It has hit the poor, the old and the sick. We have struggled, as a Party, to try to maintain their standards, and indeed to improve them, against the strength of the free collective bargaining power that we have seen exerted as some people have tried to maintain their standards against this economic policy. Now we must get back to fundamentals.”
Paul,
your father playing for Brentford and your uncle playing for Fulham must have made for some interesting sibling rivalry.
An ongoing controversy at Brentford FC is whether Rod Stewart ever played for the club in the late sixties as he has at times intimated. It appears he may have spent some time as an apprentice at the club and/or had a trial for the first team. Extant records are inconclusive, so we have to rely on the recollection of old timers. Maybe you dad would have known,
David Raw,
the sports gazette has an analysis of what went wrong for Brentford in the game last November https://sportsgazette.co.uk/why-brentford-lost-to-huddersfield/. There is no doubt, The Terriers are a tough side to breakdown. The head to head record since 1920 is fairly even https://www.11v11.com/teams/huddersfield-town/tab/opposingTeams/opposition/Brentford/ The Brentford players returned to training this week, but with the Championship at a standstill we don’t know yet if there will be play-offs this season or even if the league will restart. Its back to 1939, hoping the trouble will end sooner rather than later, so life can be returned to a semblance of normality and the Bees can regain their rightful place in the top flight of the football league.
@ Thomas @ JoeB,
Thomas is partially right to suggest:
‘“IF the country’s trade remains imbalanced to the extent of 3% of GDP this, again, is more money leaving the economy” – then let us pursue an aggressive export strategy subsidized by a dedicated national bank like the German KfW.” ‘
Arguably the KfW is against the EU rules for State subsidy to industry, which only the Germans could get away with, but as we’re out this won’t be an issue. And, yes, we should have such a bank. It will develop our industry and it will encourage our exports too. The snag (except this probably isn’t the right word) is that as our GDP grows, our imports will increase too. If we’re earning more , we’ll spend more and there’s nothing wrong with that.
Joe mentions ” Germany, Sweden, Norway, Denmark, Finland or the Netherlands.” I could add Taiwan, Singapore, and South Korea. ALL these countries manipulate their currencies downwards. All, except Norway and Denmark, in the first group by using the euro. Norway by having a Sovereign Wealth Fund – the purpose of which is to export capital. Singapore does the same thing. It’s easy enough to hold your currency down. You sell it off cheap at below free market price. Then you end up with a net inflow of money from export sales to keep the economy moving without having to deficit spend.
So, yes, in principle we could do this too. Except that we shouldn’t. It’s a thoroughly disreputable course of economic action which leads to trade wars and has in the past led to real wars too. We should be doing whatever we can to stop the practice and ensure everyone has balanced trade. The Danes wouldn’t like that. They like to make sure their bacon has an advantage in the market.
I’d say just let them get on with it but it does mean that we’ll have to replenish the money that is used to pay our net import bill via a Govt deficit. Joe likes to dress it all up as current account spending – bad, capital account spending good. It really doesn’t make much sense when you look at just what is classed as current spending. Like teachers’ and doctors’ salaries. There’s no point having the capital spending on the buildings if there aren’t enough doctors, nurses and teachers working inside them.
This 2013 economist article on the Nordic model outlines an economic system that many Liberal Democrats would aspire to https://www.economist.com/leaders/2013/02/02/the-next-supermodel
“The Nordics (Sweden, Denmark, Norway and Finland) cluster at the top of league tables of everything from economic competitiveness to social health to happiness. They have avoided both southern Europe’s economic sclerosis and America’s extreme inequality.”
“The main lesson to learn from the Nordics is not ideological but practical. The state is popular not because it is big but because it works. A Swede pays tax more willingly than a Californian because he gets decent schools and free health care. The Nordics have pushed far-reaching reforms past unions and business lobbies. The proof is there. You can inject market mechanisms into the welfare state to sharpen its performance. You can put entitlement programmes on sound foundations to avoid beggaring future generations. But you need to be willing to root out corruption and vested interests. And you must be ready to abandon tired orthodoxies of the left and right and forage for good ideas across the political spectrum. The world will be studying the Nordic model for years to come.”
@ Joe Bourke,
1) Denmark, 2) Norway 3) Sweden, and 4) Finland are all (downward) currency manipulators with the purpose of manipulating trade in what they see as their favour. I’ve rearranged them in order of culpability. Finland has struggled with the euro and is probably the least guilty. That’s how they supposedly manage ” sound fiscal management” , “credible fiscal responsibility”, “to abide by sensible fiscal rules” or however you want to spin it.
But there’s no way this supposed “Nordic Model” can also be a world model. We can’t all do the same thing. World trade only works as well as it does because there are some countries like the USA, ourselves, Australia, Canada etc who aren’t “export junkies”. If we were all like Germany and Denmark we’d have trade wars leading to real wars in no time at all.
@ Joe Bourke That’s very kind, Joe, and thank you. Goes back a long way (family links with 1930 Cup Final). Always special when a small town club achieves success over a big city slickers….like the Libs, I suppose. Success to the Bees if we get footy back this year.
I remember Neil Warnock telling our lads “Go clap their supporters” after the penalty shoot out back in ’95. On the video link below.
Town down at Brentford – Sports Babble https://www.sportsbabble.co.uk › showthread
Video for bullock penalty v brentford▶ 17:45 Brentford v Huddersfield Town Beelist
Peter Martin,
the global economy will always have some deficit countries and some surplus countries.
In principle, there is nothing wrong with a trade deficit. It simply means that a country must rely on foreign direct investment or borrow money to make up the difference.
In the short term, if a country is importing a high volume of goods and services this is a boost to living standards because it allows consumers to buy more consumer durables. However, over the long-term, when there is a persistent and growing current account deficit as there has been in the UK for four decades – this means that there is a net outflow of demand and income from a country’s circular flow. In other words, trade in goods and services and net flows from transfers and investment income are taking more money out of the economy than is flowing in. Aggregate demand will fall resulting in loss of jobs in home-based industries, an undermining of international competitiveness, slower growth and declining living standards as the currency weakens and inflation is imported. When there is a current account surplus there is a net inflow of money into the circular flow and aggregate demand will rise.
There are several causes of a trade surplus and each country will have its own unique set of circumstances:
Export-oriented growth: Some countries have set out to increase the capacity of their export industries as a growth strategy.
Foreign direct investment: Strong export growth can be the result of a high level of foreign direct investment where foreign affiliates establish production plants and then export from this base
Undervalued exchange rate: A trade surplus might result from a country attempting to depreciate its exchange rate to boost competitiveness in some cases.
High domestic savings rates: Some economists attribute current account surpluses to high levels of domestic savings and low domestic consumption of goods and services.
Strong investment income from overseas investments: A part of the current account that is often overlooked is the return that investors get from purchasing assets overseas – it might be the profits coming home from the foreign subsidiaries of multinational businesses, or the interest from money held on overseas accounts, or the dividends from taking equity stakes in foreign companies.
Peter Martin – about Canada, it used to be a rather successful export junkie until Harper won election in 2003 and spent next 12 years turning it into a tar sands-based petrostate with overvalued CAD (at the expense of 300k manufacturing job loss in Ontario).
Australia has consistently run trade surpluses since 2016, granted that they are a raw material exporter unlike Germany and Co.
Capital spending is important as this is what tends to get cut first but is also essential to maintaining sustainable economic growth.
Assume a government budget of £1 trillion based on an economy operating at near full capacity with a GDP of £2.4 trillion and projected nominal growth rate of 3.5% (2% inflation + 1.5% real growth). Say £940 billion is current spending (including £40 billion of depreciation and the capital spend is £100 billion (split between replacement plant of £40 billion and new additions to the capital stock of £60 billion). Current spending of £940 billion is tax funded and £60 billion of capital additions are funded with borrowing i.e. 2.5% of GDP.
Government debt at the start of the budget year is £2 trillion (83.3% of GDP) and this will increase to £2.06 trillion but GDP will increase tp £2.484 trillion, so debt as a % if GDP has fallen to 82.9%.
What happens if the economy does not grow as planned and GDP is £2.46 billion i.e. 24 billion or 1% growth less than forecast? Government spending remains as planned and the shortfall in tax receipts of circa 10 billion is made up by borrowing so that there is a deficit arising from current spending of 0.42% of GDP. Debt is now £2.07 trillion. The debt to GDP ratio increases to 84.1%. This is the automatic stabiliser in operation.
In practice, there will always be an undershoot or overshoot in economic forecasts, but it doesn’t impact planned spending in the near term. Planned public spending, redistribution and tax levels are a political decision. Management of public finances only comes into play once those strategic objectives have been determined.
You can have high standards of living in high tax or low tax economies. That is not the critical factor any more than deficit spending is. It is the level of productivity based on capital stock, innovation, skill-base and relative equality of opportunity that determines International competitiveness that in turn determines per capita GDP. Directed Investment in infrastructure and technical skills development as part of a broad based Industrial strategy are essential elements in developing a modern competitive economy.
@ Joe B,
“A trade surplus might result from a country attempting to depreciate its exchange rate …”
“Might”?? When doesn’t that happen with a country running a large trade surplus?
“In principle, there is nothing wrong with a trade deficit”
No there isn’t. Either in principle or otherwise.
“It simply means that a country must rely on foreign direct investment or borrow money to make up the difference.”
It doesn’t have to actively do anything or rely on anything providing that there are enough countries in the world who are determined to tilt the table for their own trading advantage (as they see it) . It’s they who are caught in a bind of their own making. They have to recycle their trading surpluses to enable them to continue to run those surpluses. I can’t quite see the point myself but if that’s what keeps them happy….
As you say “a country …importing a high volume of goods and services …. (gets) a boost to living standards because it allows consumers to buy more consumer durables.” True. In the unlikely event that Germany stopped wanting to be a net exporter our trade would become more balanced. A reduction in the trade deficit would naturally translate into a reduction in the Govt’s budget deficit too. That would keep the neolibs happy. But, we’d have to make do with fewer VW cars!
Yes, that would be an inconvenience to some. My own car is a Golf! But I’d survive perfectly well with a Sunderland built Nissan or maybe a JLR model if I’m not totally broke after the lockdown.
@ Joe B,
I’m not opposed to capital spending per se. If the Govt needs to build a bridge or a railway then that’s what should happen. Its the distinction between what is considered current and capital that I question. Any parent who spends money on a holiday would consider that ‘current spending’ which is of course fair enough. But they’d consider money spent on their own child’s education to be an investment and ‘capital spending’ just as if they’d built an extension to their house. But as a society we don’t view it at all the same way, but I’d say we should.
Thomas,
Yes you’re right about Australia. Large exports of raw materials can be a curse to the rest of the economy. After the 2008 GFC Australia was selling lots of coal and iron ore to the Chinese. Also LNG. At first they let the currency soar in value but this just about finished off their manufacturing sector. Their car industry closed down a couple of years ago. It isn’t economically viable. So no Holdens any more!
https://www.autocar.co.uk/car-news/industry/end-car-production-australia-what-went-wrong
They have tackled the problem with a SWF too. It’s a way of exporting capital to keep the currency from becoming too expensive.
https://en.wikipedia.org/wiki/List_of_countries_by_sovereign_wealth_funds
Peter Martin,
this ft article explains why a sharp fall in sterling has seen no improvement in the trade balance https://www.ft.com/content/615ae7ba-b2b8-11e9-bec9-fdcab53d6959
“Currency is just one of several key drivers that a standard trade model would rely on to explain the volume of exports. Since 2000… Britain’s share of global exports has fallen, despite trade-weighted sterling falling 29 per cent over the same period.
Alongside currency moves, there are two additional factors to consider when explaining the UK’s dismal performance.
The first is the competitiveness of the labour market. The UK..has not been able to keep up in terms of productivity growth, and has therefore allowed the cost of labour per unit of output to rise versus that of its competitors.
The trade-weighted euro has risen 23 per cent since January 2000, for example, while the sterling equivalent has fallen 29 per cent. Despite this wide gulf, the performance of Germany’s and the UK’s real effective exchange rates — that is, the nominal trade-weighted exchange rate adjusted for unit labour costs — has almost been the same over this period. So the advantage of a depreciated sterling has largely been lost (against Germany) due to poor labour market performance.”
The second factor to consider is whether exporters have pricing power in foreign markets. Most of the value of the UK’s total exports is generated by a small proportion of companies, often large multinationals that are protected by patents and intellectual property. A good example is GlaxoSmithKline, a global top 10 pharmaceutical company that has the ability to price its drugs in foreign markets.
But as sterling has depreciated, many British exporters have simply left their prices unchanged and become more profitable in sterling terms. This is great for investors, but less so for the economy in real terms — without the increase in exports, part of the expected benefit from the currency depreciation is lost.
If sterling falls far enough, companies will choose to export rather than serve the domestic economy and the UK will be able to compete. But in order to not erode the competitive advantage, a much larger depreciation than what we have seen would be needed and labour costs would have to remain at current levels.
The cost of such a currency fall in terms of higher inflation, lower purchasing power and the destruction of the value of savings would be devastating.”
@ Joe B,
I can’t see the FT article at the moment because of the Paywall. I’ve noticed you’re fond of saying things like “This article explains why …” It doesn’t. If offers an angle based on the often very neoliberally inclined political opinions of the author.
Sentences like this are a give away:
“the competitiveness of the labour market. The UK..has not been able to keep up in terms of productivity growth, and has therefore allowed the cost of labour per unit of output to rise versus that of its competitors.”
In other words, according to the author, wages and salaries are too high! Let’s have a look at a graph showing UK trade with the rest of the world and the EU. I don’t know if the FT article looks at the difference too. I suspect not.
https://ukandeu.ac.uk/explainers/trade-the-numbers/
We see that since 2011 our trade imbalance has ‘worsened’ considerably with the EU but ‘improved’ considerably with the ROW. Presumably we can put the ‘improvement’ in ROW trade, at least partially, down to a lower exchange rate as we would expect. So, if we are so hopeless, why are we doing so well with our ROW trade?
Of course currency isn’t the only factor as we all agree. The other big factor is the moribund state of the EU which has failed to recover from the effects of the 2008 GFC. It is a very poor export market – consisting as does of a mixture of depressed economies and mercantilistic inclined economies.
On the other hand it is a good import market! There are lots of producers in the EU who haven’t got a hope of selling their often very good products in their home markets and the UK has offered them a lifeline.
@Joseph Bourke
I agree with a lot of what you say above.
I’ve often read of the “productivity puzzle” of the UK. Do you have any opinion about why it exists and how we can solve it?
As you say, if we want to improve our standard of living, improving productivity is essential. But, there seem to be no quick or easy solutions – if there were, probably past UK governments would have used them. And that it’s hard to get politicians to adopt long-term solutions, because they want to get the credit for their work while they are still in office.
My preference for top priorities is education, especially:
– early years education funding: a very long-term solution, but what I have read is that all experts think this is the most cost-effective investment in improving educational standards.
– adult training/education. It may be that, to raise national GDP, the most cost-effective priority would be to improve the skills of the already skilled. But, in order to create a less unequal society, my priority would be the skills of the unskilled. This is a challenge, because the unskilled are often poorly motivated to learn. And if there are any government measures to train the unskilled, it is vital the training is high quality.
Also, if we build more houses in areas with serious housing shortages, that can help productivity too.
Once we are outside the EU and restrictions are reduced, “picking winners” will become more of an option in industrial policy. Here, I think we need to be careful. The government probably has to and should try to “pick winners” in terms of the areas of technology training that it invests the most in. But the sorry experience of the 70s is a warning. Governments are often tempted to make subsidy decisions based on political priorities, rather than good investment. If we go down that route, I fear our productivity will fall, rather than rise.
@ George Kendall,
If neoliberals had an explanation for the “productivity puzzle”, why would they call it a ‘puzzle’ in the first place?
It’s really not that difficult to understand. Put yourself in the position of an apple grower. There’s lots of marvellous technology available to help in picking apples. Google {youtube robot apple pickers} to see a selection of it. But it isn’t cheap!
So what do you do? a) Buy it anyway which will increase productivity enormously b) Look for a source of cheap labour which won’t do anything for productivity but will probably give you a better return at the end of the year?
Geoege Kendall,
I think you have hit on the right areas where attention needs to be focused. The Centre for Social Justice issued a good report in 2017 https://www.centreforsocialjustice.org.uk/core/wp-content/uploads/2017/09/CSJJ5710_Productivity_report_WEB-170918.pdf
The Chairs foreword notes:
“This report sets out to counter the claim that productivity stagnation began in 2008. We argue it has been going on for up to two decades, and has been most damaging for those at the bottom of the income scale. The report sets out three main drivers of productivity; innovation across British business, human capital and regional dynamics. We set out 51 recommendations that, if enacted promptly and properly, will help boost British productivity growth.
The message in this report is simple; investing in transport infrastructure, digital networks and technical skills is important, but unless you target policy to support the least advantaged in society, we cannot return productivity growth to pre-crisis levels. More must be done to support children who drop out of school without any qualifications and boost opportunities for students in STEM education. We must re-invest in our Further Education sector as an alternative to Higher Education. Better support for entrepreneurs from disadvantaged backgrounds is essential. We can no longer let people languish on low paid and low skilled work, without any access to training for up-skilling, and no opportunity for progression. Finally, the Government needs to take seriously the gap between London and the rest of the country, and recognise that too often productivity growth has been at the expense of employment and poverty.”
The conclusion notes “…this report is a call for Government to reconsider productivity as an issue that can be best solved by breaking down social injustices that cause poverty and empowering the most disadvantaged by giving them opportunity to thrive. Innovation, business growth and a healthy entrepreneurial environment will only occur when we encourage as many young people from disadvantaged background to get an education and start a business. Many students who fall out of education at 16 without any GCSEs should have more options open to them to pursue PTE and work based learning schemes…public money should be available for Enterprise Zones to tackle poverty at its root. “
@Joseph Bourke
Thanks, Joe.
When I have time, I’ll read the whole report. Regarding the extract, I have a couple of reservations.
While I strongly agree that our priority should be the least advantaged in society, that’s because we should care about the most vulnerable.
A while back I was talking about lifelong training with a researcher at a thinktank, and he said to me that, if our priority were to improve national productivity statistics, we would concentrate resources on the well-educated and the high-achievers. My immediate emotional reaction surprised me. I said, “I couldn’t care less about high-achievers.” That’s not strictly true. The UK having successful people helps everyone, with more employment and more tax income. We shouldn’t neglect the successful, or everyone will suffer.
But I don’t think they should be the main priority. Mostly, they can look after themselves. Our energies should be focused on those who struggle to achieve, simply because these people need the support more. And, from a selfish point of view, if we can improve the lives of those in poverty, we’ll improve the social fabric of the country and so improve everyone’s lives. It may also be vital if we want to safeguard democracy.
I suspect that researcher was right. That if productivity and GDP were the only priority, we’d go down the USA route of neglecting poverty, and concentrate our training resources on people who are skilled at learning. But, I don’t want us to go further down the route to fabulous wealth and huge poverty.
https://www.cnbc.com/2019/05/14/uk-heading-toward-the-inequality-seen-in-us-nobel-prize-winner-warns.html
My second quibble is the emphasis on starting businesses. Starting a business is stressful. Some thrive on that stress, many would be destroyed by it. I’d want to see strong evidence that measures to get the disadvantaged to start businesses are a more effective way to reduce poverty than other measures.
To get back to the original topic:
The NY Times has said that a new economic orthodoxy is almost upon us:
“Once-fringe ideas in economic theory are now nearly official policy”
https://www.nytimes.com/2020/04/15/business/coronavirus-stimulus-money.html
I’m not sure why these ideas were ever fringe. They are the only ones which make any sense. But I do have a slight concern that the point MMT advocates have always made is that a currency issuing Govt can do what it likes providing it doesn’t cause too much inflation has been misinterpreted as a currency issuing Govt can do what it likes. Period.
Joe Bourke – Two very radical ideas that I just came across are export promotion and export discipline.
https://www.bloomberg.com/opinion/articles/2018-08-20/economists-struggle-to-explain-how-poor-countries-grow-rich
You really should read the part about Joe Studwell in this article.
Peter Marin,
Sky news had a program last night on the econony after the pandemic that featured former BP boss Lord Browne, Nobel prize-winning economist Joseph Stiglitz, MMT economist Stephanie Kelton, and Stephen Moore, senior economic adviser to Donald Trump https://news.sky.com/story/after-the-pandemic-predictions-of-how-world-of-work-and-economy-will-change-11999508
Interestingly, although the panel of experts was lukewarm on the idea of UBI the audience was overwhelmingly in favour.
@ JoeB,
Thanks for that link. There’s nothing in the account what anyone said that seems particularly controversial.
It’s good that the jolt to the system leads to ideas like the UBI being discussed at a wider level. I’d say many people wouldn’t previously have heard of either the UBI or the JG. The JG is, of course, just a UBI with a requirement that the recipients actually at least make an effort to do something for both themselves and society in return. I’d be confident this would be the one to win out once the public looked at the details of the two options.