Taking a leaf out of Onward’s book – moving away from neoliberal economics

On 31st May a Tory think tank, Onward, published a report entitled ’Firing on all Cylinders’ written by Neil O’Brien, a Conservative MP since 2017 who was previously a special adviser to George Osborne, former Chancellor of the Exchequer. O’Brien calls for a new fiscal rule “to keep debt to GDP falling gently in normal years when there is no recession.”

He suggests that the national debt to GDP ratio should be kept near to its current level of 83.3% and not be reduced to 73% in 2023/24 as planned. By doing this he estimates that the government would have £238 billion extra to spend – the difference between 83.3% and 73% of GDP in 2023/24. He recommends only spending £190 billion of this over the next four years. Since I have been saying we could increase government spending by about £138 billion over the next five years, his figures make mine look conservative and not radical at all!

O’Brien’s figure of £190 billion seems to include £97 billion of extra government spending funded by new government borrowing, while my figure of £138 billion only includes £49 billion in new government borrowing, as set out in our 2017 manifesto.

Many of the Conservative Party leadership candidates have welcomed this report, such as Michael Grove, Matt Hancock, Jeremy Hunt, Sajid Javid and Esther McVey.

Neil O’Brien makes lots of suggestions for what the £190 billion could be used, and I have picked out a few of his suggestions.

He allocates £4.6 billion a year to schools; £1 billion a year for further education; up to £4 billion a year for social care; and is talking about using about £44 billion to cut Corporation Tax down to the Republic of Ireland rate of 12.5%.

O’Brien writes, “we should aim to drive down absolute poverty rates for those who are in work”, by increasing the threshold at which people start paying NI contributions from £8632 to £13,100 for people with children. He is not interested in helping people without children out of poverty. His ‘tax reduction’, which I calculate at only £8.31 a week for someone earning between £13,100 and £50,000, will not only benefit the poor but also those on above average earnings. He states this would cost just over £4 billion a year. However, £4 billion could instead be used to increase benefit levels for working-age people by £10.99 a week. And this will be targeted at everyone on benefits all of whom are living in relative poverty.

He calls for the work allowance to be increased by £3,000 a year and for a second earner work allowance of about £3,200 a year to be introduced. While the first might apply to everyone, the second clearly only applies to those with children. I hope that the forthcoming ‘A Fairer Share for All’ policy paper will include the changes to the work allowances which I have suggested, of providing them for both those with children and those without them. It is vital that our new policy paper is more radical than this report produced by a Conservative MP. We should not let ourselves be out-spent on helping the poor, and we need to be clear that we don’t see some poor people as more deserving than others as Neil O’Brien appears to do.

We as a party need to consider the figures in this report. Do we agree that there is £238 billion to be used either for increasing government spending or reducing the national debt? If so, how much do we wish to allocate to increasing government spending?

* Michael Berwick-Gooding is a Liberal Democrat member in Basingstoke and has held various party positions at local, regional and English Party level.

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  • Katharine Pindar 10th Jun '19 - 11:17am

    This article provides some quite startling information, and raises important questions for our economic policy: well done, Michael.

  • david webberley 10th Jun '19 - 11:43am

    The law of unintended consequences…”O’Brien writes, “we should aim to drive down absolute poverty rates for those who are in work”, by increasing the threshold at which people start paying NI contributions from £8632 to £13,100 for people with children. He is not interested in helping people without children out of poverty”

    The number of children born to parents who are already struggling is likely to increase, some of which is probably good for the nation, but a proportion of these will be born into poverty, through overcrowded housing, longer housing waiting lists for larger homes and if a recession hits….we have no treasure chest of rainy day funds to cushion the blow to GDP and we will be back to square one in terms of austerity.

    We need to be fiscally prudent, regardless of brexit, but we must find a way of revitalising our engineering and manufacturing industries – if we can’t sell goods (incl some services) to overseas markets we will never be able to reduce our GDP to a satisfactory level… we have few gold reserves left and no national assets left to raise a quick buck or two.

  • Joseph Bourke 10th Jun '19 - 12:34pm

    Onward has done some good work. I referenced this report a few days ago in this thread
    “I think Investment versus tax cuts will be a key battlegroud in the coming months as we approach the 2019 spending review. Many of the Tory leadership hopefuls will be endording the vision expressed on Onward’s report: Firing on all Cylinders https://www.ukonward.com/firingonallcylinders/ . We have seen that over the weekend from Boris Johnson, Michael Gove etc.
    It adopts a fiscal rule very similar to that laid out by Vince Cable for Libdem econmic policy that calls for keeping debt to GDP falling gently in normal years when there is no recession.
    The additional fiscal space provided allows for increased investment in public services and a broad range of tax cuts. The report argues for the return of school funding to its 2015 record level of real spending per pupil; providing for sustained recruitment into the police budget to enable growth in officer numbers, and increased investment in prisons.
    The report argues for a re-balancing of the Government’s own growth-enhancing spending in innovation, transport, housing and culture to lift the performance of poorer areas.
    On personal tax it proposes increasing both the National Insurance threshold and personal tax allowance to £13,000.
    For poorer families, it agues for substantially increasing work allowances and creating a separate work allowance for second earners to raise the incomes of poorer working households and increase work incentives and employment.
    It is a well researched report in parts and there are elements like increasing the NI threshold and substantial increases in Universal credit work allowances that could be usefully adopted by Libdems to the extent that they have not already been catered for in our tax and welfare policies.”
    Onward has also producd a well researched report on housing http://www.ukonward.com/wp-content/uploads/2018/06/220618-Green-Pleasant.-Affordable-Web-ready.pdf that sets out why we need a new approach to supply and demand to solve Britain’s housing problem. It argues stongly for reform of the 1961 Land Compensation Act and redirecting demand away from housing as an investment asset.
    Neil Obrien is the kind of Conservative the party can work with on a cross-party basis.

  • That proposal is not more radical than the OP’s proposal, since £44 billion will go to corporates’ pockets. The UK corporate tax is already among the lowest among OECD countries. I don’t believe that lowering corporate tax further to 12.5% will substantially improve our competitiveness, especially when the tax cuts are likely to be spent on stock buyback. That £44 billion amount can be spent on digital and general infrastructures, renewables, public research, education and NHS, or even to use a fraction of it to pay down the national debt. Seriously, £44 billion of tax cuts??? That amount can also be used to finance a national industrial policy.

    The 2017 Libdem plan is to reverse the latest corporate tax cut. And I would prefer capital investment and R&D tax credits, as well as rules enabling capital investments to be written off more quickly, over full rate cuts.

    Steve Trevethan – I feel like there is an air of Trumponomics in that proposal.

  • Only one problem with that narrative is, it is a load of rubbish. National debt is

    In Mar 2019, UK public sector net debt was £1,801.0 billion equivalent to 83.1% of GDP

    but the Bank of England held the following

    United Kingdom’s Govt Secs: Gilt Holdings: Bank of England data was reported at 458,631.000 GBP mn in Sep 2018.

    Now the Bank of England is owed by the government who owe it 458,631.000 GBP. The government could of cause ask the Bank of England to destroy the guilts they hold and low and behold the National Debt decreases by over 450 billion. Like magic the percentage of indebtedness hurtles below 70% and government finances look magically better. All due to the Bank of England’s ability to conjurer up cash out of thin air. If you understand that a large percentage of the national Debt isn’t actually a debt well the world looks a different place. The fact economists don’t is a puzzle to me.

  • David Evershed 10th Jun '19 - 2:33pm

    “O’Brien calls for a new fiscal rule “to keep debt to GDP falling gently in normal years when there is no recession.”

    He suggests that the national debt to GDP ratio should be kept near to its current level of 83.3% and not be reduced to 73% in 2023/24 as planned.”

    This seems contradictory. Which is it?

  • innocent Bystander 10th Jun '19 - 2:34pm

    It will be left to me, as usual, to strike a discordant, but realistic, note. O’Brien is a PPE graduate and was May’s Industrial Advisor. His CV shows not the tiniest acquaintanceship with industry and is a career politician. On the shop floor he would have been described as yet another juvenile who “doesn’t know that the handles of a lathe are cold”. His only offering is yet another spoonful of “Professor Keynes’ Magic Elixir – proven to cure diphtheria, syphilis and chronic economic decline”. His piercing intellect offers “We must tackle Britain’s chronic low productivity and attract new ideas and investment”. Does he think he is the first to come up with such brilliance? I go as far back as NEDC although before that there had been an Economic Advisory Council, a National Production Advisory Council and an Economic Planning Board. There have been umpteen attempts since NEDC. Innovation, Enterprise and many others. None have worked, but here is the same again. Why do otherwise intelligent people believe that “investment” in vanity high speed rail, garden bridges and other projects, with nil return, will trigger the miraculous apparition of productive industry?
    I ask Keynesians where the upturn will come from and what form will it take. The only answers I have had are “from everywhere” and because of the “multiplier effect”.

  • David Evershed 10th Jun '19 - 2:35pm


    The national debt figures ignore goverment the unfunded pensions of government employees but should be added to the goverment debt.

  • An old article but I think it explains why over 20% of the National Debt isn’t really a debt.

    The Bank of England has said it will give the Treasury the interest it earns on certain government debts it holds.

    The Bank owns £375bn in gilts due to its quantitative easing (QE) policy of buying up debt to boost the economy.

    The transfer will cut the government’s borrowing needs and the net debt it reports in its financial accounts.

    As of last March, the Bank held £24bn in cash received from government interest payments, a figure expected to rise to £35bn by next March.

    The Bank has been purchasing government debt from the market with newly created money as part of its QE policy since March 2009.

    The interest income ultimately belongs to the government under the terms of an indemnity provided to the Bank, but until now, the cash has been sitting unused in a dedicated account – the Asset Purchase Facility (APF) – at Threadneedle Street.


    I can see why politicians keep chanting the higher figure, it frightens people into being Conservative, don’t fall for it.

  • Bless David the unfunded pension frightener. Well here is an article from 2010

    The unfunded schemes are expected to pay out pensions worth around £79 billion a year in today’s prices by 2059/60, up from £25.4 billion now, the National Audit Office (NAO) said. But the report points out that the £79 million sum is before income from employee contributions is taken into account.

    It added that when annual funding costs were expressed as a proportion of GDP, the projected increase was “less stark”. Annual payments are expected to reach a peak of 1.9pc of GDP between 2018/19 and 2033/34, before falling back to 1.7pc of it by 2059/60. The figures compare with a rise in the cost of funding the schemes from 1.5pc of GDP to 1.7pc during the past decade.


    I’m not even going to go into the fact that all government pension schemes have been changed to make them much less generous and more costly since then, so the figures quoted are actually alarmist.

  • Innocent bystander,

    you ask “where the upturn will come from and what form will it take”? Here is the answer from the CBI https://www.cbi.org.uk/our-campaigns/unlocking-the-uk-s-infrastructure-pipeline/

    Driving investment in the UK’s transport infrastructure projects:
    “Business relies on infrastructure to keep moving – to transport goods between cities and trade with the world. But only a tiny fraction of projects and upgrades in the pipeline are likely to be secured for delivery. More investment is needed to launch the projects that firms depend on.”
    The change we’re calling for:
    “Better connecting our regions, and linking the UK with the rest of the world, will play a key role in driving productivity and prosperity for all. We’re calling for government to unblock the infrastructure project pipeline, make it clear and simple to invest in, and ultimately get more vital projects launched.”
    “Set out a clearly prioritised pipeline for the UK’s major infrastructure projects and define steps to success”
    “Identify and develop a range of long-term funding options, including private investment, to deliver the transport infrastructure the UK needs”.
    “Now that previous private finance initiatives have been scrapped, develop new models to make it easy for business to partner with government on contracts”

  • Thank you everyone who has commented.

    David Webberley,

    I don’t think we need to more “prudent” than the Conservatives. If they are proposing spending £190 billion to help people and the economy we need to at least match it and then set out what we would do differently to create a liberal society. In which, I hope all of the party can agree, no one in the UK would live in relative poverty.

    Joseph Bourke,

    I hope you are now convinced that there is a large pot of money (c. £238 billion) which a Liberal Democrat government could spend on our priorities without having to increase taxes.

    Steve Trevethan,

    My article is not a call to work with the Conservative nor a call for austerity lite. It is a call for us to be less cautious; for us to be radical; for us to recognise there is a pool of money which we could use to fix our society without the need to increase taxes; for us not to be out-spent on policies by the Conservatives.


    I agree with you, we could use £44 billion better than just using it to cut corporation tax to 12.5%.


    £458 billion is about 21% of GDP so if the Bank of England writes of the debt then the ratio of national debt to GDP would be about 62%.

    David Evershed,

    Both. I imagine that he would say that by following his proposals there would be a small reduction in the national debt to GDP ratio down from 83.3% but it would be very close to 83.3%.

  • Innocent Bystander 10th Jun '19 - 4:09pm

    I’ve read your link carefully (I usually do) and I’m afraid it does not answer the question at all. It is just the same nebulous word salad. I am sure the CBI wants investment in infrastructure and will repeat the Keynesian nonsense to get it. They receive lots of taxpayers money building unnecessary railways. Actually all UK infrastructure projects are excessively expensive because our contracting community know how to milk desperate Keynesian politicians.
    So, no, the CBI link does not provide any answers to my simple question.
    We are wedded to infrastructure investment in a spirit of desperation (because no one can think of anything else).
    Did our famous Industrial Revolution start because George III told his ministers to go and dig canals between random towns?
    It was enterprising individuals like Darby, Arkwright, Wedgewood whose activities forced a demand for infrastructure to support them. Infrastructure is a activity that follows economic activity, it can not lead it.
    But, heh Joe, I know I am a voice in the wilderness. No one wants ugly reality in place of a simplistic and magic formula. But please ask yourself this. If investment in infrastructure generates wealth creating enterprises then why are there so many poor countries out there? All Zimbabwe needs is a high speed rail line. Doesn’t it?

  • Michael BG,

    there is no new money in the Onward report. It is based on the existing treasury forecasts. When he says “After nine years of difficult decisions, substantial headroom has opened up in the public finances” he is referring to two things:

    1. Not paying down debt as per existing treasury plans from its current level of 83.3% to 73% in 2023/24 – that frees up £190 billion of fiscal headroom. Not attempting to pay down debt significantly in the short-term is already Libdem policy to end austerity and restore funding for the provision of public and welfare services.
    2. The proceeds of economic growth based on treasury forecasts. he advocates using the balance of the tax proceeds of economic growth to fund tax cuts. Libdem Policy is to invest the proceeds of economic growth in financing the provision of infrastructure and public housing.

  • Innocent Bystander,

    I argue that Keynesian economics is demand driven. If the total demand in the economy increases then some of this will be met from increased production in the UK. The multiplier happens because there are costs to produce more and some of these increased costs are people receiving more money and so this increases demand even more. Industrial strategy seems to be what the government tries to do to assist UK companies produce more to meet this demand and any increased demand in the world economy.

    My economic aim would be to grow the UK economy by up to 3% each and every year and provide training or a guaranteed job to those not in work who want them. My economic interest is to provide the conditions for everyone in the UK not to be live in relative poverty as I believe this diminishing their liberty.

    Joseph Bourke,

    I have not seen any Lib Dem document or statement saying that over the next five years a Liberal Democrat government would spend over £200 billion more than the Conservative government is currently planning without increasing taxes. Have you?

  • Innocent Bystander,

    you mention rail in Zimbabwe. Cecil Rhodes was a strong promoter of the Cape to Cairo railway to help settlement and enable intra- and extra-continental goods trade.
    The southern section was completed before the First World War. From Cape Town the line runs parallel to the Great North Road to Kimberley, through Botswana. From the Bulawayo junction the link continues north and is today operated by the National Railways of Zimbabwe, to the Zambezi crossing and goes on to Zambia and Tanzania.
    Infrastructure development was one of the beneficial legacies of the British empire in India and the African continent. But you need competent government and the rule of law as a foundation to make good use of it. Regrettably, in Africa, many parts of the railway are in minimal operation today due to poor maintenance and track conditions.

  • David Evershed 10th Jun '19 - 4:47pm


    The National Statistics Office sets out the governments unfunded penion liabilities at

    An extract:

    At the end of 2015, total accrued-to-date gross pension liabilities of UK pension providers in respect of employment-related (workplace) pensions and State Pensions were estimated at £7.6 trillion, up from £6.6 trillion at the end of 2010 (not adjusted for inflation). The liabilities of UK pension providers are also the entitlements of households.

    The 2015 total included £5.3 trillion of pension entitlements (279% of gross domestic product (GDP)) that were the responsibility of central and local government, of which:

    the largest part was £4 trillion of entitlements to unfunded State Pensions, which are received by most households in retirement (213% of GDP)

    unfunded defined benefit workplace pension entitlements for public sector employees were estimated at £917 billion (49% of GDP)

    funded defined benefit workplace pension entitlements for (mainly) public sector employees were worth £334 billion (18% of GDP)

  • Michael BG,

    “I have not seen any Lib Dem document or statement saying that over the next five years a Liberal Democrat government would spend over £200 billion more than the Conservative government is currently planning without increasing taxes. Have you?”

    Libdem policy is to increase taxes as noted above. Conservative policy is to run a balanced budget or surplus on both current and capital spending. Libdem policy is to run a deficit of approximately 3% in cash terms of a £2.1 trillion GDP to finance capital spending on infrastructure and public housing i.e. borrowing of circa £60 billion per year. With 2% inflation and 1.5% economic growth the debt to gdp ratio would decline by rough;y 0.5% per year (outside of recessions).


    Before people get their kn****rs in too much of a twist, did the National Statistics Office work out how much of this would return to HMG in the form of income tax from recipients of the pensions, plus, of course, VAT on purchases and Corporation tax on the profits from those purchases when the pensions are spent ?

    Plus of course the added costs for pensioners after the end of free TV licences today as a final outcome of the 2012 Coalition supported Osborne budget.

    The Wheels on the Bus go round and round – 3D Animation … – YouTube
    Video for the wheels on the bus go round and round youtube▶ 2:15

  • Innocent Bystander 10th Jun '19 - 5:36pm

    ” in Africa, many parts of the railway are in minimal operation today due to poor maintenance and track conditions.”
    That’s because it was infrastructure push, not economic demand driven. Not enough economic activity was generated to keep it going. It did not create a thriving economic powerhouse in its wake. Development should have come first and the infrastructure will follow. The relics of the British Empire are littered with ill-conceived and derelict railway lines (I include Britain itself). HS2 has no demand justification at all, it is pure vanity and will spawn no new economic activity and will be the disappointment we have all come to expect

  • Innocent Bystander 10th Jun '19 - 5:39pm

    ” this will be met from increased production in the UK.”

    As we have, by now, an insignificant manufacturing base, I can only repeat that this will be filled by production in China, Korea, Germany et al.
    Your spending will benefit an economy, but not ours.

  • Joe Bourke,

    As you didn’t post an internet link to your post of 4.47 pm, I have to assume that you “have not seen any Lib Dem document or statement saying that over the next five years a Liberal Democrat government would spend over £200 billion more than the Conservative government is currently planning without increasing taxes”. And the rest of your post is your interpretation of our policies as set out in our 2017 manifesto.

    (By the way do you prefer Joe or Joseph?)

  • Innocent Bystander,

    the construction of the trans-continental railway in America in the 19th century together with the development of the telegraph are generally recognized as the key developments in opening up the American west and propelling the economic growth of the USA.

    Abandoned by British firms, China has become the dominant force for pushing forward the renaissance of the railway in Africa. Chinese companies have become important players in African railway and Africa has become the largest overseas market for the Chinese railway industry.

    Chinese railway companies delivered two major railway projects in East Africa: the Mombasa-Nairobi Standard Gauge Railway Project in Kenya and the Ethiopia-Djibouti Railway Line Modernisation in Ethiopia.

    It is hard to argue that the UK does not need additional rail capacity when it is commonly reported that UK trains are packed to near double capacity https://www.theguardian.com/uk-news/2019/jan/03/uk-train-overcrowding-highest-level-in-years-labour. Whether HS2 is the right project may be controversial, but some services like the TransPennine Express from Glasgow Central to Manchester Airport are clearly in need of significant expansion in capacity.

  • Michael BG,

    this is an article from Vince Cable in the wake of the 2017 manifesto critiquing the Conservative budget https://www.theguardian.com/commentisfree/2017/nov/21/building-houses-saving-nhs-budget-benefits-liberal-democrats-vince-cable

    “Productivity won’t improve without business investment, which is hampered by uncertainty over Brexit.”

    “..a central failing in Hammond’s approach to fiscal policy: an inability or unwillingness to distinguish capital from day-to-day spending.”

    “Network Rail should be free to get on with its capital programme, which is badly needed to improve connectivity in the north, south-west and Wales. The chancellor should also get behind plans for large-scale publicly-financed housebuilding.”

    “If the construction of homes is to double from the 150,000-a-year average of the past three decades, as it must, the government has got to get housing supply moving by acting as a catalyst. This includes the need for more council housing, in addition to investment through new towns and development corporations.”

    “…since there is no magic money tree, this [NHS] spending has to be financed by taxation, confronting the public openly with the choice. In the same spirit, cash is urgently needed to offset the harsh and counterproductive squeeze on benefits, notably universal credit. But this has to be paid for, which is why tax cuts over the past two years will have to be reversed.”

    “… a substantial [lifelong learning] endowment of somewhere between £5,000 and £10,000 would cost under £10bn annually. This is a big sum, but less than 0.5% of UK personal and property (net) wealth. A progressive reform of capital gains tax, inheritance tax and property taxes could produce this amount.”

  • Innocent Bystander – infrastructure investments or many other forms of public procurements are an important part of a national industrial strategy. You do know that government projects in the US play a huge role in the rise of its tech sector, and “internal improvements” have always been a part of American economic policy and industrialization.

    “Did our famous Industrial Revolution start because George III told his ministers to go and dig canals between random towns?
    It was enterprising individuals like Darby, Arkwright, Wedgewood whose activities forced a demand for infrastructure to support them. Infrastructure is a activity that follows economic activity, it can not lead it” – in other countries, including the US, Meiji Japan, France and German Empire, central governments actively fund those roads and canals as well as other infrastructure projects. Alexander Hamilton, who shaped US economic policy-making during the 19th century, would certainly have something to say about it.

    Michael BG – A coherent industrial strategy and public procurement policy is needed to ensure that infrastructure and other projects are contracted to British suppliers.
    We still need a vertical, sector-based industrial strategy that focuses on key strategic industries as well as “future” industries (a.k.a Industry 4.0).

  • However, Innocent Bystander has a point that infrastructure plans that have more relevant and significant impact on economic and industrial activity, for example, digital infrastructures or energy generation (except for Hinkey Point), should be prioritized over white elephants. I also think repairing/upgrading existing infrastructures can be carried out more quickly and less costly, and is also easier to involve domestic suppliers, than building new white elephants (like Hinkey Point, which was planned from early 2010s or earlier but construction never began until well, 2018).

  • innocent Bystander 10th Jun '19 - 6:58pm

    China has many motives for investing in Africa and they are awash with surplus cash anyway. We are the opposite. Whether Mombasa is turned into a new silicon valley as a result is still to be seen. I’m not holding my breath.
    My concern is for our grandchildren. Keynesian economics is not victimless. Spending more than they (not we) can afford is a crime against them. Try as I might I can not persuade any Keynesian to explain. specifically, how such spend pays off.
    All I ever get are answers that don’t even qualify as vague. Dreamlike or religious faith are the closest descriptors.
    And please remember, these are gambles that could put our grandchildren into severe suffering.

  • innocent Bystander 10th Jun '19 - 7:15pm

    Of course infrastructure spend is important. But it follows activity, it responds to it. It doesn’t lead it. The cotton industry in Manchester did not arise as a result of the Liverpool to Manchester railway. The railway did not trigger ‘King Cotton’ it was built to cope with it. HS2 won’t trigger anything at all except vast profits for even the most incompetent contractors and provide very comfortable post career directorships for the politicians and civil servants who have signed it off.
    I agree (and have agreed before) that an industrial strategy is a necessity but (and please accept this as politely and courteously meant) your expectations reveal that you have not travelled in the world of economic regeneration. I have spent some years deep within it and what worked in Japan and Germany will not work here.
    A stock take must be first of what a government can and can’t actually do. I remember a DTI civil servant saying to an industrialist – “the government can provide you with every form of assistance, short of actual help”.
    And then a savage (yes savage) excision of the hordes of consultants, advisors, and deliverers who watch any politicians’ announcement with eager anticipation and quickly scalp any spend with worthless promises.
    Consider the Garden Bridge. £40M +. Where did it go? Not one brick or bag of cement was purchased. So again, where did it go?

  • Peter Martin 10th Jun '19 - 7:25pm

    @ Frankie

    “If you understand that a large percentage of the national Debt isn’t actually a debt well the world looks a different place.”

    Well done. A sensible comment! It’s a responsibility, or a liability, rather than a debt. In accountancy terms everything sums to zero. Assets and liabilities have to balance. So if we want to be in possession of positive numbers in our wallets and bank accounts someone, somewhere, has to assume responsibility for the negative numbers. That ultimately has to be national government. They are the only ones who can’t go bankrupt.

    The difficulty you highlight with QE is that the monetary base historically wasn’t counted as National Debt, because the Gold reserves were meant to offset the debt. Now there is no gold involved they should be.

    @ Michael BG,

    ‘O’Brien calls for a new fiscal rule “to keep debt to GDP falling gently in normal years when there is no recession.’

    This is just neoliberal nonsense. Trying to reduce the National debt means running a fiscal surplus. This is fair enough if we have lots of export money flooding into the country. Does anyone think that’s likely any time soon? Trying to run a surplus when there is no need for it will fail and bring about the recession that’s a precondition for the policy in any case.

    It’s like trying to fly a plane with insufficient throttle power. Yes it will climb for a little while but the airspeed slows and the plane stalls. In a panic, the pilot has to open the throttle to prevent the plane crashing. Much better to have opened up the throttle a little more to begin with.

  • innocent Bystander 10th Jun '19 - 7:33pm

    “national government. They are the only ones who can’t go bankrupt.”

    Just cast your experiences a little wider than the UK and Australia. Stop off along the way. There are plenty whose people live in squalid favellas, dusty villages, have disgusting hospitals, horrifying prisons, high mortality rates, no teachers, doctors or nurses and give the eager citizens an impromptu lecture on the theme
    “Nations can not go bankrupt”.

  • Peter Martin 10th Jun '19 - 7:37pm

    @ Michael BG,

    I was a little hasty. You said ” debt to GDP falling gently”. I missed the ‘GDP’ bit!

    In other words, it’s not necessary to reduce debt if GDP rises. If you can do this then that’s fine. This was how it worked in the postwar period. The neolibs still weren’t too keen on it all though. A lot of the debt was whittled away by inflation. Which meant that people’s savings were eaten away by inflation. As I keep saying the Govt’s debt is everyone else’s savings. Everyone else has to include our overseas trading partners.

    So a reduced National Debt has to mean reduced savings in one way or another. Do we really want to do the same thing again with inflation? Why not just shrug our shoulders and let savings increase to whatever level everyone is comfortable with?

  • Peter Martin 10th Jun '19 - 7:48pm

    @ JoeB,

    “We don’t want to leave our grandchildren with an enormous debt burden that may well have to be refinanced at ever higher rates of interest and for which they will have nothing to show for the original investment.”

    Goodness me! “Impoverishing our grandchildren” is such a stupid argument that it defies belief that anyone can seriously use it. The standard of living of every generation is determined by what each generation can produce. Period. That’s all there is to it.

    The post war generation didn’t unduly suffer from having to ‘repay’ war debts. The standard of living of baby boomers was solely determined by what was produced in the postwar economy.

  • innocent Bystander 10th Jun '19 - 8:17pm

    As usual your responses are courteous, well thought out and interesting but I don’t see us in a nicely convenient cycle with periods of “up” happily cancelling out the “down”. I would like to know what Keynes thought of an economy in a state of relentless, and seemingly unstoppable, decline with minor and insignificant upticks. There is precious little sunshine for roof fixing and the stimulus shows no sign of being short lived at all.
    There is no sign of the stable or recovery period which you mention. Far from it. I would concede if your Keynesian “investment” did lay down prosperity for the oncoming generations but this money is spent on the wrong projects, in the wrong places for the benefit of the wrong people.
    Your “We want to leave” starts with a “functioning economy”, and quite right too as all the things which follow depend upon that.
    And therein lies the $64,000 question. I watch the business papers and time after time our exciting start ups are swallowed up and disappear.
    Thomas has a point about a comprehensive industrial strategy but it has to be more “comprehensive” than I think he envisions. It involves a clear out of failed civil servants and a complete re-missioning of all our organs of state and education and research sector and any who complain summarily kicked out of their positions.
    There is a role for economic advice in this process but not for economists who offer ” only a “miracle solution” be it Keynes, LVT or MMT.

  • Peter Martin,

    “The standard of living of every generation is determined by what each generation can produce.”

    What you can produce is dependent on the infrastructure development that has gone before. That is why developed countries enjoy a higher standard of living then less developed countries.
    The post-war generation lived through severe austerity in the immediate aftermath of the war and rationing did not end until the early fifties. By the mid-fifties, the European economies were well on the road to recovery and UK export markets began to boom.
    War debts were, however, a burden on the competitiveness of British industry and delayed or rationed industrial investment in nationalised and private industry alike. Ultimately, the UK sought refuge in the common market in an effort to arrest the post-war decline. Too late though to reverse the permanent loss of dominant positions in overseas markets in shipbuilding, textiles, steel, motorcycle and car manufacturing and many more industries besides.

  • Peter Martin 10th Jun '19 - 9:52pm

    @ JoeB

    “What you can produce is dependent on the infrastructure development that has gone before.”

    No it isn’t. There’s no point building good schools, which counts as capital spending on infrastructure, if you are going to then skimp on the maintenance of those schools, the quality of the teaching, the provision of books etc and the size of classes. All this counts as current spending. Both are equally important. Capital spending -good, Current spending – bad is a flawed concept.

    In any case it all counts as debt in an accounting sense. The important thing is the keep the economy at as close to full capacity as possible with the constraint that we keep inflation under control. Debts and deficits will take care of themselves providing the economy is buoyant. We maintain good environmental standards, and try to solve the CO2 problem. Rising sea levels and a degraded environment will cause our children and grandchildren problems. They’ll be no more concerned about our deficits than we are about the deficits run up by the Thatcher government. Or the Americans are concerned about the deficits run up in the Reagan era. Which were quite large incidentally. Who do the Americans have to repay it to?

  • Peter Martin 10th Jun '19 - 10:09pm

    @ Innocent Bystander,

    “There is a role for economic advice in this process but not for economists who offer ” only a “miracle solution” be it Keynes, LVT or MMT.”

    There’s no such thing as a “miracle solution”. We are constrained by the resources available to us on the planet. There’s no getting away from that. It’s not hard to understand we shouldn’t waste those resources. We need everyone to make a useful contribution to society. Yes, because we are all better off with those contributions. But those who are making them are better off too. They get their fair share of what is available. They aren’t just given money in the form of a so-called “Universal Basic Income” and told they can sit in their tower blocks playing video games all day providing they don’t go out and cause too bother to anyone else!

  • Innocent Bystander,

    Even if the UK produced nothing and all the increased demand was met from imports there would still be a need for extra workers in the UK to deal with the increased imports and either sell them or deliver them to the consumers. These extra workers would produce more demand – the multiplier effect. So Keynesian economics can be used to generate more demand and this will normally generate some economic growth.

    Joseph Bourke,

    Your quotation of Vince is not a “Lib Dem document or statement saying that over the next five years a Liberal Democrat government would spend over £200 billion more than the Conservative government is currently planning without increasing taxes”. I particularly dislike it because Vince says “there is no magic money tree”, when as an economist he should know there are at least two – increasing the money supply and increased revenue from economic growth.

    (Do you prefer Joe or Joseph?)


    I don’t think EU rules allow governments only give work to only UK companies. Also government procurement has to try to achieve value for money. Therefore industrial strategy has to have other ways to encourage UK firms to produce more.

    Peter Martin,

    Reducing the national debt to GDP ratio when there is no recession is not neoliberal economics. I agree with you “The important thing is (to) the keep the economy at as close to full capacity as possible with the constraint that we keep inflation under control”. In the past the aim was full employment. I advocate trying to achieve economic growth of up to 3% a year as the primary goal of fiscal policy.

  • Michael BG – I know that, that’s why we need to avoid white elephants and prioritize shovel-ready projects first, as they are easier to involve domestic suppliers.

    Another big elephant in the room is to help startups grow into larger national firms, if not international giants. In addition to government grants/tax credits and improvements of access to financing, reforms of takeover laws should help us prevent startups from being taken over by MNCs before they can even grow.

    We also want UK Ltd to spend on modernizing “means of production” (machinery and capital equipment, different from infrastructures). The “means of production” aspect is neglected by all parties including the Libdem in 2017 manifestos. This is the quickest way if you want to see immediate productivity growth. The automation usage in Britain is the lowest among OECD countries, which partly explains why our productivity sucks. Theoretically, you want every single manufacturer to modernize their plants and equipment, e.g. to automate a labour-intensive, low-productivity production line, or to improve energy efficiency (a more economical investment than Hinkey Point). This area has been neglected.

    Joe Bourke – Peter Martin is right. The whole capital/current spending concept seems to ignore human capital and personnel investments. For example, spending on teachers is current spending.

  • Joseph Bourke 11th Jun '19 - 1:06am

    Innocent Bystander,

    “There is a role for economic advice in this process but not for economists who offer ” only a “miracle solution”.” This is very true, Engels wrote:

    “Finally, when all capital, all production, all exchange have been brought together in the hands of the nation, private property will disappear of its own accord, money will become superfluous, and production will so expand and man so change that society will be able to slough off whatever of its old economic habits may remain.”

    We know how that worked out. A central planned and controlled economy does not believe in Adam Smith’s “Invisible hand”, the notion that supply and demand for goods and services, production, etc is not achievable without formal direction from government. The contrarian view is that surpluses and scarcities are addressed more efficiently by the end-consumer of all goods and services.

    A mixed market economy relies on private enterprise for the development of technology that delivers increased standards of living. We elect a government to make and enforce laws, oversee state institutions tasked with the provision of public services, the maintenance of economic stability and the provision of welfare services.

    Keynesian economics has a single overriding objevtive – full employment. We have that today – at least for now until the next recession.

    The priority today is increasing real wages. That can only come within the framework of a stable economic environment where savings can earn a real return on investment. Government investment does of course have to achieve value for money and not simply waste taxpayers money on ‘white elephant’ projects.

    Vince Cable in his 2017 pre-budget speech https://www.libdems.org.uk/vince-cable-economy-speech-full-text-november-2017 noted:
    “The budget cannot solve the productivity problem but it can address it properly and point to the steps needed to counter it. The first is the need for increased business investment which incorporates innovative technology and better work practices.
    However, a long-standing dearth of investment is now compounded by the radical uncertainty surrounding Brexit.
    Long term studies by the LSE have shown that the two main determinants of poor UK performance on productivity are lack of innovation (R&D as opposed to basic science where the UK is strong) and low levels of skills.”
    The speech spells out the Libdem approach. Fund current spending with taxes; use deferred taxation(borrowing) to fund investment in infrastructure, public housing, R&D and skills development

  • Joseph Bourke 11th Jun '19 - 1:32am


    capital/current spending concept is a basic premise that spreads the burden of taxation over the period in which the spending is consumed. That applies whether it is spending on physical infrastructure, public housing, tuition fees or the proposed individual learning accounts for skills development.
    We are collecting the same level of taxes as a % of GDP now and spending the same proportion of GDP as we were immediately before the financial crisis with a much higher employment ratio and a lower unemployment level. Spending on public service wages for teachers, nurses etc is going to have to increase by more than inflation- most probably by the equivelent of inflation and economic growth i,e. about 3.5% per year. To add more teachers per pupil, more nurses per patients etc requires more resouces than econmic growth alone will provide. That means increasing the level of public spending as a % of GDP and the taxes to fund it.

  • Thomas,

    I wonder what the EU rules are on stopping foreign takeovers. I expect with the freedom of movement there are rules to ensure free movement of capital which I assume means foreign capital being able to buy up UK businesses. I wonder how much protection a UK government could give to UK companies to stop them being taken over by foreign investors. Perhaps there is more which could be done to stop non-EU takeovers.

    It might not be right to stop start-ups and small to medium companies from being taken over by foreign investors, because the owners of these companies have to have the freedom to sell their company if they wish to do so.

    The Liberal Democrats want to set up a business investment bank for provide funds to small to medium companies for them to invest in increasing their output. I don’t think it is possible to make UK companies purchase more modern equipment. I think a government can only provide the conditions for companies to want to do so and the means for them to do so.

    I think reasons why we have poor productivity are that labour is still cheap and it is still easy to find people in the EU to come to the UK to work, but it is becoming harder. As we can’t do much about the second unless we leave the EU, we have to address the first and provide the demand for companies to invest in increasing productivity.

  • Joseph Bourke 11th Jun '19 - 2:05am

    It is not all doom and gloom. Sky News reports “the UK technology sector produced 13 “unicorn” companies – firms privately valued at more than $1bn (£784 million) – over the past year, taking its overall total to 72″ https://news.sky.com/story/uk-tech-created-13-billion-dollar-startups-in-2018-11738841
    “The UK created more billion dollar tech companies than any other country besides the US and China. More than a third of Europe’s fastest-growing tech companies are now based in Britain.”

  • @Michael BG “I think reasons why we have poor productivity are that labour is still cheap and it is still easy to find people in the EU to come to the UK to work, but it is becoming harder. As we can’t do much about the second unless we leave the EU…”

    The cheaper and more flexible people actually come from outside the EU; leaving the EU will simply provide more opportunities for these workers… Given what the UK government can do, whilst it is a member of the EU, and hasn’t done, I don’t a post-Brexit government doing much about it, other than to make it even easier to recruit people from outside the UK…

  • Michael BG – “I wonder what the EU rules are on stopping foreign takeovers. I expect with the freedom of movement there are rules to ensure free movement of capital which I assume means foreign capital being able to buy up UK businesses. I wonder how much protection a UK government could give to UK companies to stop them being taken over by foreign investors. Perhaps there is more which could be done to stop non-EU takeovers”
    Well, the EU allows nations to have their own takeover laws, even against fellow EU countries to some extent, actually national security/strategic national interest excuse can be used. France, which recently nationalized a shipyard to prevent an Italian takeover, has a notoriously tough takeover law. And you are totally free to block Chinese takeovers, which may involve Communist government’s agenda.

    “It might not be right to stop start-ups and small to medium companies from being taken over by foreign investors, because the owners of these companies have to have the freedom to sell their company if they wish to do so” – It depends. For example, Britain has a startup X. The following is my approach. If X is not going to become a Google 2.0 and is not operating in a strategic industry, well, we can allow it to be acquired by, say Google. Otherwise, a sane government would not allow X to be taken over by foreign giants.
    One of the biggest reason for the likes of Google to take over startups is to prevent future rivals. Meanwhile, our national interest is to see native startups growing into large MNCs.

    “I don’t think it is possible to make UK companies purchase more modern equipment. I think a government can only provide the conditions for companies to want to do so and the means for them to do so.” – that’s my point.

  • Joe Bourke – “Government investment does of course have to achieve value for money and not simply waste taxpayers money on ‘white elephant’ projects” – Hinkey Point is a big white elephant – you can invest in wind turbines to generate the same output much earlier and also at lower cost per megawatt hour. The construction of that white elephant had not even started until last year. Investing in energy efficiency practices can even save us an amount equivalent to 6 Hinkey Points (I will try to find the link).

  • Peter Martin 11th Jun '19 - 6:52am

    @Michael BG

    “Reducing the national debt to GDP ratio when there is no recession is not neoliberal economics. ”

    Isn’t it? Why do you want to do it then unless you somehow feel the National Debt is bad thing ie akin to household debt?

    “I agree with you ‘The important thing is (to) the keep the economy at as close to full capacity as possible with the constraint that we keep inflation under control’. In the past the aim was full employment. I advocate trying to achieve economic growth of up to 3% a year as the primary goal of fiscal policy.”

    OK but suppose the choice is between achieving your growth rate and your Debt/GDP ratio reduction? What then? Do you stop agreeing with me? Japan has something like a 230% Govt Debt/GDP ratio. It would have been possible to keep this figure lower but would it have meant that Japanese people were better off than they are now?

    To answer my own question they wouldn’t. The Japanese govt could have squeezed the economy so hard that everyone became much poorer. Fewer people could afford to save and so Govt debt would fall.

    Of course if we ask the neoliberals they’ll tell us that high debts are OK when interest rates are low. They pretend that rates are low because somehow they are the result of market forces. The “London is awash with capital” argument. This is just nonsense. Interest rates are low because the Government wants them low. Period.

    That’s what QE was about. The govt can always have whatever interest rates they want.

  • Peter Martin 11th Jun '19 - 7:14am

    @ JoeB, @ Thomas

    “capital/current spending concept is a basic premise that spreads the burden of taxation over the period in which the spending is consumed.”

    It’s a basic neoliberal premise! There’s really no difference between spending on builders’ wages and teachers’ salaries. We are calling on the resources of the economy in both cases. Pretending that the school’s bricks and mortar have a monetary value which can be used to offset a govt loan is just ‘smoke and mirror’ economics. How often are schools sold off before the end of their useful life? What’s the point of building a school unless it’s going to be used as a school?

    Do we need to raise taxes to pay for the school’s builders and the teachers? Maybe. It all depends on the economic conditions at the time. As always we raise taxes to create the space for Govt’s to spend without adding to inflationary pressure in the economy.

  • Joseph Bourke 11th Jun ’19 – 1:06am…

    You extol Cable’s legacy as business secretary…

    This, IMO, is his real legacy…
    Today’s Guardian…NDAs routinely used to cover up mistreatment at work…The MPs’ strongly worded report said difficulties in pursuing claims through employment tribunals – where legal aid financial thresholds have rendered legal advice largely unaffordable – meant staff often felt they had little choice but to reach a confidential settlement prohibiting them from speaking out…………

    Thank you Vince!

  • Innocent Bystander 11th Jun '19 - 7:53am

    Having government rules on the holding of traded shares might be one thing but many of these more exciting start ups may be entirely funded by the owner/directors.
    Are you proposing stealing their companies? And chaining them to their desks?
    What message will that draconian action have on the next generation of entrepreneurs?
    Their conclusion must be to move abroad.

  • Innocent Bystander – “Having government rules on the holding of traded shares might be one thing but many of these more exciting start ups may be entirely funded by the owner/directors.
    Are you proposing stealing their companies? And chaining them to their desks?
    What message will that draconian action have on the next generation of entrepreneurs?
    Their conclusion must be to move abroad”
    Other countries, especially the US, frequently intervene and strike down foreign takeover bids when “Star” firms (Stars in BGC matrix) or strategic firms are under risk of foreign takeover. Only the UK seems to lack proper laws and policies to do so.

  • “He allocates £4.6 billion a year to schools”
    At least he thought about (state) schools, but not impressed, given total school spending (in England) in 2017/2018 was just under £39 billion, this represents a little under 12%.

    According to the NAO and IFS, real terms per pupil spending has gone down 8% since 2015 and is set to decline a further 2~5% in the next 2 years as a direct result of funding increased pensions contributions with no additional funding from government [aside. the government is funding the first year, but not subsequent years.]

  • @Steve Trevethan “Perhaps part of our national and international economic problems lie in current financial theory?
    “In theory, theory and practice are the same, in practice they are not.” “

    I think a real problem is the lack of practical understanding of financial theory, particularly by those that espouse policies based on the theory, probably because they take what is written in the economic textbooks as gospel truth.

    For example, since the 2016 referendum the GBP has been trading at a significantly lower value than previously, financial theory says that foreign investment should be flooding in, it hasn’t and isn’t, and potentially we are seeing the opposite, foreign investors reducing their investment in the UK economy. I’ve not read a single paper/article from a economist who is prepared to put hard figures to the financial theory mantra; I suspect we could do a Greece and still the textbook economists will be reciting the financial theory mantra…

  • Innocent Bystander 11th Jun '19 - 1:34pm

    I wholeheartedly agree that the UK should quickly shed its global player dreams and follow Trump’s lead (as you suggest) with something similar to the FIRRMA law he enacted late last year. We should be as nationalist and as assertive as he and be in your words “a sane government” with regards to foreign ownership.
    However, this legislation is new and its operation is not clear yet. I accept we could have applied something similar in the case of ARM (as that was listed on the LSE and SoftBank could acquire its shares) but I still struggle to see how it could be applied to start up entrepreneurs (my interest) who are director / owners?
    These are routinely snapped up and how can that be prevented? They can just put all the essential equipment in a ISO container and take it (and themselves) out of the country. If the govt attempts to”steal” privately owned companies because they look attractive that could invoke entirely unintended consequences.
    My quarrel with the majority of the posts here is that the proposals are intensely aspirational from a social liberal viewpoint but they have all been tried before (and multiple times) and have never succeeded yet.

  • Joseph Bourke 11th Jun '19 - 1:54pm

    Steve Trevethan,

    “…consumers, devoid of real income growth, attempt to maintain their living standards by going deeper into debt. Meanwhile, corporations borrow cheaply to buy back their share instead of investing in research, plant etc.
    This pushes up stock and bond prices which spills over into raising property prices.
    This results in poverty for many and an unhealthy increasing disparity in the distribution of wealth”

    I think this is precisely the problem. It starts in the banking sector with excess credit creation (as Minsky described) to fund asset purchases primarily in the property and stock markets but increasingly in consumer credit markets as well. When bad debts begin to build a slowdown in the rate of lending leads to an economic downturn (as Steve Keen describes). The government has to intervene by driving down interest rates to reflate asset prices to prevent a meltdown in the banking sector, property and stockmarkets that would worsen the slump. The private debt transfers to the pubic sector the cost of servicing the debt created to inflate asset prices passes to the taxpayer. The result is austerity, unaffordable house prices and rents and as you point out corporate borrowing not to invest in increaing productivity but to buyback shares and push preice-earnings ration ever higher.
    Alan Greenspan spoke in the dotcom boom of the 1990s spoke of “irrational exuberance” and asked “how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?
    Japan’s lost decade has now lasted 30 years. When asset bubbles are created as they were in the UK under Gordon Brown interest rates need to be incresed to deflate them. If you do not act at the time it will come back to haunt you as we have seen over the past decade.
    Interest rates need to increase now to take the heat out of inflated financial markets. That will hurt borrowers and benefit savers with cash in bank and building society accounts. There are winners and losers with every economy policy. As Milton Friedman once said of the dismal science – “there is no such thing as a free lunch”.

  • Innocent Bystander – “I wholeheartedly agree that the UK should quickly shed its global player dreams and follow Trump’s lead (as you suggest) with something similar to the FIRRMA law he enacted late last year”
    That specific policy predates Trump actually, and France and even Germany also has similar laws. Obama already had a fair share in blocking foreign takeovers.

    “I still struggle to see how it could be applied to start up entrepreneurs (my interest) who are director / owners?” – by making access to finance easier for them so that they do not have to turn to, say, Chinese investors. Changing the way the City operates, however, is not an easy thing. There are two paths. In the US, there is a huge venture capital sector. In Germany and France, a state-sponsored “national bank” provides finance to exporters and manufacturers and SMEs.

    Roland – “GBP has been trading at a significantly lower value than previously, financial theory says that foreign investment should be flooding in, it hasn’t and isn’t, and potentially we are seeing the opposite, foreign investors reducing their investment in the UK economy” – weaker domestic currency leads to capital outflows both in theory and in practice, because it reduces earnings for foreign investors when converted into their own currencies.

    “At least he thought about (state) schools, but not impressed, given total school spending (in England) in 2017/2018 was just under £39 billion, this represents a little under 12%” – this is a masqueraded corporate tax “reform” bill.

    Steve Trevethan – “Meanwhile, corporations borrow cheaply to buy back their share instead of investing in research, plant etc” – theory also says when there are no profitable opportunities to invest in, corporates will use excess cash to either buy back shares or pay dividends, and normally they prefer the former.

  • Peter Martin 11th Jun '19 - 3:41pm

    @ Thomas @ Roland

    “GBP has been trading at a significantly lower value than previously, financial theory says that foreign investment should be flooding in…”

    “weaker domestic currency leads to capital outflows both in theory and in practice, because it reduces earnings for foreign investors when converted into their own currencies.”

    I’m not sure if either of these statements are quite right. The capital account is the exact mirror image of the current account. The two sum to zero. If there is a tendency not to the exchange rate shifts to bring everything back into balance.

    So a reduction in the capital inflows ( not necessarily an outflow) will lower the exchange rate which in turn will cause the current account deficit to fall. Exports and imports become more closely balanced. This may not be such a bad thing!

  • Peter Martin,

    I am sorry, I thought what I had written was clear. If the national debt to GDP ratio is falling this does not mean that neoliberal economics are being pursued as the main economic aims could be different and based on other economic theories.

    For me the priority of the government’s economic policy is to try to keep economic growth as close to 3% as possible and this is more important than reducing the national debt to GDP ratio. I believe that a side effect of this policy will be that in some years the national debt to GDP ratio will decline as a result of economic growth.


    I think O’Brien is saying that £4.6 billion a year by 2022-23 will restore the real value spending per pupil of the peak year of 2015. Therefore I think it is a good start. However, is more money per pupil needed? And/or do we want to increase the pupil premium?

    Innocent Bystander,

    How do you judge if an economic policy is a success or failure?

    Joseph Bourke,

    If there is too much money in the economy wanting to be invested, is not the answer for the government to borrow it and then use it to create more demand in the economy so businesses will want to use it in the future to increase their production?

    (Do you prefer Joe or Joseph?)

  • Peter Martin 11th Jun '19 - 3:56pm

    @ Joe B,

    “Interest rates need to increase now to take the heat out of inflated financial markets.” ????

    This is what the Fed thought in the run up to the 2008 crash. They probably succeeded but not in quite the way they’d planned! They had to reduce them to almost zero in a mad panic afterwards. They made the same mistake at the turn of the century with the collapse of the dotcom bubble. It looks like they never learn and are in the process of doing the same thing yet again!

    The Government would be much better deciding on a level of interest rates and not fiddling around with them anywhere near as much as they do.


  • You can’t look at government deficits without looking at other sectoral balances. We need the corporate sector and families to deleverage which, without a huge trade surplus, would imply larger, not smaller, government deficits. Considering that we can always pay for debt demoninated in our own currency, and there is a worry about secular deflationary trends, higher spending and investment seems wiser than focussing on the rather odd metric of national debt/GDP. Besides, if growth is bigger than the interest rate on the debt, then it all becomes more affordable anyway. Put money in the hands of poorer consumers, increase spending on R&D, and give British firms higher incentives for long-term productive investment.

  • It’s become routine for some to set up strawman versions of Keynes/Keynesianism the better to attack him/it. He was the greatest liberal economist ever so we should instead try to understand which of his insights remain valid and which were specific to the 1930s as the basis for sensible policies.

    The crashes of 1929 and 2008 were alike (and unlike any other recessions in between) in that they were preceded by booms caused by epic debt-financed spending. Most of the debt incurred was squandered in speculation with little invested in real-world, income-earning assets so it eventually became unpayable. The scale of that unpayable debt was so large that the banks that held it went bankrupt.

    When that happens, the proximate effect is ‘debt deflation’. Turning off the debt spigot causes a big fall in spending and hence economic activity as borrowers curb their spending. Their suppliers must then cut back as a negative multiplier kicks in. Even worse, when banks close their doors then, absent deposit insurance (which didn’t exist before FDR), other individuals and businesses become collateral damage when they lose their money. In short, it can metastasise into a domino collapse of the economy.

    So, someone must make good the banks’ losses. One option is to ‘bail-in’ savers (i.e. they lose everything over the deposit insurance level) but that’s not popular!! Other options exist but the best by far is for government to ‘print’ the necessary money – some to directly recapitalise the banks and some to keep the economy going by deficit spending on ‘infrastructure’ projects which create something of real and lasting value.

    Back in the 1930s international trade was limited so most spending circulated in the domestic economy plus work was far more labour-intensive and welfare less developed, so this was a good plan that put food on a lot of tables, but it wouldn’t work well now – and Keynes would have said so.

    Since 2008 governments have used the ‘fake Keynesian’ (I’m sure he would never have approved) of privatised debt, in particular (a) rising mortgage debt encouraged by ‘Help to Buy’ and (b) student loans which are large in relation to GDP/capita. This leaves public debt as the modest residual needed to keep the economy growing to meet political targets.

    This fixes nothing and little is created of lasting value.

  • Michael BG,

    businesses undertake demand creation through a myriad of advertising and marketing programs. In a market economy competition for custom (in the absence of monopoly) will tend to keep prices close to production costs that in turn requires efficient investment.
    The household savings rate in the UK is reportedly close to zero. The only sectors accumulating surpluses are the non-financial corporate sector and the foreign sector.
    John Baptiste Say held the view that Supply creates its own demand. In other words, if supply increases, the demand will be there. The Keynesian theory of effective demand refutes this theory (at least in the short-run). In Keynes theory the level of effective aggregate demand determines equilibrium national income. The level of effective demand will be where the aggregate demand curve equals aggregate supply. We assess the level of effective aggregate demand by reference to the level of unemployment and utilization of idle capacity. At full employment (as now) the economy is said to be operating at an equilibrium of effective demand.
    The government cannot increase effective demand beyond its equilibrium level. The government’s has a role in maintaining investment at an adequate level to absorb household savings and provide the foundation for technology driven economic growth. It has an additional role in redistributing income from those with a lower marginal propensity to consume (wealthy) to those with a higher marginal propensity to consume (poorer) to keep economic activity flowing. Firms distribute their surpluses to households in the form of dividends and or share buybacks and invest in financial markets that are the source of lending to consumers (as a substitute for higher wages). Foreign sector surpluses are also invested in financial markets and adjust over time via the exchange rate.
    Holding up this entire edifice of financial capitalism is land. Keynes called for the euthansia of the rentier and the socialiation of investment. We still have a long way to go.

  • Innocent Bystander 11th Jun '19 - 8:11pm

    “they do not have to turn to, say, Chinese investors”
    The exciting small start ups don’t turn to Chinese investors and it is a myth that they are short of investment at all. One of our sons has a masters in Physics and his first job was working for a group of Business Angels to search for high tech entrepreneurs and persuade them to let his angels invest. Dragons’ Den is reality TV where pathetic ideas are pitched. The problem we have is high quality ideas, not money to back them. The Chinese would regard these start ups as a small hors d’oeuvre and not bother. They consume companies at the multi billion level. Also, public investment banks exist so civil servants with no skin in the game at all can hand over public money to con-men, snake oil salesmen and dead loss proposals not even worthy of “the Den”. Hey, if the investments were any good the private sector (much smarter) would have invested themselves.

    @Michael BG
    “How do you judge if an economic policy is a success or failure?”
    If it delivers what everyone else here wants. An end to poverty, no food banks, quality health and end of life care and all the rest.
    My point of dispute is that virtually all voices here underestimate the task by several orders of magnitude. It took a century and two world wars to take us from the richest nation the world has known to a crumbling basket case and it will take a lot more than a bit of Professor Keynes Magic Elixir or LVT to reverse all that. Most commenters, if not all, start with the solution and then re-imagine the problem to fit it. I am an engineer, trained to work the other way round. Typical solutions invoke taxing the very rich. No chance at all. The only individual I know in that category has homes in four continents and isn’t taxable. “Close all offshore tax havens” – this has been the clarion cry for decades and not one has closed, never mind all. “Stimulus” – the ‘multiplier effect’ is fiction. The money will disappear as has always happened before with not a single new factory to show for it.
    So I want a prosperous, healthy country but none of the solutions are adequate (or even close). What is needed is for the British apple cart to be turned over and kicked into the ditch with a drastic restructure and refocus of our electoral system, our parliaments, our offices of state, our stock exchange rules, our institutes of higher education and every aspect of our national life.
    Won’t happen, of course.

  • Joseph Bourke 11th Jun '19 - 11:51pm

    The ONS sectoral balance framework groups aggregate balances by households, corporates, government, and the foreign sector. Within the domestic economy the national accounting identity makes the basic assumption that all spending of firms is income of households (payments for goods and servics, wages, distibutions to shareholders etc). Households have savings (including undistributed profits in firms that are reflected in share prices) and firms retain or borrow back these savings to finance investment. Hence in the national accounting framework savings = investments. The government deficit can be viewed as a residual component of the balance of payments capital account that is financed via private sector investment ( The current account deficit was £81 billion in 2018 with a goverment deficit (net borrowing) of £32 billion – the balance being met by investment in property and stocks and exchange rate adjustments).
    British households spent on average around £870 more than they earned during 2018, amounting to a £23.5 billion deficit for the household sector as a whole for 2018 i.e. households in aggregate are borrowing more for mortgages and consumer finance than savings provide for.
    The sectoral balances approach relies heavily on aggregates. For example, we know that small firms in the corporate sector are in deficit while medium and large firms are in net surplus. They only tell us something about what is happening between sectors, rather than within. Much of growth in overall household debt is the result of households lending more to each other (mainly intermediated through the creation of credit by banks). A measure of gross debt therefore better captures the lived experience of families in terms of their overall debts to one another as well as other sectors. NEF analysis shows that from 2014 to present, total consumer debt per person rose from £4,100 to nearly £6,320 . This debt has also grown much faster than household incomes, and at 38.2%, is now higher than before the global financial crisis.
    Household debt can rise or fall irrespective of the government’s balance sheet.
    Within the household sector itself, there is also good reason to believe that the increased debt burden for families has not been shared equally. As welfare payments and funding for public services have been cut back, low income families have increasingly had to take out proportionately more debt.

  • Gordon,

    Keynesian economics has always recognised the effects of foreign trade on the economy. What would have worked in 1930 did in fact work in 2008. It was only with the Coalition government that the UK government gave up on Keynesian economics, but the 2010 Liberal Democrat manifesto still implied we adhered to Keynesian economics when it stated that a Liberal Democrat government would have an economic stimulus in the first year of government and it would only take money out of the economy once the economy was strong enough.

    Innocent Bystander,

    Thank you for answering my question. Looking at the economic policies of UK governments between 1949 and 1973 why do you think they were unsuccessful? Inequalities were reduced, full employment achieved, the UK economy grew each year. Taking the UK economy as valued at 100 in 1948 it was worth 231.8 at the beginning of 1973. Looking at the policies over the short-term I would say that governments used Keynesian economics to grow the economy more than it was really capable of growing resulting in “stop-go” economics. This doesn’t mean that Keynesian economics didn’t work, it just means that UK governments were not very good at implementing them.

    Have I missed your response to my 10th June 10.22 pm post about how the multiplier would still exist even if the UK manufactured nothing?

  • Innocent Bystander – so you want full-scale institutional reforms (electoral, political, education…)? I will add corporate governance and industrial relation to the list. Yes, I agree. The whole culture must be changed and only deep political and institutional reforms can do so.

    British entrepreneurs also tend to have a tendency of “retiring” and live a wealthy life in a rural mansion after earning their first millions instead of staying and driving their firms further forward. Very different compared with American and European businessmen.

    Joe Bourke – “Firms distribute their surpluses to households in the form of dividends and or share buybacks and invest in financial markets that are the source of lending to consumers (as a substitute for higher wages).” – sounds like a complete opposite to conventional economic theory which often assumes households to be the net savers. And I don’t think this situation is desirable. Firms invest in financial markets and make stock buybacks/dividend payments instead of investing in productive capacity and technology and increasing wages, while low-wage, low-saving households keep making themselves even more indebted. This only makes inequality and low productivity problems even worse.

    Michael BG – “Inequalities were reduced, full employment achieved, the UK economy grew each year” – Relative decline. You see France and even Italy (temporarily) managed to catch up and surpass us despite starting at least 30% behind in 1945. British firms, inflexible, outdated and uncompetitive, were also continuously losing to foreign competition. You can search British shipbuilding, British textile or British machine tool via Google Books, there are many interesting documents detailing how these industries lost to Japanese and European competitors due to slow adoption of new technology (for textile, the main cause was not foreign cheap labour, but the inability to modernize). Labour relation was poisonous with union militants often blocking any attempts to modernize processes, plants and machinery.

  • Peter Martin 12th Jun '19 - 6:37am

    @ Michael BG,

    You still haven’t said why you want to reduce the National Debt/GDP ratio.

    I’m not saying we should increase it. But I’m agnostic. If it falls it falls. If it rises it rises. I wouldn’t be too worried either way providing the economy was ticking along OK.

    There must be a lingering element of thought that the National Debt is a bad thing which needs to be ‘paid off’. I perhaps should declare an interest here. I’ve got a few thousand pounds worth of Premium Bonds which I own directly. Plus my pension fund will have a few on my behalf. Should I sell those bonds so that I’m not a drain on the Exchequer who have to cough up 1% or so every year to cover the prize money?

    I could buy a new car with the money and a fair bit would straightaway go back to the Govt in VAT. Then the car dealer might spend his share and stimulate the economy a little – at the same time he’ll be paying higher taxes. As the money moves through the economy the transactions will be taxed and the Govt will get it back. Unless, of course, some of it is saved by someone else, either in the UK or overseas, buying some more Govt bonds.

  • Peter Martin 12th Jun '19 - 7:24am

    @ Innocent Bystander,

    “What is needed is for the British apple cart to be turned over and kicked into the ditch….”

    This seems a curious thing for a member of a centrist party to say. The apple cart does have apples to the tune of $60k per person p.a. if we believe the official stats. Why waste them? It’s quite dangerous to go in for revolutionary change, especially if we don’t know or understand what was wrong with the previous system.

    Can it be fixed? Yes. I believe it can and without destroying what we now enjoy. That is also what I would expect Lib Dems to be saying.

    @ Joe B,

    “Hence in the national accounting framework savings = investments.”


    Look, the National accounts show:

    (S-I) + (T-G) + (M-X) =0

    Notice that we have separate terms for Savings (S) and Investment (I)

    IF S=I then there would be no need and and we would have


    In other words, the Govt deficit would be exactly equal to the trade imbalance between imports and exports. Which it isn’t!

    Therefore S cannot be equal to I. Q.E.D.

  • Innocent Bystander 12th Jun '19 - 7:41am

    Thank you but I have to agree with Thomas that the years 1947 to 1973 were not a golden age at all but the period in which this nation went from being the workshop of the world to what was called “the sick man of Europe”. We were so desperate we begged to join the EEC.
    I counter the point on the multiplier because I ignore airy economic persiflage and return to basics. Multiplication requires the money to create more wealth by triggering primary wealth creation such as agriculture or manufacturing. We are net importers in both of those categories. Keynes wasn’t much of an idea when the factories were in Birmingham and the customers were in China. Now it’s the other way round it’s economic suicide.
    I have been both a Managing Director and Chairman and any businessman will tell you that just increasing turnover is not enough, it’s profit that counts. We don’t want a bigger GDP. We want one that operates at a bigger margin.
    I accept your aim but first we need a stocktake of what extra govt spending is capable of achieving. The US govt has done marvels for its aviation and computer industries by very cynically targeted spend in defence and space.
    Our govt spend is constrained by the OJEU process and (I think) a dysfunctional procurement process lacking an overall plan (and honesty).
    I return to HS2 as an example of completely wasted and misdirected spend chosen after intense lobbying from those who will benefit financially. It is obviously not part of any plan to reconstruct our manufacturing base. It is being done for its glamour only.

  • Innocent Bystander 12th Jun '19 - 8:13am

    I thought your observation that British entrepreneurs retire rather than become players on the world stage was very correct.
    How do we reignite British ‘mojo’?

  • Joseph Bourke 12th Jun '19 - 12:25pm

    Peter Martin,

    I have explained this before and don’t want to go through it again on this thread. In the national accounts savings includes savings/dissavings of the public sector and foreign sectors.. Savings = invesment in aggregate not in individual sectors. Here is a link explaiing why savings = investment in the national accounts https://www.freeeconhelp.com/2011/11/why-savings-equals-investment-si-and.html.
    “the total amount of savings occurring in the economy is equal to the amount being invested. Remember that investment leads to the accumulation of capital which leads to increased labor productivity which leads to economic growth (which is a good thing). So having high amounts of savings is good for economic growth.” (As long as they are reinvested in expanding productive capacity)

    “Note that it is possible to have negative amounts of saving or dissaving. For example, if T is less than G + TR then public saving will be negative. Also, if C + T is greater than Y + TR then we will also have negative private saving, but this is very rare.” (but this is what has been happening since 2017/2018).

  • Joseph Bourke 12th Jun '19 - 12:37pm

    Innocent bystander,

    like you I have been both a Managing Director and deputy Chairman. The adage “”turnover is vanity, profit is sanity, cash is a reality” is not a bad one to live by in business.
    In my view, the problem we have in the UK is an unwillingness to tackle the more diffucult and longer-term underlying structural issues (of which I believe a dysfunctional housing and land market is a principal one). Good quality start-ups today have little difficulty in attracting capital. The number one complaint for tech start-ups in the city is the extortionate cost of renting city centre commercial property https://www.theguardian.com/media-network/2016/apr/12/startups-abandon-tech-city-commercial-rent-soars-east-london-shoreditch.
    Fiscal and monetary stimulus have their uses at times but they do not address the fundamentals of economic growth and as Gordon notes above, improperly applied “this fixes nothing and little is created of lasting value.”

  • Thomas,

    Living standards and the quality of life in the UK improved between 1949 and 1973. Indeed our old industries were in decline and British industry was not very good at investing in modern machinery. This was not the fault of the government, and as Innocent Bystander points out there were many attempts by different governments to try to provide solutions to these problems.You can take a horse to water, but you can’t make it drink. In the end the power of Trade Unions were destroyed.

    Peter Martin,

    I haven’t said I want to reduce the National debt to GDP ratio. Like you I am agnostic. I was only pointing out that if it is reduced it could be a side effect of how a government responds to other factors in the economy and not because it is an aim.

    Innocent Bystander,

    Thank you for your answers. We have different aims for economic policies. I am agnostic with regard to what we manufacture. I am mainly interested in running the economy to minimise unemployment and ensure no one in the UK lives in relative poverty. Part of achieving this is to provide conditions for industry to expand production. Another area I am concerned about are regional imbalances and so I believe the government has to have regional policies to improve the economic well-being of the poorer regions of the UK.

    It is wrong to look at running the economy as we would running a company. I don’t recall anyone in the companies I have worked for saying we should not increase sales. All were very interested in increasing sales and turnover. Of course the profit margin was important. It is no good producing more and selling more if there is no profit.

    I don’t accept that infrastructure spending is better than current government spending. Both can grow the economy.

    If there is no demand for a product then that product would not be manufactured. Demand has to come first.

    The multiplier is the fraction of the revenue from the increased production which is spent in the home economy. Please consider my example again. Even if we manufactured nothing, some employment in the UK would be generated by purchasing something manufactured outside the UK. I have suggested this would be in the distribution industry and the retail industry if purchased from a shop. Can you understand this?

  • Michael BG,

    “If there is no demand for a product then that product would not be manufactured. Demand has to come first.”

    Ask yourself these questions:
    Why do so many people buy bottled water en masse when tap water is available free in unlimited quantities?
    Why do people pay £3 for a cup of coffee in a plastic container with a layer of frothy milk on it, when it costs pennies to make?
    Why do people pay £1,500+ for a Burberry raincoat when you can buy a perfectly adequate Macintosh raincoat or other brands for a fraction of the price?
    Why are there so many hand car washes around now when a car can be cleaned in an automated car wash for a couple of pounds?
    Why is there so much demand for Apple iPhones when brands like Samsung offer a comparable product at half the price?
    Why are ladies prepared to pay upwards of £1,000 for a Gucci handbag to carry their possessions in?

    If the answer is government spending creates the demand, then maybe we should start thinking about the planet and environmental degradation more and stop doing it.

    Sweden went through a serious banking and financial crisis in the early 1990s but have now developed a highly successful economy, As this article concludes https://sweden.se/business/how-sweden-created-a-model-economy/
    “Sweden’s present economic and social prosperity was built on the lessons learned from the financial crisis in the early 1990s. Governments pursued reforms and fiscal sustainability became institutionalized. Stable economic policies combine with competitiveness, innovation and an open approach to trade to make Sweden a model for economic success.”

  • Innocent Bystander 12th Jun '19 - 7:35pm

    ” Can you understand this?”
    Well Michael, i am trying to. I see no multiplier effect in your scenario, because there is no multiplication. The spend is just one to one. It doesn’t trigger new wealth. If I were to give £100 of the free govt financial confetti (a.k.a. Keynesian stimulus) to a factory in Korea and in return they gave me a mobile phone that had cost them £90 to produce then they have a multiplier (1 : 1.1). If the UK distribution channels saw any of that it would be miniscule and because of elasticity in those channels it would be most likely zero. i.e. if Postman Pat brought it, he was bringing the gas bill anyway.
    We see this continually in the infrastructure projects. Our little town has a station on the GWR. They have recently replaced the HST125s (built in Derby) with Hitachi Class 800s. These are “manufactured” in Newton Aycliffe as long as you stretch the definition of “manufactured” to include opening a cardboard box under the close supervision of Japanese engineers and managers. The multiplier here entirely benefits the Kasado area of Japan where “manufactured” has its traditional meaning.
    Do you think the HS2 trains will be “British” or the even the rails they run on?
    I am not against your spending plans but they won’t have the effect you want unless they are brutally nationalist and patriotic and deliberately planned to ignore any competition problems. The French are subject to OJEU as well as us. Do you think we will ever see a Hitachi train running on French metals for SNCF?

  • Peter Martin 12th Jun '19 - 7:35pm

    @ Joe BG,

    I’ve not time to go through your reference properly, right now, but I’m very sceptical of anyone who says:

    “Financial intermediaries are companies including banks….. that borrow money from the savers in the economy and lend the money to borrowers.”

    This is simply not how the banking system works. I think you are well aware of this BoE link having given it to me previously!


    They say just the opposite.

    ” Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits”

    You’re happy to quote whichever version happens to suit your argument at the time!

    So which one are you saying is right and which are you saying is wrong?

  • Innocent Bystander,

    If we take your £100 mobile phone example. Assuming that you purchased the phone for £100 and this is the price you paid for it in a shop. I assume retail mark-ups are quite high, so I will assume that the mark-up is £20. I assume that the supplier also had to pay £10 to get the phone into the country and to the warehouse of the retailer. This £30 is divided between workers, owners and other costs. Therefore the majority of this £30 will end up being spent in the UK economy. This is what is meant by the multiplier effect. In this example the multiplier is 3/10th. I believe that in the UK it is 1/6th.

    As a liberal it is difficult to justify why the government should purchase goods manufactured in the UK, if cheap and/or better products are available from aboard. The role of government is to support the development of UK business that can compete with foreign businesses. I would say that is what a government’s industrial strategy should be about. As you have pointed out previous UK governments have tried different things in the past and providing support to industry has proven difficult to do successfully. No matter how hard it is, governments have to try to provide conditions for businesses to start-up and for them to grow.

  • Joseph Bourke 12th Jun '19 - 11:43pm

    The idea behind the Keynesian fiscal multiplier is that a government spending stimulus increases aggregate demand which in turn leads to higher labor demand and thus more employment and higher wages. This higher labor income then stimulates consumption, in particular of poor households, which again leads to more employment, higher labor income, more consumptionand so on and so forth.
    The idea is based on the assumption that output is demand determined. Two key conditions must be present. Firstly, firms must have idle capacity. If they do not prices will increase and not quantity of output in response to more government demand.
    The second assumption is that a large fraction of any additinal income – the marginal propensity to consume (MPC) – is spent on consumption and not saved or used to repay existing debts.
    Where these two conditions do not exist, fiscal stimulus will increase prices, lower output and increase unemployment – stagflation.
    Japan and Sweden both experienced a financial crisis in the early nineties. Sweden acted decisively to restructure its economy and got its economy back on track quickly. Japan prevaricated for a decade and has struggled to recover its former vigour ever since. Thir article offers five lessons to learn from Sweden https://www.washingtonpost.com/business/economy/five-economic-lessons-from-sweden-the-rock-star-of-the-recovery/2011/06/21/AGyuJ3iH_story.html?utm_term=.72a3f945aa9a

  • Michael BG – “As a liberal it is difficult to justify why the government should purchase goods manufactured in the UK, if cheap and/or better products are available from aboard. The role of government is to support the development of UK business that can compete with foreign businesses. I would say that is what a government’s industrial strategy should be about. As you have pointed out previous UK governments have tried different things in the past and providing support to industry has proven difficult to do successfully. No matter how hard it is, governments have to try to provide conditions for businesses to start-up and for them to grow” – Businesses in new industries/sectors need sustained demand/market until they achieve economies of scale, especially when established first movers already exist abroad. Britain developed its world-beating textile and shipbuilding industries during the 16th- early 19th centuries thanks to protectionism (oh, and many of these protectionist measures were introduced by the Whigs). Since high protective tariffs cannot really be used today, non-tariff protection measures are needed: apart from foreign investment laws, subsidies and investment/R&D tax credits, the only other option left is government procurement preference (of course I am not proposing kicking out foreign suppliers, just some forms of preferential treatment sufficient to help domestic suppliers but without being too extreme to trigger retaliation).

    Now, I will tell you how I can justify it for 21st century. You know, Industrial Revolution 4.0 is coming with brand new industries emerging. So there will be infant industries popping up in the upcoming decades, and we cannot afford to lose out to foreign competitors and lag behind. US, China, Japan and Germany are already first movers in many of those Industry 4.0 sectors such as AI and robotics, so any hypothetical British newcomers will be more likely to die prematurely without government support. Times for some development state/economic policies.
    Additionally, some of these new sectors will potentially become geopolitically important, which means we cannot afford to wholly rely on foreign suppliers, especially those from a non-ally, non-friendly geopolitical rival like China (don’t forget to read my geopolitical stuffs).

  • Peter Martin 13th Jun '19 - 8:10am

    @ JoeB,

    “The idea behind the Keynesian fiscal multiplier is that a government spending stimulus increases aggregate demand which in turn leads……”

    OK but you could have said:

    The idea behind the New Keynesian multiplier is that a freer credit induced private spending stimulus increases aggregate demand which in turn leads…….

    The more neoliberally inclined New Keynesians, or maybe most of them, acknowledge that this no longer works when interest rates are ultra low. The MMT view is that ultra low interest rates are the inevitable result of this type of economic regulation. So, in the end, there is no real alternative to old style Keynesianism.

    On the question of “Savings equal Investment” we have to consider why neoliberals are so keen on this ‘identity’. If I save £1000 in a safe deposit box, how is that ‘investment’? The idea is obviously flawed. They want to push the idea that there are only so many savings and if the Government is doing too much borrowing there is less for productive industry to utilise. Meanwhile, back in the real world, as we’ve seen Govt borrowing increase after the 2008 GFC we’ve also seen the growth of huge cash piles accumulated by the big players who clearly don’t know what to do with it. So there’s obviously something wrong in their thinking somewhere!

  • Peter Martin 13th Jun '19 - 8:36am

    @ Michael BG @ Thomas,

    “As a liberal it is difficult to justify why the government should purchase goods manufactured in the UK, if cheap and/or better products are available from aboard…..”

    This is also the MMT view. An aspect of MMT that, incidentally, I’m not totally sold on! So maybe there is a natural fit between the two of you? 🙂 The idea is that exports are real cost and imports are a real benefit. So it is better to receive than to give! If, say, Germany wants to send us twice as much stuff as they get back from us in return, who is getting the better deal? Us or them? All we have to do to keep driving around in German cars is create the IOUs to pay for them. If it keeps the Germans happy accumulating surpluses which they’ll never spend, why not just let them get on with it?

    Once they, and not us, have made the decision to do this, they have to keep buying UK bonds to maintain the value of the pound, to recycle the money, so that we can continue to be good customers. The UK Govt deficit spends the proceeds back into the economy so that you and I have the money to buy yet more German cars. The German government are now caught in a bind. Even if it occurs to them that this isn’t a smart thing to do they’ll find it difficult to change their ways. They will be up against the combined power of German car manufacturers and their labour unions.

  • Michael BG – forgot to tell you, during the Gilded Age, the Republican Party was the liberal party, yet they supported tariffs (unless you consider “the party of Jim Crow/KKK” liberal). They were pro-industry, pro-Robber Barons and anti-regulation, but this was the same thing for most liberal political parties in Europe at that time, including the British Liberal Party (the only difference was the tariff issue). In fact, you can even make a genuinely liberal case for industrial policy and (moderate) protection.

  • Innocent Bystander 13th Jun '19 - 12:19pm

    Thank you for your reply and I am sorry for the tardy reply and I will have to sign off now as I have a brother in law in intensive care to visit and a friend’s funeral to go to. I’m in that unhappy end of the age spectrum, but I had to appreciate your response.

    “in a shop”
    Good Lord! Do people still use shops? I got my ‘phone from Geekbuying.com and it came direct. In a shop you have to pay that 20% mark up you mentioned. You will be telling me that some people still pay with cash next.
    Also, Class 800s aren’t sold through shops.
    I appreciate your views and those of similar mind here but I see that the problem, based on some very relevant experience of mine, is not as you all see it.
    It is not a failure of “systems” or of “economic model”. Rather, it a failure of people. Specifically a layer of that took over our national leadership many years ago and have driven us into this state. They form a self protecting cadre of serial failures. They form the leadership of all the offices of state and quangos. They fill all the committees and advisory boards.
    Admission to this group is very selective. Usually privately educated and well connected they never suffer any consequences of their actions. They are knighted and given something else to try no matter what. Watch and follow what happens in our society. Every office of state is regularly mired in some scandal. Only the politicians get publicly castigated. Meanwhile a hugely paid executive layer hides completely unknown. Some will respond that they only do the minister’s bidding. Nonsense, and if that were the case why do earn so much salary, pension and honours if they are just “Willie the mail boy”?
    So I know that all your ambitions are well intentioned but are doomed to fail as have all similar efforts before.
    People of skill and worth will make any system or model work and the incompetent and corrupt will fail no matter what tools you provide them with.
    They have to be ruthlessly gotten rid of first.

  • Joseph Bourke 13th Jun '19 - 12:58pm

    Peter Martin,

    In economics savings usually means any income not spent on consumption. These savings can be invested in land, capital goods or intellectual property rights, in stockbuilding, in government securities, cash surpluses in bank accounts not lent out or held in cash in a safe deposit box.
    When savings and investment are defined thus they are always equal. … While this is true for the world as a whole, it does not hold for individual countries. … the amount an individual country saves does not have to be the same as the amount it invests. The difference between the two is the amount borrowed from or lent to foreigners i.e. the current-account deficit or surplus… While at a global level saving must equal investment, the fact that saving and investment end up in balance does not mean that … households and individuals … desire to save and invest in equal measure. … Actual saving and investment must be equal. Desired saving and investment may not be.

    Most of the time, … If people’s desire to save exceeds their desire to invest, interest rates will fall so that the incentive to save goes down and the willingness to invest goes up. Across borders, exchange rates have a similar effect. … Classical economic theory suggests that interest rates automatically bring saving and investment into a productive balance. The central principle of Keynesianism, however, is that this alignment between saving and investment is not always automatic, and that a misalignment can have serious consequences. … The modern consensus is that both classical and Keynesian theory can be right, but over different time frames. In the long term, saving and investment will be brought into line by the cost of capital. But in the short term, firms’ appetite to invest is volatile, and policymakers may need to step in to shore up demand.
    Simon-Wren Lewis has a blog discussing some of the issues around the savings=investment identity https://mainlymacro.blogspot.com/2012/01/savings-equals-investment.html

  • Peter Martin 13th Jun '19 - 1:02pm

    @ Michael BG,

    “I haven’t said I want to reduce the National debt to GDP ratio.”

    OK but you are “taking a leaf out of Onward’s book” written by the Tory MP Neil O’Brien. As you say, O’Brien calls for a new fiscal rule “to keep debt to GDP falling gently in normal years when there is no recession.”

    I like the ‘gently’ bit! It’s good to know that neolibs do have some compassion! So what does it mean for a country like the UK which typically runs a trade deficit of something like 3% of GDP? It means the Govt deficit will have to be 3% of GDP too to replenish the money lost to pay our net import bill.

    Therefore, if the economy also grows by 3% the GDP ratio will stay the same. But what happens if the Government has an inflation target of 2%? That means the Govt’s deficit has to be 5% of GDP. Also what happens if the private sector wants to save by 2% of GDP. We’re now up to a Govt deficit of 7% of GDP.

    I would suggest that Neil O’Brien is talking BS! Leave those leaves alone!

  • Peter Martin 13th Jun '19 - 1:32pm

    @ Joe B

    This is how I understand the S-I issue:


    The article explains the S=I identity is only valid for a closed economy with no government! It’s not a very realistic scenario! IMHO.

  • Daniel Walker 13th Jun '19 - 1:52pm

    @Peter Martin

    Joe B said “While at a global level saving must equal investment,” [emphasis mine], and you said “the S=I identity is only valid for a closed economy with no government”

    Surely the world is a closed economy with no government? 🙂

  • Peter Martin 13th Jun '19 - 2:13pm

    @ Daniel Walker,

    On 11th Jun ’19 – 11:51pm Joe kicked off this discussion with:

    “Hence in the national accounting framework savings = investments”

    The ‘global’ bit came later after Joe was challenged. And it’s a good point that the Earth is closed economy! Most countries have National Debts. They sum to about $75 trillion. We don’t owe that money to the Martians! It does have Governments though and they just create the money ‘out of thin air’! That’s why they’re in debt. They have to be.

    Apologies to those who think this is all academic. But, it’s our misguided notions of the nature of debts, deficits, savings and investments that leads us into all kinds of unnecessary trouble. Brexit is just a consequence of this.

  • Thomas,

    I accept that a nation should have some industries for defensive reasons. We wouldn’t be able to fight a long war if we couldn’t build our own ships, aeroplanes and tanks and manufacture our own small arms etc. With technology the issue is not so simple. If a foreign technical company was providing a service to the UK and we went to war, then the British government would need to take steps to ensure that the service wouldn’t be stopped and British people in the UK took over running the service.

    I do accept that the government should regulate markets to encourage new firms to enter the market and ensure no one company becomes a monopoly. I believe this can be done with regulation.

    I believe governments should be more pro-active in giving support including financial support for businesses to develop in the regions with the highest levels of unemployment.

    However, I do believe that regulated markets are often the best way for most consumer goods to be provided.

    Governments set financial rules for their suppliers and could set other rules, but the more other rules the further the government moves away from always achieving the best value for money. I think the government often finds it difficult to comply with its rules and to use smaller UK companies. I would support changing the rules to ensure that smaller UK companies can compete with larger companies which met the financial rules set by government procurement policies.

    I am not aware of any protectionist measures which were introduced by any UK government between 1847 and 1900. Please can you give some examples?

    I don’t think either the nineteenth century Liberal Party or Conservative Party was anti-regulation. I think most governments introduced new regulations and recognised that markets had to be regulated. I am not very aware of USA politics and laws but I think you may well be correct they were not very good at introducing regulations in the nineteenth century.

  • Innocent Bystander,

    I am sorry to hear about your brother-in-law and friend.

    I did think you might have purchased your mobile phone on the internet. And therefore there would be no £20 in my example. However, there would be some of the £100 being spent in the UK, even if just on people unloading the goods and getting them to you, which I valued at £10. This £10 would be spent in the UK and some of it will end up increasing activity in the UK. So assuming 1/10th ends up paying for UK costs the multiplier effect would be £10, £1, 10 pence and 1 pence making £11.11 which is 1/9th. The multiplier effect is a real thing and not something just in an economic theory. I hope you can now understand how it works while we can argue about how small it is. You might think it is 1/19th or even smaller.

    Peter Martin,

    You have taken the wrong leaf. The leaf I want Liberal Democrats to take is to acknowledge there is £238 billion which the government could spend over the next four years. I don’t think it would be a good idea to spend all of this £238 billion because I think it would cause inflation not because I care about the national debt to GDP ratio.

    But (S-I) + (T-G) + (M-X) = 0

    Therefore if M-X = 3 and T-G = 1 then S-I = 4.

    Therefore you are wrong to assume that the government budget deficit has to equal the trade deficit.


    I don’t think your understanding of how Keynesian economics works is correct. It has nothing to do with increasing wages, this would be seen as a bad thing. If the government gave the money to people the theory says they would spend it, and the amount spent on British goods would depend on the marginal propensity to consume. It is by this amount by which aggregate demand is increased by. This increase in demand for UK goods would be met and the revenue from these sales would then it turn be spent in accordance with the marginal propensity to consume. The increase in GDP caused after the initial stimulus is the effect of the multiplier. During this process to increase production businesses would employ more people or increase productivity.

    It seems that you have accepted that S does not always equal I in a countries economy and that by including foreign investment/saving transactions to get S = I you should accept Peter Martin’s equation (S-I) + (T-G) + (M-X) = 0 for a nation’s economy.

    You still haven’t answer my question – Do you prefer Joe or Joseph?

  • Peter Martin 13th Jun '19 - 8:43pm

    @ Michael BG,

    I should point out that it’s not my equation! If you Google it you’ll see it in Wiki and they haven’t given me a mention 🙂

    (S-I) + (T-G) + (M-X) = 0

    But there’s something wrong with your numbers, somewhere, you’ve got 7 =0

    I think what i was saying was that we have a 3% of GDP trade deficit so M-X = 3

    If people want to net save 2% of GDP, S-I =2

    So T-G = -5 (We’ll leave inflation out of it for now.)

    What I meant to say was that if domestic net saving was zero the budget deficit and trade deficit would be equal.

    Yes, I appreciate that suggesting £238 billion could be spent over the next four years sounds progressive, but I don’t believe it’s good economics. It’s looking too far ahead. Things could change in that time. It’s rather like flying a plane and trying to keep it level. The pilot should be looking at artificial horizon in his cockpit and keep making constant adjustments. He probably won’t know what he’ll need to do 4 minutes into the future.

  • Joseph Bourke 13th Jun '19 - 10:32pm

    Michael BG,

    this is an explanation of the Marginal propensity to consume https://www.investopedia.com/terms/m/marginalpropensitytoconsume.asp
    “The marginal propensity to consume (MPC) is the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.”

    Savings in the national accounts is a residual of Income (including export income) less consumption include consumption of imports. All income not spent on consumption is invested.
    The domestic private sector includes households and firms. The net savings of this sector are classed as household savings as households own firms via share ownership.
    National savings include domestic savings +/- goverment surplus/deficit.
    Total savings are national savings plus the savings of the foreign sector.
    In the formula you quote above S+(T+G)+(M-X) = I

  • Peter,

    I had 8= 0, I should have added a minus signs, how about:

    M-X = 3 and T-G = 1 then S-I = -4?

    My point being if we had a trade deficit of 3% of GDP we still could have a budget surplus and it would be the nation’s Saving Investment balance which will fund both. Which would mean that foreign investors would be investing in UK business rather than lending their money to the UK government.


    Here is a better definition – “The marginal propensity to consume (MPC) is the increase in consumer spending due to an increase in income” (https://www.intelligenteconomist.com/marginal-propensity-to-consume/). It is often simplified to one household but it is not really about one household. It is about how much of the extra national income that will be spent on products and services produced in that economy. Now I understand why you think wrongly it is about higher pay.

    If you accept S+(T+G)+(M-X) = I
    Then it follows you accept:
    (T+G)+(M-X) = (I-S);
    And (T-G) + (M-X) + (I-S) = 0;
    And of course S Savings is domestic savings only.

    Therefore you accept what Peter Martin keeps telling you. Why do you find it so hard to admit this?

  • Peter Martin 14th Jun '19 - 7:05am

    @ Michael BG,

    Good point about S being the savings of the private sector which I meant to mention to Joe. He either didn’t appreciate that or was deliberately muddying the waters.

    Yep, your numbers add up now. The example you give corresponds to what we have temporarily when we have credit fuelled growth spurt usually accompanied by a bubble in an asset price of some kind. Housing mainly but it could be stocks. It is highly unlikely, though, we could induce anywhere near the same level of borrowing frenzy for investment for productive purposes.

    (S-I) can go negative but it’s not a good sign. Take a look at what happened shortly after it did just that in the USA.


    So we really should be aiming to keep S-I slightly positive. Most people are fairly conservative in their spending patterns and don’t want to ‘spend money they haven’t got’. The neolibs are happy to take advantage of this natural inclination with the electorate and extend the principle to government. So they’ll be wary of anyone who isn’t ‘fiscally responsible’. The truth of the matter, though, is that if everyone did that there wouldn’t be any money in the economy.

    The conclusion has to be that if we decide to keep S-I slightly positive we can’t have both a trade deficit and a balanced budget.

    It’s just simple arithmetic.

  • Joseph Bourke 14th Jun '19 - 12:40pm

    Michael BG,

    In the national accounting framework GDP can be calculated by summing income or summing expenditure in aggregate. Savings must be summed in aggragate also.

    Domestic private sector savings are the savings of one sector only.
    Total savings is a residual defined as total Income (GDP) less consumption spending.
    Investment is a residual defined as total expenditure (GDP) less consumption spending.
    All savings are invested.
    You can juggle that all you like but in the national accounting framework savings = investment. This is made clear in the links above to the blogs of Simon-Wren lewus or amy other competent economist you care to read.

    The defnition of the marginal propensity to consume is as given by Investopedia. The amount spent on British goods does not depend on the marginal propensity to consume (as you state above) or have anyting to do with how much is spent on imports versus domestic production.

  • Peter Martin 14th Jun '19 - 1:04pm

    @ JoeB,

    You say “All savings are invested” but you’ve still not answered my point about money kept in a piggy bank. How are those savings invested?

    Also Simon Wren Lewis writes :

    ” In the most simple model of a closed economy without government , income (Y) = ……………. So S=I by definition.”

    I don’t know about you, but most of us aren’t that interested in closed economies without a government!

  • Joseph Bourke 14th Jun '19 - 1:29pm

    Peter Martin,

    the defintion applies in all cases. When you add governent you must include government savings (surplus) or deficit (negative savings. When you add a foreign sector you must include non-domerstic savings (current account deficit or surplus).
    The assumptions undelying the national accounting framework are that savings are intermediated by financial instutiions to finance investments in fixed capital like bulidings, plant & machinery, intellectual property and stocks. See https://en.wikipedia.org/wiki/Saving_identity for more detail.
    “The saving identity or the saving-investment identity is a concept in national income accounting stating that the amount saved in an economy will be the amount invested in new physical machinery, new inventories, and the like. More specifically, in an open economy (an economy with foreign trade and capital flows), private saving plus governmental saving (the government budget surplus or the negative of the deficit) plus foreign investment domestically (capital inflows from abroad) must equal private physical investment. In other words, the flow variable investment must be financed by some combination of private domestic saving, government saving (surplus), and foreign saving (foreign capital inflows.”
    Cash kept in a piggy bank or jar eventually get deposited to a bank account and the notes will probably be burnt and replaced with new notes. If held for a very long period the notes may be withdrawn from circulation i.e. just canelled. There are minor tiiming differences that won’t register even as a rounding error in the national accounting framework.

  • Peter,

    I think I agree with you that the government should not set out in stone its spending for the next five years. It would be better to do it on a yearly basis. My reasoning is to do with the predicted economic growth level and the need for the government to ensure that it does not increase its spending by as much as the difference between the predicted growth figure and 3%. I believe it needs to cap its increased spending by the difference minus 1/6th of the difference (which I think is the needed to accommodate the extra growth produced by the multiplier).

    My new fiscal rule would be – when the forecast for economic growth is less than 3% then the government should increase its spending by 5/6th of difference between the forecast rate and 3%. I suppose I should have the negative side as well – when the forecast for economic growth is more than 3% then the government should reduce its spending by 5/6th of difference between the forecast rate and 3% or increase its revenue by the same amount or do a combination of both.

    Therefore I am not bothered about if there is a budget deficit or surplus. My aim is to try to convince my party that what is important is getting growth to as near to 3% as possible and not allowing it to get much above 3%. And to try to convince them that the budget deficit does not matter.

    Your argument that budget deficits are a necessary thing assuming we have a trade deficit might be a step too far for my party to accept.


    You have accepted that S = domestic savings. You have accepted S+(T+G)+(M-X) = I. Therefore S does not necessary equal I. The Wikipedia article, that you provided a link to, clearly shows that S does not equal I. It also states that I is not only what we think of as investments but also includes “inventory accumulation”. What I don’t understand is why you can’t just accept S does not necessary equal I.

    The definition I gave from intelligenteconomist.com is a much better definition as it has less room to allow for your confused view of what the marginal propensity to consume is. The marginal propensity to consume is indeed the amount of the increased national income which is spent on domestically produced items. The difference between what is taken in tax, saved or spent on imports (the leakages from the economy). This is a basic concept in Keynesian economics and I am really surprised that you do not understand this concept.

  • Peter Martin 14th Jun '19 - 3:51pm

    @ JoeB,

    Ok But if you add in the Government and Foreign Sector then we just end up with a single sector which is in principle no different from having a closed economy with no Government. The ‘savings’ you end up with isn’t the ‘S’ from the sectoral balance equation. Both S (savings) and I (investment) are defined as from the Private Domestic Sector.

    If you look at the wiki link I posted at 7.05 am you can clearly see that (S-I) is labelled “private”.

    The “national accounting framework” (your exact words) is always taken to mean the relationships discussed in the same link which ends up with:

    (T-G) + (S – I) + (M – X) = 0

    In this context it is simply not true to say S-I = 0

    Normally I can understand where people are coming from, even when I disagree or think they are wrong, but I’m at a total loss to understand what you are trying to show and what relevance this has to “moving away from neoliberal economics”.

  • Michael BG,

    I have given copious information on the saving identity in the national accounting framework and explained why economists state savings = investment in the national accounting framework. This is exactly what the Wikipedia article explains.
    The intelligent economist definition of the marginal propensity to consume is exactly the same as given by Investopedia. They even give an example to help you:
    “For example, if an individual receives a $1,000 bonus on top of their normal annual salary. Now they have an extra $1,000 to spend that they didn’t before. Suppose, the individual decides to spend $750 of that $1,000 on a vacation, then his or her Marginal Propensity to Consume will be 750/1000 = 0.75
    If the individual saves the entire $1,000 then his/her MPC will 0 and if he/she spends the entire $1,000 then their MPC will be 1.”
    As incomes increase there is a higher propensity to save. The MPC formula is a estimate used in economic models to reflect this tendency.
    It is part of the calculation of leakage from the circular flow of income in calculating any expected positive or negative multiplier effect arising from stimulus spending. While the amount saved from stimulus spending is a leakage, it may be relatively small compared with the main areas of leakage i.e tax and spending on imports. Tax is currently around 37% of GDP and spending on imports is circa 38% on total non-government in GDP, while the savings ratio is said to be 4.5%.

  • Peter Martin,

    in the MMT reframing of the saving identity, you state that S-I equals net savings. However, this formulation of net savings has no substantive meaning. It merely compares domestic savings with the amount of capital spending in the economy.
    As noted earlier, new investment is not dependent on pre-existing savings. Investment occurs first and creates savings via the money creation process. This is the point Keynes was making a century ago, Investment is not limited by the stock of savings, it is driven by the cost of capital and the level of demand. Demand can only increase by the productive capacity of the economy to grow . In a full employment economy with very little idle capacity that is encapsulated in Total Factor Productivity (TFP). TFP is often considered the primary contributor to GDP Growth Rate and is driven by Technology growth and efficiency i.e. productivity of labour and capital combined.

  • Peter Martin 14th Jun '19 - 6:08pm

    @ JoeB,

    I think we are getting off the point. The OP suggest a fiscal rule “to keep debt to GDP falling gently in normal years when there is no recession.”

    Is this a realistic ‘ambition’ for a country like the UK which traditionally runs a current account deficit in its trade?

    Whatever you think (S-I) may or may not mean in the National accounts we do, I hope, agree on what T-G means. Maybe you could take a look at the first graph in wiki link and suggest some plausible values that that the UK could aim for and ‘achieve’ T-G =0 (or close to it) consistently.

    I’m saying its just not possible unless we somehow manage to run a surplus in our current trading account. The sectoral balances aren’t the be all and end all. They don’t say anything about growth or inflation. But they do say something about the wisdom (not) of trying to balance a government budget at the same time as having a trading deficit.

  • Joseph,

    Just posting copious quotes does not prove you understand what you are talking about. I have always assumed that you did understand, now I am no longer convinced as you just keep quoting without understanding what is being discussed.

    Do you understand

    S+(T+G)+(M-X) = I

    where S = Savings, that is domestic savings?

    The individual is an example, but the concept as it is normally used in Keynesian economics applies to the whole economy. The marginal propensity to consume is usually referred to the whole economy, especially in Keynesian terms. This is clear from the Wikipedia entry – “MPC’s importance depends on the multiplier theory. MPC determines the value of the multiplier” (https://en.wikipedia.org/wiki/Marginal_propensity_to_consume). Do you understand this?

  • Peter Martin 14th Jun '19 - 7:49pm

    @ JoeB,

    “keeping debt to GDP falling gently in normal years when there is no recession is a fiscal policy that I would endorse and is the basis of Liberal Democrat economic policy.”

    You won’t be surprised to see me describe this as highly neoliberal. I’d be inclined to cut you some slack if you’ve included some sectoral balance analysis in your calculations. If you have, maybe you could show me?

    You’ve cleverly left yourself a neat get-out with the inclusion of the word ‘normal’. It’s a long time since we’ve had what might be a ‘normal’ year and I wouldn’t expect another one any time soon. Any government will need all the get-outs it can manage when making these kinds of promises. What was the coalition’s promise? To balance the budget over the course of a Parliament? How well did that work out?

    The criticism shouldn’t be that you didn’t do it. It should be that you didn’t realise you were making a stupidly impossible promise to begin with. This sort of policy is just a continuation of the same mistake. I suspect you know that, deep down, and hence the get-out, but you think you have to play the game and make yourselves appear to be ‘fiscally responsible’.

  • Peter Martin,

    sectoral balance analysis is one tool among many for monitoring changes in the composition of saving and borrowing by households and other sectors in the economy. A useful source of information but of limited use in determining cause and effect.
    In the UK, immediately prior to the financial crisis there was a significant increase in the level of surpluses accumulating in the corporate sector in particular. This confirms what was already known from other economic indicators. There was a rapid increase in household borrowing for both consumption and house purchases creating a house price and consumer debt bubble. Firms were not increasing or were reducing investment spending. Wage growth was stagnating and there was a big expansion of working tax credits that relied on bloated tax receipts from a booming financial sector that was lending increasingly unwisely.
    All of this was being pointed out prior to the financial crisis by Vince Cable, but it was falling on deaf ears with Gordon Brown as chancellor. So here we are today, still dealing with the consequences of failure to take corrective action before the bubble burst.

  • Peter Martin 14th Jun '19 - 9:13pm

    @ JoeB,

    I previously gave you a graph showing how the US Fed were putting up interest rates prior to the 2008 crash. This is graph of UK base rates.


    This shows the BoE raising rates prior to 2008. Not to the same extent but still making the same mistake as you, yourself, suggested the other day. The thinking is that if there is too much private debt in the economy you need to increase rates to cure the problem. It’s too late by then. The Fed and BoE were simply hastening the crash.

    It’s not that the BoE and Gordon Brown were unaware of the problem looming prior to 2008. It was that the economic mainstream that had it all wrong. You can’t regulate an economy on monetary policy alone. Sure, you can speed up the economy by lowering interest rates and deregulating the credit market but you can’t safely slow it down by doing the reverse. You’ll likely just crash it as debt deflation sets in.

    Furthermore, the mainstream view was that Gordon Brown shouldn’t try to use fiscal policy to regulate the economy. That function had been passed to the monetary committee at the BoE. His job was to run the government much as you and I would run a household. Spend the money that comes in and maybe borrow a bit for capital projects, keeping Budget deficits manageably small. The figure of a 3% budget deficit wasn’t set in stone like it was in the euro countries but that was the sort of level that was considered acceptable. Just enough to provide some growth in Govt spending as the economy expanded. That was indeed close to the deficit that New Labour actually ran prior to the GFC.

    Spain had done as well as anyone prior to the GFC to keep within SGP rules. Rules that were designed, as stated on the tin, to ensure “stability and growth”. When the crisis hit it didn’t do them the slightest bit of good. Were the neoliberal authors of the SGP serious about this or did they have a warped sense of humour? I can’t know for sure, but I’d say they were serious but they didn’t know what they were talking about and they didn’t know what they were actually doing.

  • The IPPR issued a report last year https://www.ippr.org/research/publications/on-borrowed-time noting rising house prices are stopping renters buying, giving people a belief they have more money than they actually do and fuelling debt-based spending sprees. A period of soaring house prices has directly preceded financial collapses time and time again in countries across the world. The IPPR report recommends:
    “The Bank of England should be given a target to control house price inflation.”
    Since 1979, house prices in the UK have increased tenfold. That’s twice the increase of prices in general. This change has had two effects on the economy. Homeowners are now, relatively, richer than they were 40 years ago, and they’ve also found it easier to get into debt – borrowing cheaply against the increased value of their homes. But it’s not just borrowing against houses that has risen.
    “There is a clear correlation, not only between mortgage debt and house prices, but also between consumer credit and house prices,”
    “High and rising asset prices exert upward pressure on the exchange rate by increasing international demand for UK assets [all else being equal], making UK exports more expensive and imports cheaper.” That also puts pressure on the state of the UK economy.
    “These processes created a self-reinforcing cycle in which increased levels of bank lending pushed up house prices, and high house prices allowed consumers to borrow more against the rising value of their home.”
    And over a number of years that pushes the UK deeper and deeper into a position where the only way we can keep going is through borrowing more and more. Until we can’t, and a new financial crisis ensues..
    “Asset price rises boost household wealth, allowing consumers to finance higher levels of current spending through debt,”
    The Bank of England’s Financial Policy Committee currently places controls on loan-to-value and debt-to-income ratios – that is to say what percentage of a house’s total value you can borrow and how big a loan you can get compared to your wages.
    “The Bank of England should be given an explicit house price inflation target.”
    “The aim of such a target would be to set property price expectations (a critical driver of house price inflation), reduce excessive debt, and reduce capital inflows by disincentivising property investment.”

  • Joseph,

    From your post of 7.55 pm of yesterday, I still have no idea if you understand the concept of the national marginal propensity to consume rather than applying just to individuals. It is this national marginal propensity to consume which is important for Keynesian economics and calculating the multiplier. In the quote you gave yesterday at 9.34pm Keynes calls it “the community’s propensity to consume”. Do you understand this national Keynesian concept?


    Looking at the 2018 budget book the budget deficit is only 1.9% of GDP with a forecast of 1.4% for 2019-20. I think the current account trade deficit was 4.4% of GDP for 2018. Therefore T-G does not equal M-X and S-I is negative. From this it would seem that the government would have been wrong to set the budget deficit to match the trade deficit. Also if the deficit as a percentage of GDP is less than economic growth then the national debt to GDP ratio will decrease.

  • Joseph Bourke 15th Jun '19 - 4:24pm

    Michael BG,

    yes, I understand the MPC very well. Well enough to know that the MPC does not determne the amount spent on British goods. The increase in income can equally be spent on imported goods. This is what you need to know about the MPC:
    – Marginal Propensity to Consume is the proportion of an increase in income that gets spent on consumption. Consumption includes spending on both domestically produced goods and imported goods.
    – MPC varies by income level. MPC is typically lower at higher incomes. The MPC factor in economic models is a compound estimate across a population with varying individual MPC’s https://www.investopedia.com/ask/answers/050115/how-do-you-calculate-marginal-propensity-consume.asp
    – MPC is a key determinant of the Keynesian multiplier, which describes the effect of increased investment or government spending as an economic stimulus.
    To calculate the mutiplier you need to take the MPS (Marginal propensity to save + MPT (Marginal propensity to tax+ MPI (Marginal propensity to import) together as the MPC factor.

    It is not the budget deficit that matches the current account deficit, it is national savings (i.e. excluding savings of non-residents invested via the capital account) less investment spending that equals the current account (i.e. the current account is the balance between national savings and national investment. See article for explanation https://www.economicshelp.org/blog/6411/economics/current-account-savings-investment/

  • Peter Martin 15th Jun '19 - 8:42pm

    @ JoeB,

    “In essence, unemployment results from a lack of private investment”

    How about

    “In essence, unemployment results from a lack of spending” ?

    And of course it doesn’t matter if that spending is public or private. A teacher, or even a cleaner, employed in a state school is just as employed as one in a private school. No more and no less. And does it matter if we count the spending as capital or current? Not in the slightest.

    Do we have to raise taxes to employ the public sector workers? Possibly yes.

    @ Michael BG,

    “…..budget deficit is only 1.9% of GDP with a forecast of 1.4% for 2019-20. I think the current account trade deficit was 4.4% of GDP for 2018. Therefore T-G does not equal M-X and S-I is negative.”

    On your figures S-I is indeed negative to the extent of ~ 2.5% of GDP. If you’re right we are in deeper s*** than I thought!

    It’s just another credit bubble! And the neolibs answer to creating too much private sector debt? Create even more debt by lowering interest rates even further!

  • Joseph Bourke 16th Jun '19 - 12:11am

    Peter Martin,

    we discussed above the savings identity. In a closed economy, national savings is the sum of private saving and the public saving (government surlplus or deficit). In an open economy, national saving is the sum of private savings, the public saving, and net capital inflows.

    Investment spending is an important category of real GDP. Not only is it usually the most volatile part of real GDP, but investment spending on physical capital is also an important contributor to economic growth. So, if a firm wants to build a new factory, where does it get the funds to build it? Usually, firms borrow that money and the spending on investment creates savings. Remember that in economics the word “investment” refers to spending by businesses on physical assets, other non-current assets and stockbuilding (not investment in financial assets) That business capital will require borrowing, so investment requires loans.

    As Keynes wrote “employers would make a loss if the whole of increased employment were to be devoted to satisfying the increased demand for immediate consumption. Thus, to justify any given amount of employment there must be an amount of current investment sufficient to absorb the excess of total output over what the community chooses to consume”

    This condition can be satisfied by maintaining a level of public investment that together with private sector investment is broadly matches the desire for savings. If the government is borrowing only for investment the desired level of savings and the actual level of investment can be maintained in equilibrium

    If the government is borrowing the savings of the domestic private sector for spending on consumption and households are borrowing non-resident savings to buy existing housing stock at ever higher pricss that pushes the UK deeper and deeper into a position where the only way we can keep going is through borrowing more and more. Until we can’t, and a new financial crisis ensues.

  • Peter Martin 16th Jun '19 - 6:44am

    @ JoeB,

    “In an open economy, national saving is the sum of private savings, the public saving, and net capital inflows”

    Ok so what does this mean in terms of T,G,S etc which are the familiar and accepted terms of the National accounts? What is “public saving” in these terms? The Govt has a debt as we all know.

    “If the government is borrowing the savings of the domestic private sector……”

    Who said they were? Why would the currency issuer need to borrow my savings? If I buy some National Savings certs, Premium bonds, or even Govt gilts it’s not because I’ve just received a letter from Philip Hammond saying the Treasury are a bit short this month and could I see my way to lending him a bit to tide him over.

    The system works the opposite way around to this. The bigger the Govt deficit the more money stays out in the economy looking for a home. This pushes down interest rates. That’s why they are now so low, and they are low because the Govt wants them low. There’s a common term ‘crowding out’ to describe what you are getting at but it really should be ‘crowding in’.

    And who is the ‘we’ that is borrowing more and more? Yes there is a problem if the economy relies on too much private debt because ‘we’ in the private sector have to pay the money back. The Government doesn’t. That’s the difference. So yes there is an inflation risk if there is too much borrowing and spending generally. It doesn’t matter if that spending is by the private sector or the public sector. The risk is debt deflation later in the private sector when it comes to repaying the money.

  • Peter Martin, Michael BG – how about?
    M-X = -3 and T-G = 1 then S-I = 2?
    Or: M-X =-2 and T-G =0 then S-I = 2?

  • Joseph Bourke 16th Jun '19 - 1:42pm

    Peter Martin,

    Why do governments borrow? To maintain spending when tax revenues are less than predicted; Automatic fiscal stabilisers in a recession or slowdown; investment to boost productive capacity and economic growth; to temporarily meet rising cost of healthcare and pension costs rsulting from an ageing population; political populism/reelection; defence spending during war; to take advantage of periods when international borrowing costs are low paticularly when investment can generate economic growth that reduces the real debt burden.

    What government uses its borrowing for is key to financial stability. Japan’s gross government debt may be 236 percent of GDP, but after netting out government-owned financial assets the International Monetary Fund estimates net debt at a much lower 152 percent.

    Moreover, the Bank of Japan owns government bonds worth 90 percent of GDP, and ultimately returns to the government as dividends all the money it receives from the government as interest on the bonds it holds. Deducting both public financial assets and all the debts the Japanese government and people effectively owe to themselves, the debt level is only about 60 percent of GDP and not rising. This level of debt could be sustainable even if fiscal deficits remain high for many years. UK debt is at a similar level after deducting debt held by the BofE.

    Keynes advocated higher government borrowing in a recession. Keynes noted in recession, firms cut back investment and households cut back spending. This causes a rise in private sector saving and a rise in unused resources. In this circumstance, government borrowing will not cause crowding out, but inject money into the circular flow and ‘kickstart’ economic activity. Government borrowing will enable economic recovery and an improvement in tax revenues.

    What is crucial here is savings are deferred consumption. When a government is investing and creating the condiotions for economic growth it is creating the savings that will be spent as the assets produced are consumed. If there is no or mimimal return on savings, inflation just eats away the purchasing power of national savings depleting their value in much the same way as a tax on savings accouns woud. This is the consequence of over-consumption.

  • Joseph,

    You seem to want to make something which is quite simple to understand a lot more complicated. I have already mentioned that when taking about Consumption we are discussing domestic consumption just as Savings is domestic savings when discussing Keynesian theory. I have already informed you that there are leakages – what is taken in tax, saved or spent on imports and what is not a leakage is domestic Consumption.

    Sometimes it seems you do understand then you quote something which gives the impression that you don’t understand.

    Do you accept that when discussing Consumption and Marginal Propensity to Consume when discussing Keynesian economics and the Multiplier we are discussing domestic consumption and marginal propensity to consume is the aggregate for the national economy?

    You have already stated that S+(T+G)+(M-X) = I is true. So (S-I) + (T+G) = (X-M). To discuss other definitions is just to complicate things.

    You wrote, “Keynes noted in recession, firms cut back investment”. Do you accept that with Brexit businesses have cut back on investment and therefore the government needs to increase its spending to created extra demand so businesses will invest to meet this extra demand?


    Why is it a problem if Investment is more than Savings and it is being funded by foreign investment?


    The figures I was presenting were UK figures. It is unlikely that in the medium term that M-X will be negative with exports being greater than imports. I am not bothered that it is negative. Many UK governments have tried to encourage UK industry to turn it round but none have succeeded. Some countries do it by devaluing their currency, but this will increase inflation and I think lead to a decline in economic growth.

  • Peter Martin 16th Jun '19 - 3:07pm

    @ Thomas,

    Your examples require running a trade surplus. Which could be possible but the government would have to intervene to keep the value of the pound down. Just as all net exporters keep down the value of the currency. This could well involve exchange controls. If you want a current account surplus you have to have a capital account deficit. The two sum to zero. You don’t want inward flows of money.

    @ Joe B,

    You ask:

    “Why do governments borrow?”

    They don’t. They just swap one type of IOU for another type. Usually they hand out gilts which is just a govt IOU with some small amount of interest attached in exchange for pounds which is just a govt IOU with no interest attached. So why do they want to do this? Why pay out interest when there is no absolute need to? The answer has to be that it is a matter of choice and they want to set the level of interest rates as part of their monetary policy.

    Sometimes they do it the other way around. They hand out pounds and take in gilts to boost the value of the gilts in the market. Thereby decreasing interest rates.

    Japan’s gross government debt may be 236 percent of GDP, but after netting out government-owned financial assets the International Monetary Fund estimates net debt at a much lower 152 percent.

    The odd thing is that governments tend not to class currency as debt. I’ve noticed this with a discussion of so-called Italian mini-bots. The question asked is are they currency or are they debt? The only sensible answer is that they are both. To pretend otherwise causes the kind of confusion you highlight.

    If govts replace, in the wider economy, all their IOUs which bear interest and which are counted as debt (bonds) with IOUs that don’t bear any interest and aren’t counted as debt (currency) then hey presto the debt disappears! Or appears to! But does anyone really think anything has changed?

  • Joseph Bourke 16th Jun '19 - 4:43pm

    Michael BG,

    “To discuss other definitions is just to complicate things.”

    Defintions are important in economics. If you are not talking the same langaguage you end up talking past each other.
    Savings in economic terms has a specific defintion. It means only one thing—consuming less in the present in order to consume more in the future. In the national accounting framework i.e. output produced (GDP) less goods and servics consumed. Investment also has a specific definition. It is output produced (GDP) less goods and servics consumed or goods produced for consumption in the future. These investment goods are durable goods purhased by households, businesses, and governments. Private (nongovernmental) investment is commonly divided into three broad categories: residential investment, nonresidential, or business, fixed investment, which accounts for most of the remainder; and inventory investment.
    Once you are using a common economic language the savings identity is clear.
    The purchase of investment goods typically involves the intermediation of financial institutions to create and lend money to buyers. This spending on investment offsets the leakage of demand from the circular flow of money in the economy that money savings create.
    As long as sufficient levels of investment are maintained to accomodate desired levels of saving then the supply and demand for goods in the economy can be maintained at a full employment equilibrium.
    To grow the economy requires a constant stream of investment in infrastructure, technology, skills development and innovation to grow the productivity of both labour and capital as that arch neo-liberal John McDonald describes in this article https://www.theguardian.com/commentisfree/2017/nov/26/borrowing-to-invest-labour-economy-tories-growth
    “Not all borrowing is good. After missing so many deficit targets, the Conservatives are spending billions on interest payments because austerity has failed to get wages growing and tax receipts increasing. Unlike Labour, they borrow to pay for their failure rather than invest in the future. Our “fiscal credibility rule” commits us to borrowing only for investment, as well as reducing the debt burden over the course of a parliament.”

  • Michael BG – “The figures I was presenting were UK figures. It is unlikely that in the medium term that M-X will be negative with exports being greater than imports. I am not bothered that it is negative. Many UK governments have tried to encourage UK industry to turn it round but none have succeeded. Some countries do it by devaluing their currency, but this will increase inflation and I think lead to a decline in economic growth” – exports exceeding imports by a small margin is a desirable goal for a hypothetical Libdem government. With Britain’s current economic structure that gears towards financial services/asset stripping, foreign capital inflows imo should be reversed as they tend to go into short-term, speculative investments rather than long-term ones, and a reversal of trade balance and capital inflows can reduce the level of (private) debt.

    Also, encourage exports is also founded by most international trade academic research to have significant positive impacts on firms’ efficiency and productivity (unless you are an underdeveloped nation exporting primary products only). This we must consider, because it is normally neglected by macroeconomics.

    Additionally, even when ignoring exchange rate factor, British manufacturers are simply less productive and competitive than its OECD peers, due to lack of capital investment and lack of R&D spending. Our Gross fixed capital formation (capital investment measure) never exceeded 20%, and R&D spending never exceeded 2% of GDP. British factories are also less modern technologically, evidenced by the fact that Britain’s level of automation in manufacturing (both total and per 1000 industrial workers figures) lags behind most major OECD members. Fixing these issues will massively improve Britain’s competitiveness in manufacturing.

    If Michael BG aims to get a 3% GDP growth, politicians can easily cheat, by increasing short-term government spending (typical Labour solution), or worse, by encouraging “Tory-style market solutions” to boost GDP via jacking up credit growth and thus credit-driven asset bubbles. However, targeting R&D spending to 3-4% of GDP and (non-residential a.k.a plant and machinery) capital investment to over 20% of GDP will work towards sustainable economic growth.

  • Laurence Cox 16th Jun '19 - 5:31pm

    I was looking at some other blogs on economics and came across this posting from Gavin Jackson of the FT: https://medium.com/@GavinHJackson/speech-on-the-productivity-puzzle-58e54869658

    The point he makes that we are not measuring productivity correctly impinges on growth forecasts and therefore the money available for the Government to spend going forward; also there are decisions we have made (for example to increase recycling) that don’t increase GDP but do improve the environment.

  • Peter Martin 16th Jun '19 - 5:49pm

    @ Michael BG,

    “Why is it a problem if Investment is more than Savings and it is being funded by foreign investment?”

    Firstly, if S-I is negative, you don’t know where the net borrowing is coming from. If M-X is zero then the Government is taking it from the economy as a surplus. S-I is is then the deficit of the private sector.

    If you look at what happened in the USA on the first graph in this link you can see that S-I was either negative or low between 1997 and 2007. It was this build up of debt in the US private sector which led to the 2008 crash.


  • Joseph Bourke 16th Jun '19 - 6:13pm

    That’s an interesting article, Laurence. I have not seen that kind of explanation by sector before. The author concludes:
    “… the biggest thing is this “the allocation effect”. What that means is there has been an increase in low productivity jobs, more workers are being allocated to low productivity industries. Hospitality, delivery drivers, care workers that kind of thing.

    So what can we do. I don’t think we can or should go back to the past. We do not want to go back on environmental on financial regulation, as the US is doing right now. But what we can do as a society is try to be open to new opportunities and technologies that are coming along and that means investing in the basics of education, infrastructure and research to make sure that we are able to make the most of things like e-commerce and working out what to do about those who lose out from these transitions.”

  • Peter Martin 16th Jun '19 - 6:18pm

    @ JoeB,

    There’s plenty of people on the left who may be Marxist, or who claim to be, but don’t understand how 21st capitalism works. Marx was always keen on idea that socialists should analyse the system to be replaced. Marx had plenty to say about the capitalism of the 19th century. And it is, IMO, important to realise that capitalism has moved on. 21st century capitalism isn’t the same. He was quite right, though, when he said:

    “The ideas of the ruling class are in every epoch the ruling ideas, i.e. the class which is the ruling material force of society, is at the same time its ruling intellectual force. The class which has the means of material production at its disposal, has control at the same time over the means of mental production”

    It’s possible JMD does understand MMT and how 21st century capitalism works but thinks trying to explain this to a sceptical and brainwashed electorate won’t be a winning formula. But it’s also possible that he doesn’t!

    Whatever, the so called “fiscal credibility rule” is highly neoliberal. The New Statesman doesn’t get it quite right with:

    “Contrary to the claims of supporters of Modern Monetary Theory, the party’s policy does not mandate austerity.”

    Anyone who understands MMT wouldn’t actually say that. Neoliberalism isn’t always synonymous with austerity. Prior to the 2008 GFC we had neoliberalism but we didn’t have austerity.

    Nevertheless imposing a so-called ‘fiscal credibility rule’ severely limits any Govt’s room for manoeuvre. To keep the economy moving and growing it may well be necessary to break it. This will just give ammunition to your neoliberal opponents who will claim you’ve failed by your own set standards? Why do that in the first place?


  • Peter Martin,

    this is an MMT critique (and Keynesian critique) from a marxist economist https://thenextrecession.wordpress.com/2019/01/28/modern-monetary-theory-part-1-chartalism-and-marx/ and https://thenextrecession.wordpress.com/2019/02/03/mmt-2-the-tricks-of-circulation/. You may find it of interest (or not) but the conclusion in part 2 is not favourabe “…according to MMT, capitalism can be saved and achieve harmonious growth and full employment by ‘tricks of circulation’. MMT ignores or hides the social relations of exploitation of labour for profit. And by selling ‘snake oil’ (MMT) instead, it misleads the labour movement away from fundamental change.”

    Notwithdtanding the Marxist critique, I think there is a fundamental problem with any economic analysis that ignores economic rents and capital accumulation. GDP measures income from production only. It does not measure capital accumulation arising from the appreciation of assets (capital gains) and yet this is what consistutes the bulk of money savings today. It is not savings out of income that produces the bulk of housing equity or inflates the market value of shares in pension funds, private equity funds and investment portfolios to ever higher price/earnings ratios. Yet it is this capital accumulation from capital gains that commands the purchasing power to squeeze wages, drive up rents and put house prices out of the reach of anyone without inherited wealth.
    The Resolution Foundation reports https://www.theguardian.com/business/2019/jun/15/second-homes-now-worth-nearly-1tn-to-britons that property wealth in Britain from second homes has risen by more than 50% over the past two decades to reach nearly £1tn. The number of British adults in families who have wealth from properties additional to their own home has risen by more than 50% this century to reach 5.5 million – around one in 10 of the UK population. The proportion of young families owning their home has halved since 1990.
    Another report from the NAO this week https://www.theguardian.com/commentisfree/2019/jun/14/help-to-buy-well-off-housing-crisis-afford-market says “Help to buy has helped the well-off – and made the housing crisis worse. More than half of those using the scheme could already afford a home. More than 8,000 of them even had a household income of over £100,000.”

  • Peter Martin 16th Jun '19 - 9:42pm

    @ JoeB,

    “I think there is a fundamental problem with any economic analysis that ignores economic rents and capital accumulation………”

    The fundamental problem isn’t with MMT and which doesn’t ignore these issues. Most criticisms of MMT are based on similar erroneous statements. However, it does seek to separate the economic from the political. So should we have a LVT? There’s no reason why not, but this is a political issue. Should we restrict capital accumulation and have greater social equality? Again, this is a political question. Should we nationalise the railways and utilities etc? Once again a political issue.

    So, although MMT is usually described as being of the left, there’s no reason why those on the right can’t use it too. If they did they’d almost certainly make far fewer mistakes!

  • Joseph Bourke 16th Jun '19 - 11:09pm

    Peter Martin,
    The fundamental problem is with most standard economic models as Joseph Stiglitz explains http://evonomics.com/joseph-stiglitz-inequality-unearned-income/
    “rents are increasing (due to the increase in land rents, intellectual property rents and monopoly power). As a result, the value of those assets that are able to provide rents to their owners— such as land, houses and some financial claims— is rising proportionately. So overall wealth increases, but this does not lead to an increase in the productive capacity of the economy or in the mean marginal productivity or average wage of workers. On the contrary, wages may stagnate or even decrease, because the rise in the share of rents has happened at the expense of wages.

    The assets which are driving the increase in overall wealth, in fact, are not produced capital goods. In many cases, they are not even ‘productive’ in the usual sense; they are not directly related to the production of goods and services. With more wealth put into these assets, there may be less invested in real productive capital… a disproportionate part of savings in recent years has gone into the purchase of housing, which has not increased the productivity of the ‘real’ economy.

    Monetary policies that lead to low interest rates can increase the value of these ‘unproductive’ fixed assets— an increase in the value of wealth that is unaccompanied by any increase in the flow of goods and services. By the same token, a bubble can lead to an increase in wealth— for an extended period of time— again with possible adverse effects on the stock of ‘real’ productive capital. Indeed, it is easy for capitalist economies to generate such bubbles. The increase in the wealth– income ratio may still have more to do with an increase in the value of rents than with an increase in the amount of productive capital. Those who have access to financial markets and can get credit from banks (typically those already well off) can purchase these assets, using them as collateral. As the bubble takes off, so does their wealth and society’s inequality. Again, policies amplify the resulting inequality: favourable tax treatment of capital gains enables especially high after-tax returns on these assets and increases the wealth especially of the wealthy, who disproportionately own such assets (and understandably so, since they are better able to withstand the associated risks).

  • Joseph,

    I agree we should use the same economic language and not confuse things by defining things differently depending on the context. And the one I always use is the Keynesian one where C + S + T + M = C + I + G + X and you accepted when you accepted S+(T+G)+(M-X) = I.

    Do you agree with the “neo-liberal John McDonald”, that austerity could get wages growing and therefore it doesn’t deflate the economy?


    As I have said I am not bothered by having a trade deficit in the region of 3 or 4% of GDP. However, I do think the government should encourage business to invest more in R & D and for the government to provide internal demand to encourage businesses to invest to increase productivity.

    Increased asset prices do not increase GDP.

    I would hope that my aiming to increase demand higher than current expectation would lead to businesses to increase their planned investment to meet the expected increased demand and so also increase our productivity.


    Why is it worse if the government has a surplus rather than more is being saved in the economy that invested, which is what you implied? Why can’t the money in either case be used to buy assets causing an asset bubble?

  • Peter Martin 17th Jun '19 - 6:11am

    @ JoeB,

    There’s nothing I can see, either in your Stiglitz quotation or in what you’ve said yourself later that is contrary to any principle I know of in MMT. Yes, I agree wealth is far too unequal. Yes, I agree that rentier capitalism should be discouraged. Yes, I agree, a LVT could be one way of making some useful remedies in that direction. But it’s just me saying that! Nothing to do with MMT.

    MMT is just a lens,through which we can look at the economy and better understand how it works. So to that extent it’s totally apolitical. Having gained that understanding then we can better know the viable political options open to us. The problem MMT highlights with the kind of Georgism you espouse isn’t necessarily due to any disagreement MMT advocates might have with your motivations. It is that Georgists are still stuck on the idea they can replace, to a greater or lesser extent, conventional taxation on incomes and purchases with a land tax. If the amount of money that comes in is the same then we can all be better off – according to Georgists. But MMT says probably not. Because we are moving away from taxing people who would otherwise probably spend that money to taxing those who probably wouldn’t. The counter-inflation effect would be markedly different in both systems. That’s not to say you shouldn’t do it.

    However Georgists first need to recognise that the purpose of taxation, in the 21st century fiat money system, isn’t to raise to spending money for the government. Then they can start to make the kind of sensible analysis which is necessary before heading off in that direction.

  • Peter Martin 17th Jun '19 - 6:12am

    @ Michael BG,

    I’m not saying it is worse. I’m saying its more deflationary for the Government to try to run a surplus than a deficit. Sometimes that’s the best thing to do if the economy is overheating and inflation needs to be reduced. In a closed economy we have:

    G-T = S-I

    So if the Government tries to increase its deficit the tendency will be for the private sector to increase its savings. On the other hand if the Private sector is determined not to increase its savings the Government won’t be able to increase its deficit even if it tries to. This actually is the basis for how a stimulus actually works. If the Government simply increases its deficit and the private sector increases its savings then there isn’t any stimulus.

    So it might sound a bit odd but a successful Govt stimulus is brought about by a Govt trying and failing to increase its deficit.

  • Joseph Bourke 17th Jun '19 - 1:36pm

    Keynes made the point that inequality was necessary in capitalism to maintain the circular flow of production and spending. Savings and investment were two sides of the same coin and only those with income surplus to their immediate needs could save.
    In the national accounts. consumption of of owner-occupied housing services is estimated by using imputed rents. As this article notes https://notayesmanseconomics.wordpress.com/2016/05/23/the-problem-that-is-imputed-rent-and-hence-gdp/
    “A growing proportion of GDP is nothing more than earnings from property. 12.3% of the UK’s measured GDP in 2014 was rent and “imputed rent”…….Since 1985, rent and imputed rent have almost doubled as a share of GDP, from 6.2%.2
    This is point that stiglitz is making and a key element of the so called productivity puzzle. Much of the investment that is occurring is in the property sector and mortgage lending is where the great bulk of household lending occurs. The reason this sector attracts investment is capital gains income that does not appear in GDP because it is not income from production.
    What does appear in GDP iconsumption figures is the higher value of imputed rents.
    Keynes thought inequality was necessary to ensure that capitalists could fund continuing investment in productive capacity. Today that inequality is necessary to maintain the expontial rise in the value of urban land. Increaing levels of Income in the form of rents and interest on ever higher house prices are extracted from the share of economic vaue produced that goes to wages and profits arising from productive activities.
    These problems cannot be solved by macroeconomic demand management. This reuires investment in publlic housing, reform of planning laws and careful regulation of mortgage lending.
    Stiglitz in his aricles concludes: “The economic policies required to change this are not difficult to identify. We need more investment in public goods; better corporate governance, antitrust and anti-discrimination laws; a better regulated financial system; stronger workers’ rights; and more progressive tax and transfer policies. By ‘rewriting the rules’ governing the market economy in these ways, it is possible to achieve greater equality in both the pre- and post-tax and transfer distribution of income, and thereby stronger economic performance.”

  • @ Joe Bourke “Keynes made the point that inequality was necessary in capitalism to maintain the circular flow of production and spending.”

    Keynes wasn’t morally correct on everything, Joseph. He was a man of his time.

  • Peter,

    Indeed running a budget surplus is deflationary, which is why it should only be done where the economy is trying to expand too fast and demand has to be removed from the economy to control inflation. This is I suppose the part people don’t understand. I have seen many posters here state that the government should run a budget surplus when they state the economy is in the “up cycle”.

    I was reading something the other day which stated that if Savings were increased the economy would contract. If I remember correctly the argument was that with the increase in Savings, there would be an increase in the number of goods held in warehouses which would lead to a reduction in production and this would lead to a reduction in the economy as people were made unemployed and a new equilibrium level would come about but with no increased stock piling and reduced production. However, if government spending increased by the increase in savings then the economy wouldn’t contract as demand in the economy would be stable and there would be no increase in goods held in stock.

    With your example I don’t things are as simple. If the government increases its expenditure and the marginal propensity to buy imports is 40% and the government takes 40% and the marginal propensity to save is 5%. A new equilibrium we come about where the economy has grown and the increase in government expenditure is financed by increased revenue and by increased savings and increased foreign investment.

  • Thomas,

    Neil O’Brien identifies lower investment in R & D, machinery and training as causes of the UK’s productivity problem. He proposes increasing capital allowances across the whole country and even more in “lagging regions” by “increasing capital allowances to match the most competitive rates in the world” and introducing “new allowances where there are gaps (suggested by business groups)” plus introducing enhanced allowances for the “lagging regions”. He also wants to introduce a “human capital allowance” and “an allowance to encourage technology diffusion”.

    He doesn’t provide any costs, but states that currently capital allowances cost £21 .5 billion (including about £3.5 for R & D). Perhaps we as a party should be looking at increasing them. If the economy is worth £2366 billion in 2023-23 I think having total private investment at 10% of the economy would be an excellent target. With a 20% corporation tax and all of this amount not paying corporation tax the cost would be £47.3 billion, so that is the ceiling. Therefore doubling the amount to 43 billion would be realistic by providing £5.5 billion extra for R & D allowances and £5 billion for human capital and £6 billion for regional extra relief leaving only £5 for increases the national rates. If introduced over four years equally this would cost a total of £53.75 billion out of O’Brien’s £190 billion.

    Laurence Cox,

    Gavin Jackson concludes, “You can see that finance and pharmaceuticals are no longer shrinking in the way they once were. Energy and waste management are still dragging down productivity but the biggest thing is this “the allocation effect”. What that means is there has been an increase in low productivity jobs, more workers are being allocated to low productivity industries. Hospitality, delivery drivers, care workers that kind of thing.”

    If this is the case and the main causes of our productivity problem are reduced energy usage, waste management, the increase in hospitality, delivery drivers and care workers, there is nothing we can do accept look at how we measure productivity. Education, training, new infrastructure and more research are not going to fix them.

  • Michal BG,
    Leakages from the circular flow of spending in the economy include savings, taxes and imports. Injections include investment spending, government spending and exports. When leakages equal injections, total spending will equal total output and the macroeconomy will be in equilibrium. If leakages exceed injections, then total output exceeds total spending and the level of national output (GDP) will fall. If injections exceed leakages, then total spending exceeds total output and the level of national output will rise close to capacity. Equilibrium can be reached at a level of GDP in which there is some unemployment. If there is too much spending, GDP may reach equilibrium at a level in which there is more inflation than desired.

    Demand management policies (principally fiscal and monetary policy) affect the levels of output, employment, and prices in the economy only in the short-term. Fiscal policy involves changes in government spending and/or taxes. In a recession, government spending is raised and taxes are lowered. Both lead to more spending in the economy and help to increase GDP. In an inflation, government spending is decreased and taxes are increased in an attempt to reduce spending in the economy. Monetary policy is used to increase the money supply in a recession and reduce it in when inflation is growing above target.
    Neither fiscal or monetary policy can expand the economy beyond its physical capacity to expand the supply of goods and services. Adding physical capital has relatively long-time frames and requires sustainable increases in demand rather than short-term stimulus.
    Budget surpluses occur naturally when there is a significant current account surplus and high levels of foreign direct investment as is the case with many of the Gulf oil exporters. To balance out the circular flow of spending in the economy, these surpluses are recycled into sovereign wealth funds or similar exports of capital that buy income producing assets around the world.
    Budget deficits occur naturally when there is a significant current account deficit and/or low levels of foreign direct investment. Where the surpluses accumulated by the foreign sector are invested is crucial. If it is in increasing domestic productive capacity this has a beneficial impact on economic output and wage levels. If it is in investments in property and intellectual property that transfers rents and royalties overseas without generating any increase in productive capacity, this drains added value from the domestic economy. The loss of value puts downward pressure on the exchange rate making imports more expensive without expanding the supply capacity to increase exports and hence slowly impoverishes the population.

  • Joe,

    It is good to see that you do understand how Keynesian economics and demand management works even if you are still mistaken that it is only has a short-term affect and that they only work in a recession. An economic theory either works or it doesn’t, it can’t only work in certain circumstances. Building something rather than having a tax cut might be our preferred method of stimulating the economy but our reasons are not the same. I don’t think that the building will necessary have a long term effect on economic growth but you do; I just believe that the labour and materials needed to build the building have a beneficial affect by directly increasing the economy before the multiplier is applied and some of the stimulus is lost in leakages.

    I was surprised to read that you accept, “Budget deficits occur naturally when there is a significant current account deficit”.

    I agree that where surplus money is invested is important and can result in increased asset prices rather than investment to increase output.

  • Joseph Bourke 17th Jun '19 - 11:05pm

    Peter Martin,

    “the purpose of taxation, in the 21st century fiat money system, isn’t to raise to spending money for the government.”

    If Boris Johnson does a trump tommorow and promises big tax cuts to stimulate economic growth will that be a policy based on Modern Monetary Theory.

    A possible speech might be:

    Stuff the EU. If they don’t want the £275 billion of goods and services we send them every year we will just stop doing it. It won’t make any difference to the British economy, we will step in with an equivalent amount of tax cuts to make up the loss of output and and an extra £25 billion of tax cuts to make sure everyone who wants a job can have one.
    Once we are out of the EU we can just print the £300 billion to cover the deficit. Those suckers in Europe will be happy to keep sending us their cars and proseco in exchange for our IOU’s. With no need to make exports for the EU we can all go on a four day week and spend our longer weekends driving around in our European cars and guzzling Italian sparkling wine. What’s not to like? What could go wrong? Vote Boris for PM!

  • Joseph Bourke 18th Jun '19 - 12:04am

    Michael BG,

    I have never claimed that fiscal stimulus applies only in recession, only that is when it is most effective. What I have said is it should be gradually withdrawn as growth returns to stable levels and this is typcially what happens in an economy like the UK with a high level of automatic stabiliers.

    Fiscal stimulus does indeed have only beneficial effects in the short-run. Hence, Keynes famous dictum “We are all dead in the long-run”.
    A fiscal expansion affects the output level in the long run because it affects the country’s saving rate. National saving is composed of two parts: private saving (by individuals and corporations) less the government deficit. A fiscal expansion entails a increase in government negative saving. Lower saving means, in turn, that the country will either invest less in new plants and equipment or increase the amount that it borrows from abroad, both of which lead to unpleasant consequences in the long term. Lower investment will lead to a lower capital stock and to a reduction in a country’s ability to produce output in the future. Increased indebtedness to foreigners means that a higher fraction of a country’s output will have to be sent abroad in the future rather than being consumed at home.
    Those effects can be mitigated if the fiscal stimulus is focused on productivity enhancing investment spending. Railways, housing. the next generation of renewable energy and fibreoptic broadband installation are obvious areas.

  • Peter Martin 18th Jun '19 - 9:59am

    @ JoeB,

    “If Boris Johnson does a Trump tomorrow and promises big tax cuts to stimulate economic growth will that be a policy based on Modern Monetary Theory?”

    I’m sure I’ve said this before, but maybe I need say it again, MMT applies to all types of policy. Just like Newton’s Theory of Gravitation applies to all types of apples! And all types of everything else too. It is a theory of how 21st capitalism works. Or, maybe that should be doesn’t work or, at least, doesn’t work as well as it could. MMT recognises that those on the right of the political spectrum might well prefer to stimulate the economy with tax cuts of the kind implemented by Reagan and now Trump.

    Nearly all attempted caricatures of MMT are either based on a misunderstanding or are a deliberate misrepresentation. Yours is no exception. I’m pretty sure it’s the latter in your case. There are some MMT advocates, like Richard Murphy, who writes a blog called taxresearch.org.uk who favour continued EU membership for the UK. Providing of course we don’t adopt the euro. I would say this is minority viewpoint. But there’s nothing in MMT which says we have to leave.

    However, the way the EU conducts its economic policy runs totally counter to what MMT advocates usually stand for. Although it is quite possible that some malevolent EU bureaucrats have used their knowledge of MMT to have deliberately created a dysfunctional system.

  • Bill le Breton 18th Jun '19 - 10:55am

    Peter there is a simpler explanation.

    As Draghi said this morning. The ECB (his) monetary stimulus over recent years has been offset by counter cyclical fiscal policy across Eurozone countries. By ‘counter cyclical’ he means fiscal tightening/ austerity at a time of disinflation. It has been like one foot on the accelerator and one on the brake.

    A central bank can only be effective in stimulating the economy if fiscal policy is complimentary.

    Liberals, because of their hang-up with Keynes or pop-Keynes, have no confidence in monetary policy.

  • Peter Martin 18th Jun '19 - 11:37am

    @ Bill le Breton,

    “It has been like one foot on the accelerator and one on the brake. A central bank can only be effective in stimulating the economy if fiscal policy is complimentary.”

    I mostly agree. Certainly it doesn’t make any sense for the central bank and government to be fighting each other with contradictory policies. That’s happened in the US and UK too. Governments have run fiscal policies which have been too tight and the central bank have run a too loose monetary policy to try to compensate. That’s whu interest rates are so low.

    It’s rather like having two pilots on a plane. (A plane a better analogy than a car IMO) One is trying to keep height by putting down the flaps. But the other is too stingy on the throttle. The worst outcome is that the plane stalls and crashes.

    Having just one well trained and skilful pilot in charge would be far preferable. Then it might be possible to consider that in certain circumstances it would be perfectly good practice to use less throttle and more flaps, or vice versa.

  • Joseph,

    I don’t recall you saying that the annual new government stimulus should decrease depending on how much growth is predicted for the economy. A stimulus cannot be withdrawn, it has to work its way through the economy. If the government reduces spending the following year this is not a withdrawal it is a deflationary measure. If you believe cutting government expenditure is a withdrawal of a stimulus it is no wonder that you think incorrectly that they don’t work some of the time.

    You seem to have forgotten that Investment includes stock piles, therefore the increased government spending could just keep demand in the economy stable and reduce Investment by the amount stock piled. This is why it is wrong to think of the government deficit reducing the amount the private sector could spend on machinery and equipment. In the Keynesian model I – Investment is not affected by an increase in government spending. This is because they are on the same side of the equitation – C + S + T + M = C + I + G + X.

    I don’t recognised a “savings rate”. There is a marginal propensity to save, and savings will reach an equilibrium point. What I wrote to Peter at 4.07 pm yesterday applies. If the government increased spending by 10% if my calculations are correct the economy would grow by 16.7647%; the deficit would have grown by 6.70588 and savings by 0.575. At no point does the increase in the economy disappear or reduce because of the stimulus. When discussing Keynesian economics you need to think of Savings as being domestic savings which is separate from the budget deficit or surplus and the trade balance. Perhaps your failure to keep these six variables separate and your mistaken belief they have to be grouped together is why you have mistaken beliefs with regard to Keynesian economics.

    Bill Le Breton,

    If Draghi recognises the problem can we hope that the EU will recognise the problem and change the Stability and Growth Pack which restricts governments from providing large fiscal stimuli?

  • Peter Martin 18th Jun '19 - 3:09pm

    @ Michael,

    “Can we hope that the EU will recognise the problem and change the Stability and Growth Pack which restricts governments from providing large fiscal stimuli?”

    In a word. No.

    The German right wing would never allow it. The rules must be obeyed and all that. Except when they mustn’t be, of course, when it suits them not to obey. As with the rules on allowable surpluses.

    The limit for Govt deficits under the SGP is 3%. More like 2% for Italy. That’s not at all “large”.

  • Bill le Breton 18th Jun '19 - 3:09pm

    Michael BG – wouldn’t bet on it, would you?

  • Joseph Bourke 18th Jun '19 - 6:00pm

    Michael BG,

    this article expains why in Keynesian economics Savings equal Investment http://www.economicsdiscussion.net/keynesian-economics/keynes-theory/saving-and-investment-equality-with-explanation-and-diagram/14397

    “Keynes…held the opinion that the equality between saving and investment is brought about not by the rate of interest, but by changes in income. As and when investment exceeds savings, increased investments (through multiplier) must increase the aggregate income of the community to such a level that the increased saving out of the increased income is equal to increased investment.
    Thus, income change is the mechanism through which the equality between saving and investment is established.
    Keynes defined saving and investment in such a way that in his theory, saving always equals investment. This is called accounting equality. Accounting equality between saving and investment is also called logical identity.”

    Savings in the circular flow of income means goods produced but not consumed i.e. durable capital goods and increases in inventories. This is always equal to investment.

    When more productive capacity in the economy is allocated towards the consumption of consumer goods production resources are shifted from capital goods industies to the production of consumer goods and services. This reduces domestic capacity to produce investment goods and increases reliance on imports to meet demand in the future.

    This is the reason why fiscal stimulus when thw economy is already operating at near capacity reduces output in the long-term.

  • Joseph Bourke 18th Jun '19 - 6:27pm

    Peter Martin,

    “MMT applies to all types of policy.” That’s a yes then to stopping exports to the EU and cutting taxes by £300 billion. What would Boris do next:

    His follow-up speech might be:

    I am going to cut a ‘fantastic’ deal with my buddy President Trump. He doesn’t like having a trade deficit with us, so I’ll do a deal to stop sending any more exports to the States. He’ll be happy and we can just print-up some more IOU’s for stuff we buy from the states. same as Churchill did with FDR. While I am at it, we won’t be selling any more arms to Saudi Arabia. They can’t be trusted not too use them. I’ll cut immigration too by banning anymore foreign students from coming here. Once we stop exporting £600bn of our goods and services and cut taxes by £600bn, we will all be able to go on a three day week and and pop over to New York for four day weekends. Vote Boris for PM!

  • Joseph,

    In Keynesian economics when the economy is in equilibrium leakages equals injections. Savings only equal Investment if Imports and Taxation equal Investment and Government Spending. But you already know this as you accepted – S+(T+G)+(M-X) = I.

    The quote that you give assumes no Imports, Taxation, Investment and Government Spending and with those assumptions the value of Savings and Investment would end up equal when the economy is back in equilibrium.

    There is no way according in Keynesian theory that a fiscal stimulus would reduce output. In Keynesian theory if the economy is at full production then inflation will result from a government stimulus. There is no crowding out in Keynesian economic isn’t it a neo-liberal thing?

    Earlier Peter Martin suggested that you were doing a deliberate misrepresentation of MMT it seems you are carrying on with it. Do you really not understand MMT?

  • Joseph Bourke 19th Jun '19 - 1:34am

    Michael BG,

    sectoral savings are not total savings and savings from income arising from production are not money savings as understood in its everyday use.
    GDP is the total value of the production of goods and services in the economy. The components of GDP or aggregate demand when measured by spending is the sum of spending by domestic households, firms and government adjusted for net exports/imports. Total savings is the value of those goods produced for future consumption i.e. durable goods and inventories. This is equal to investment and investment is financed by borrowing.
    Money savings arise from income from production of goods and services not consumed and capital gains (capital gains are not recorded in GDP). In the UK, total wealth is estimated at £10 trillion. About 50% of this wealth (£5 trillion) is in property wealth; about 40% is money savings (£4 trillion) invested in private sector financial savings; and about 10% of domestic savings (£1 trillion) is invested in government securities. The money lent to the government nets out in national savings.
    It is a mistake to think that domestic household savings finance investment, they do not. Investment creates savings from income as Keynes argued. not the other way around.
    In his General Theory, Keynes states that during normal growth when the economy is close to full capacity expansionary fiscal policy would cause crowding out. Keynes justification for government borrowing and higher spending only occurs at certain times of recession and its immediate aftermath, when there is evidence of a liquidity trap (i.e. when monetary policy is ineffective).

  • Peter Martin 19th Jun '19 - 1:45am

    @ Joe

    Some people have a talent for parody. Not you unfortunately! MMT can’t be used on moral decisions like selling arms to Saudi Arabia. Give it up. You’re looking silly.

    @ Michael

    The national accounting identities have been around for some time. They are recognised as important by MMT but aren’t claimed as part of MMT.

  • Joseph Bourke 19th Jun '19 - 2:35am

    Michael BG,

    Do you really not understand MMT? Yes, I understand it. This chap https://worthwhile.typepad.com/worthwhile_canadian_initi/nick-rowe/ gives
    two examples of why arguments based on accounting indentities (all such arguments are based on Ceteris Paribus).

    1. Y = C + I + G + X – M. Therefore an increase in Government spending will increase GDP.

    2. Y = C + S + T. Therefore an increase in Taxes will increase GDP.

    My guess is that you are much more uncomfortable with the second of those two examples than the first. You have probably seen the first argument before, but have probably not seen the second. But they are both equally correct accounting identities and are both equally rubbish arguments.”

    “Sadly, we don’t just fool other people when we write down accounting identities to divide the world up one way rather than another. We fool ourselves too.”

    Do you really think we could make up the loss of income from hundreds of billions of exports to the EU or elsewhere by simply cutting taxes or increasing governmemt spending to make accounting identities balance?

    When you understand our national income and living standards are determined by what we produce not by what we consume, you will be able to figure out the answer.

  • Peter Martin 19th Jun '19 - 8:08am

    @ Joseph B,

    “Do you really not understand MMT? Yes, I understand it.”

    So, maybe we can then dispense with your silly argument about it being a vote for Saudi Arabia and Donald Trump? Some people do have talent for parody. But not you I’m afraid!

    So, back to the accounting identities. Which I should say have been around for a time and so can’t be considered to be a part of MMT. Although probably MMT economists do give a higher prominence to them than most others.

    So what’s the MMT view? It isn’t that they are causal in the sense that we can assume we can change one variable and all the other variables will stay the same apart from the one we’re interested in.

    You could also have ask what would happen if the Govt also introduced a compulsory savings scheme, as they did during the war. So S increases, T increases because you raised taxes in your example. So the obvious answer is that C has to fall. No-one can pay more taxes AND save more AND consume more. It’s just not possible. MMT recognises that.

    Equally if G increases it could well be that people then save more – meaning that consumption might not rise and could even fall. Some neoliberal economists do believe that. Or at least say they do. The argument is that people will save more to cover the expected rise in future taxes. It is arithmetically possible. MMT accepts that too.

    However MMT does also accept the need to study human nature. What’s going to happen if we give rich people a tax break? It could be that they’ll invest in productive industry or buy a new RR this stimulating the economy. It’s possible. But we would say unlikely. It’s more likely they do nothing with it at all apart from putting it in the bank. On the other hand, we can ask what’s going to happen if we lower VAT to 15%. It is also possible that everyone will put the money aside for a rainy day. It’s possible but we say unlikley.

    We could be wrong, but we are of the opinion that less affluent people will spend the extra money available to them.

    Of course if we are more right than we expect to be we could also end up with an overheated economy!

  • Joseph Bourke 19th Jun '19 - 1:18pm

    Peter Martin,

    we export to Saudi Arabia, the EU and the US for the simple reason that we need to do so to buy the oil, food and other commodities required by the UK pooulation. The idea that exports can be dramatically curtaied and overseas central banks will simply accumulate ever lager sterling reserves is complete guff. The money is exchanged in International markets for Dollars, Euros and Yen. The pound would plunge making everyone in the UK worse off and the poorest will be hit hardest.
    There are plenty of very good economists in the UK – Martin Wolf, Simon-Wren Lewis, Jonathan Portes, Thomas Palley and Vince Cable among them. All understand that our national income is what we produce and our future prosperity is driven by investment in innovation, skills development, technology and infrastructure.
    The tax and welfare system in the UK has a high level of in-built automatic stabilisers. Discretionary monetary and fiscal stimulus on top of automatic stabilisers is a short-term tool for recessions and their immediate aftermath. In extreme circumstances like the financial crisis that may require unorthodox policies like QE or helicopter money to put a floor under deleveraging. Once growth is reestablished, private and public sector spending should be maintained in real terms. What should not happen is the kind of policies tried by Anthony Barber and Dennis Healey to stimulate a structurally weak economy that caused so much chaos and long-term damage to industry.
    Vince Cable is a real-world economist with experience as a development economist, in academia, in multi-national business and in government. If you want a voice of rationality and authenticity you could do worse than read and attempt to understand his article on the post-Brexit economy https://www.independent.co.uk/news/long_reads/brexit-britain-economy-crisis-vince-cable-prosperity-future-liberal-a8887471.html.There is a lot of wisdom in there.

  • Joseph,

    I have informed you that I only use the word Savings to mean domestic savings in the Keynesian sense, but still you wish to muddy the waters. In the same way that you have to differentiate between the budget deficit and the national debt you have to differentiate between Savings in the Keynesian model and the total amount held in assets (total savings).

    Please can you provide quotes from Keynes where he uses the term “crowding out”?

    You may already have guessed that I prefer:

    C + S + T + M = C + I + G + X.

    If S, T or M are increased this reduces the economy and if I, G or X are increased it increases the economy. Therefore a reduction in T Taxation should increase the economy. It should be remembered that S, T and M are leakages and I, G and X are injections.

    If exports are reduced the economy will shrink just like when we have a recession, my cure is the increase government spending.

    The bit you seemed to misunderstand is that there would be no reduction in working days as production would need to be switched from producing things to be exported to things to be purchased by either the government or consumers.

  • Michael BG – “He doesn’t provide any costs, but states that currently capital allowances cost £21 .5 billion (including about £3.5 for R & D). Perhaps we as a party should be looking at increasing them. If the economy is worth £2366 billion in 2023-23 I think having total private investment at 10% of the economy would be an excellent target. With a 20% corporation tax and all of this amount not paying corporation tax the cost would be £47.3 billion, so that is the ceiling. Therefore doubling the amount to 43 billion would be realistic by providing £5.5 billion extra for R & D allowances and £5 billion for human capital and £6 billion for regional extra relief leaving only £5 for increases the national rates. If introduced over four years equally this would cost a total of £53.75 billion out of O’Brien’s £190 billion”
    Correction: UK private investment is currently around 15% of total GDP (total investment at around 17%). This means a 10% target equaling reducing investment. As a result, our target must be raising private a.k.a non-government investment to 20% of total GDP, and increase government investment (% of GDP) by 1 percent point.

  • Peter Martin 19th Jun '19 - 4:19pm

    @ JoeBG

    What is the Lib Dem position on selling arms to Saudi Arabia? It’s a simple question. Maybe you can supply a simple answer?

    From an economic POV, yes I agree it could be good business. From an MMT perspective, the analysis is that the sale of the arms will bring in US$ which can be changed for pounds. This pushes up the currency meaning we can afford more and better imports. If we didn’t sell the arms the currency would be lower. We could still have full employment but it would be less lucrative employment.

    So we don’t ‘need’ to sell the arms but we’re better off if we do.

    I’m not sure what Katharine Pindar will say to you if you’re all for the arms business!

  • Peter Martin 19th Jun '19 - 4:26pm


    There’s some evidence that Keynes wasn’t quite there on ‘crowding out’. On the other hand, currencies in his day tended not to be the floating fiat currencies of the 21st century.

    This is the inimitable Bill Mitchell telling it like it is:

  • Michael BG,

    the suggestion that there would a reduction in working days is a parody of the kind of arguments used by politicians like Donald Trump that are supported by MMT advocates in the states. It is not a serious suggestion. The IMF has estimated that a no-deal Brexit could cost the UK economy somewhere between 5% and 8% of GDP, representing a loss of thousands of pounds per household.
    Increasing government deficits won’t be able to offset such a shock. Mrs. Thatcher’s early governments oversaw the highest post-war sustained 5 year period of public spending as a share of GDP, with public spending that was 46% or more for a record 5 consecutive years, from 1980/81 to 1984/5 while unemployment kept growing.
    As regards UK public sector current spending (i.e. excluding capital spending), the highest sustained period of current spending was also under the Thatcher government, from 1981/2 to 1984/5. This was at a time when the North Sea oil bonanza was boosting government coffers. There will be no oil bonanza this time around and we would face the prospect of much higher interest rates or another round of destabilizing quantitative easing programs to prevent another banking crisis.
    Keynes was well aware that government borrowing could crowd out some private investment. In The General Theory, he noted that the effects of the government directly increasing employment on public works may include “increasing the rate of interest and so retarding investment in other directions.” Keynes argument. however, was that under depression conditions an increase in government spending can result in an increase in total output larger than the initial spending increase (a multiplier greater than one).

  • Peter Martin,

    you can read Libdem Policy on International Affairs here https://www.libdems.org.uk/2017-world
    Policy to Improve control of arms exports is:
    – Implementing a policy of ‘presumption of denial’ for arms exports to countries listed as Human Rights Priority Countries in the Foreign and Commonwealth Office’s annual human rights report.
    – Enforcing end-user certification on all future arms export licenses with an annual report to Parliament on this certification.
    – Creating a public register of arms brokers.
    Liberal Democrats believe that despite efforts to prevent violent conflict, sometimes military intervention is necessary. The UK should only militarily intervene when there is a clear legal and/or humanitarian case, endorsed by a vote in Parliament, working through international institutions whenever possible. We will encourage dialogue and mediation to reduce conflict between and within countries, working through the UN and other agencies.
    On Saudi Arabia, current policy is to suspend UK arms sales in response to their consistent targeting of civilians, in breach of International Humanitarian Law, in Yemen; and to work with international partners to re-commence the peace process in Yemen.

  • Peter Martin 19th Jun '19 - 7:38pm

    @ JoeB,

    I’ve noticed that when you’re a tight spot you’ll often slip in a clause like “when the economy is operating at near capacity.”

    But that’s not really what is being said by the crowding-out-ers. They don’t like the idea of any government intervention in the economy. Period. Whether the economy is near full capacity or not!


  • Peter Martin 19th Jun '19 - 7:50pm

    @ Michael BG,

    To understand Keynes’s approach to the question of interest rates and the effect of public borrowing you need to delve into something known as the “IS-LM” framework.

    This is a point of difference between MMT and some Keynesians as Lars Syll explains in this article.

    “MMT rejects the IS-LM framework that Krugman uses to demonstrate the conclusion that widening budget deficits put upward pressure on interest rates and crowd out private investment. The model remains the workhorse for many mainstream Keynesians. MMT considers it fundamentally flawed.”


  • Thomas,

    Where did you get your 15% figure for Investment from?

    C + I + G + X.

    Government spending (G) is about 40% and so are Imports (I) therefore if Investment (I) is 15% this only leaves about 5% for domestic consumer consumption (C).


    Of course a reduction in exports of 8% of GDP can be made up with an economic stimulus. However, the constraint on the UK economy is 3% for economic growth. Therefore if exports fell by 8% of GDP in one year it might not be possible to make this up within one year. If exports fell by 8% of GDP then there would be spare capacity in the economy to produce 8% of GDP of something else.

    You talk of government spending as if it has something to do with economic stimuli on its own. If government spending is being financed from taxation it is not an economic stimulus. Between 1980 and 1986 the national debt did not increase by large percentages of GDP in any year and by 1986 it had fallen by 0.38 of GDP.

  • Michael BG,

    the Brexit forecasts are based on permanent loss of growth. The BofE forecast https://www.bankofengland.co.uk/-/media/boe/files/report/2018/eu-withdrawal-scenarios-and-monetary-and-financial-stability.pdf?la=en&hash=B5F6EDCDF90DCC10286FC0BC599D94CAB8735DFB notes:
    “The estimated paths for GDP, CPI inflation and unemployment in the disruptive and disorderly scenarios are shown in Charts A, Band C. GDP is between 7¾% and 10½% lower than the May 2016 trend by end-2023. Relative to the November 2018 Inflation Report projection,GDP is between 4¾% and 7¾% lower by end-2023. This is accompanied by a rise in unemployment to between 5¾% and 7½%. Inflation in these scenarios then rises to between 4¼% and 6½%.”
    Offical treasury forecasts https://www.theguardian.com/politics/2018/nov/28/uk-significantly-worse-off-under-all-brexit-scenarios-official-forecast-gdp
    suggest “Under the worst-case, no-deal scenario, GDP would be 10.7% lower than if the UK had stayed in the EU in 15 years’ time, assuming there is no longer any net migration into the UK from the EU and European Economic Area (EEA) after Brexit.”

  • Peter,

    I liked your link to tutor2u. Geoff Riley states, “Keynesian economists argue that fiscal deficits crowd-in private sector investment”. If the economy is not growing at full capacity then it is very likely there would be spare money around for the government to borrow and spend to increase demand.

  • The actual reference is “Keynesian economists such as Paul Krugman argue that fiscal deficits crowd-in private sector investment. Well-targeted, timely and temporary increases in government spending can absorb under-utilised capacity and provide a strong multiplier effect that generates extra tax revenue.”

    Paul Krugman’s oped in the New York Times https://www.nytimes.com/2017/01/09/opinion/deficits-matter-again.html?rref=collection%2Fcolumn%2Fpaul-krugman&action=click&contentCollection=opinion&region=stream&module=stream_unit&version=latest&contentPlacement=1&pgtype=collection
    “What changes once we’re close to full employment? Basically, government borrowing once again competes with the private sector for a limited amount of money. This means that deficit spending no longer provides much if any economic boost, because it drives up interest rates and “crowds out” private investment.

    Now, government borrowing can still be justified if it serves an important purpose: Interest rates are still very low, and borrowing at those low rates to invest in much-needed infrastructure is still a very good idea, both because it would raise productivity and because it would provide a bit of insurance against future downturns. But while candidate Trump talked about increasing public investment, there’s no sign at all that congressional Republicans are going to make such investment a priority.

    No, they’re going to blow up the deficit mainly by cutting taxes on the wealthy. And that won’t do anything significant to boost the economy or create jobs. In fact, by crowding out investment it will somewhat reduce long-term economic growth. Meanwhile, it will make the rich richer, even as cuts in social spending make the poor poorer and undermine security for the middle class. But that, of course, is the intention.

    But back to deficits: the crucial point is not that Republicans were hypocritical. It is, instead, that their hypocrisy made us poorer. They screamed about the evils of debt at a time when bigger deficits would have done a lot of good, and are about to blow up deficits at a time when they will do harm.”

  • Joe,

    I believe that we would be worse off if we left the EU and it would take time to deal with the damage caused. I made this clear in my earlier post.

    The Bank of England report states, “no discretionary changes in spending or tax policy are assumed” (p 41). Therefore the assumption is that the government does not stimulate the economy to try to mitigate the reduction in the economy caused by reduced exports, it assumes that the government takes no action and allows the market to try to deal with the problem.

    It also states that it used the New Zealand experience as a model which had modest reductions in exports of about 2% in 1973 and 1974 and then increased by over 10% in 1975 and about 10% in 1976. I can’t see this reflected in the forecasts produced. I would suggest that by 1977 New Zealand had recovered from the UK’s entry into the EEC and any downturn from there was not caused by the UK joining the EEC.

    So to be clear the forecasts are bench mark forecasts and not real world forecasts because of the assumptions they have used are not realistic.

    I do not advocate a large economic stimulus when the economy is growing near to full capacity. I only advocate an economic stimulus when it is forecast that economic growth will be lower than the capacity for the economy to grow, which in the UK’s case is 3%. I also advocate that the economic stimulus must be less that the difference between the forecast economic growth rate and 3% to allow for the working of the multiplier.

    (You haven’t provided a reference for your earlier quote which you said was from “The General Theory”. Can’t you find it?)

  • Peter Martin 20th Jun '19 - 7:54am

    @ JoeB,

    As usual you are muddying the waters and misrepresenting what others are saying to suit your own line. You know very well that MMT is that the government shouldn’t attempt to expand the economy too quickly, either using a monetary or fiscal stimulus, otherwise we’ll have an inflation problem. So, if we are indeed at or close to “full capacity” the question of crowding out simply doesn’t arise.

    There won’t be any stimulus if policymakers are sensibly following MMT guidelines.

    There’s no dispute about what we do when we are close to full capacity except perhaps to recognise that there will be some unemployment which won’t simply go away. That’s where the JG comes in.

    And you also know very well that those who push the ‘crowding out’ falsehood, irrespective of what Keynes himself may or may not have said, aren’t limiting their argument to what should happen when everything is going well.

  • Peter Martin 20th Jun '19 - 8:14am

    @ Joe B,

    “the crucial point is not that Republicans were hypocritical. It is, instead, that their hypocrisy made us poorer. They screamed about the evils of debt at a time when bigger deficits would have done a lot of good, and are about to blow up deficits at a time when they will do harm.”

    Those of us on the left who want society to be more equal obviously don’t go along with giving tax cuts to the wealthy and relying on a trickle down effect. Much better to either spend more on social programs like providing decent health universal care, raising tax thesholds, and reducing indirect taxes.

    And furthermore, as explained in my comment of 17th Jun ’19 – 6:12am, it isn’t an increase in Govt deficit that creates a stimulus. I you get a tax refund of £1000 and you don’t do anything with it, other than put it in the bank, where’s the stimulus? Yes the Govt’s deficit has increased by £1000 but there’s no change in the economy. On the other hand, if you did spend it, the Govt’s deficit would fall as the transactions collected all kinds of taxes as the money moved from holder to holder. After a just a few there wouldn’t be much left in the economy and so the Govt’s deficit would hardly be any different than previously.

    So the criticism of Trump from an MMT point of view is that the increased deficit isn’t making much difference to the US economy. From a political POV it is that Trump’s policies are increasing inequality.

  • Joseph Bourke 20th Jun '19 - 11:42am

    Peter Martin,

    This is not an economics blog per se.This is Liberal Democrat site where we discuss politics and policy.

    Keynes oft repeated dictum was “But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.”

    The questions for economists and policymakers is both what to do here and now and how to set a course for developing longer-term future prosperity. The claim that fiscal stimulus can deliver real annual growth of 3% regardless of what supply shocks hit the economy or what capacity limits there are, is no less credible than all the spurious tax cutting promises of Tory leadership candidates.

    The official analysis of the impact of impediments to trade following a disorderly or disruptive Brexit all point one way. The UK economy will be smaller and less properous than it otherwise would be under all scenarios regardless of what tax and spending policies are employed.

    This analysis was largely conducted before it became clear that we now face the potential loss of virtually the entire UK manufacturing industy; a withdrawal of Japanese Inward investment; a major reduction in the aerospace space as Airbus contemplates a move to the continent and the meltdown of the British steel industry.

    The Chancellor in his mansion house speech today will advise that government plans to ease austerity and use its borrowing headroom to increase spending will be scuppered by a no-deal Brexit.

    We may well have to introduce a job guarantee as an automatic stabiliser to tackle mass unemployment in the wake of a no-deal Brexit and avoid a repeat of the unemployment levels we saw after the financial crisis and even print money for a time to prevent deflation. But lets not pretend that hundreds of thousands of people (if not millions) shifting from high-paying skilled jobs to minimum wages and working tax credits is going to make no difference to UK living standards and properity. Economic growth will be significantly lower. Relative poverty, however, may actually decline as the average income line against which poverty is measured will be lowered.

  • Peter Martin 20th Jun '19 - 1:27pm

    @ JoeB,

    “The claim that fiscal stimulus can deliver real annual growth of 3% regardless of what supply shocks hit the economy or what capacity limits there are, is no less credible than…”

    I’d say that should be “no more credible” ! 🙂

    But, again, this is just a misrepresentation of what MMT says. IF, say, the Yellowstone volcano were to erupt creating a global emergency then we couldn’t get out of trouble by simply running an increased budget deficit! We are NOT saying we could.

    What we ARE saying is that if the growth rate was nearly 3% in the decade up to 2008 then we could have had nearly 3% afterwards if only the correct policies had been implemented.

  • chris moore 20th Jun '19 - 2:21pm

    Boom and bust abolished. 3.23% growth rate forever. We are the Immortals.

  • Peter Martin.

    Secular stagnation refers to an economy with a long-term lack of demand. Historically, a booming economy with low unemployment and high GDP growth (i.e., an economy at or above capacity) would generate inflation in wages and products. However, an economy facing secular stagnation behaves as if it is operating below capacity, even when the economy appears to be booming; inflation does not appear. Savings by households exceeds investment by businesses, which in a healthy economy would cause interest rates to fall, stimulating spending and investment thereby bringing the two into balance. However, an economy facing secular stagnation may require an interest rate below zero to bring savings and investment into balance. The surplus of savings over investment may be generating price appreciation in financial assets or real estate as was happening before the financial crisis and has resumed since. I think this long-term lack of demand may be a consequence of the larger share of economic output/disposable incomes being absorbed by rents. Elevated house prices may be a cause as well as a consequence of secular stagnation. If an increasing quantity of capital is absorbed by a non-productive asset class at a time when there is little growth in the productive sections of the economy, and when technological innovations in IT, are becoming much more capital intensive, the rate of growth in the productive economy will tend to flatten rather more than it might if some of the capital going into residential property were to fund investment in productive capacity. A renewed and seemingly indefinite increase in the cost of shelter poses an almost existential threat to the economy and to the welfare of rising generations. Joan Robinson’s oft-repeated observation was “If they [the funds lent by creditors] merely permit an excess of consumption over production, the economy is on the road to ruin.”

    Simon-Wren Lewis gives an alternative view https://mainlymacro.blogspot.com/2018/03/the-output-gap-is-no-longer-sufficient.html and focuses on the innovations gap.

    “It is UK GDP per head (source), which is a pretty good measure of average prosperity, and a trend line in red for 2.23% growth p.a. So from 1955 to 2007 prosperity grew at an average rate of almost two and a quarter percent each year. Since then it has increased at an annual rate of around 0.35%. And if the OBR are right, none of this is due to unutilized resources and lack of demand. ”

    “The existence of a large innovations gap, both in the UK and elsewhere, means that we need two things. First, we need a monetary policy that is very relaxed about raising interest rates. Second we need, in the UK and pretty well everywhere, a large increase in public sector investment. The first needs independent central banks to be less inflation averse and to stop treating the sustainable level of output as something which is independent of what they do. The second requires governments to stop being obsessed about deficits and instead to start investing in the future of all the people they govern”

  • Peter Martin 20th Jun '19 - 3:36pm

    @ chris moore,

    “Boom and bust abolished. 3.23% growth rate forever. We are the Immortals.”

    I appreciate the mathematical impossibility of “growth rates forever”. Nevertheless most political parties are stuck on the notion that we need to have growth otherwise unemployment rises, inequality rises, businesses fail etc.

    The Lib Dems are no exception.

    If, however, you’d like to explain how a zero growth economy might work, I’d be interested to hear it.


    “And if the OBR are right, none of this is due to unutilized resources and lack of demand.”

    And when have they been right about anything?

    “Elevated house prices may be a cause as well as a consequence of secular stagnation.”

    If interest rates are low, and the Govt is encouraging more private borrowing, what are us Brits going to do? We’re going to borrow on bricks and mortar. If the price of housing is rising year in year out then it makes perfect sense to borrow as much as you can which helps those prices rise even more. Others see the rising prices and they too want to do the same. There’s no need to overcomplicate matters. This is all there is to it.

    High house prices are an inevitable consequence of neo-Keynesianism. NK is not to be confused with any sensible Keynesianism. It monetarism. Neoliberalism. It’s not just us Brits who go bonkers in the housing market. It’s the same story in New Zealand, Australia and China too.

    “First, we need a monetary policy that is very relaxed about raising interest rates.”

    Ok if you want to burst the bubble and create the next crash then go do it.

  • Peter,

    After a just a few there wouldn’t be much left in the economy and so the Govt’s deficit would hardly be any different than previously”.

    This seems to suggest that you don’t accept that the economy would grow from a fiscal stimulus and that it is unlikely that the revenue generated from a fiscal stimulus will equal the stimulus. Have you applied this to the model C + S + T + M = C + I + G + X? I would be interested to see your figures if you have.


    The claim that fiscal stimulus can deliver real annual growth of 3% regardless of what supply shocks hit the economy or what capacity limits there are, is no less credible

    I assume you are referring to me. You are wrong to assume that 3% annual growth is not within the capability of the UK economy to grow each year. From history we know the UK economy can grow by more than 3% in a year, I just don’t think it can maintain a growth rate of over 3%, while I do believe it can maintain one of 3%. This proposition has never been tested. The only way to know is to follow my proposed economic policies and see if it can be maintained. It should be clear within a few years if the 3% target is too high. I have never said that negative growth of 8% could be turned into 3% growth over 12 months. I have made no suggestion for the maximum size of a fiscal stimulus if the economy is forecast to have negative growth.

    You still have not recognised that all the scenarios considered by the Bank of England include this assumption – “no discretionary changes in spending or tax policy are assumed”. Also it seems that monetary policy is to increase interest rates which would make matters worse.

    I note you suggest increasing the money supply if there is a no deal Brexit.

    Introducing a Job Guarantee scheme would be an economic stimulus especially if it was provided to everyone unemployed and they were paid at much higher levels that the benefit levels. If it was only £100 a week above benefit levels it would cost £5.2 billion per million people. I would expect travel costs also to be paid and these might be in the order of more than £1 billion for one million people. (Please note these “transfer payments” are an economic stimulus.) I note that the BoE is predicting unemployment of only 7.5% with no deal compared to 8.5% in autumn 2011 (under the Coalition) which was higher than 7.9% in the summer of 2009.

  • Michael BG,

    With population growth averaging around 0.6 – 0.8% a year (about 50% of population growth is caused by net migration), real GDP is boosted by this growth in population. Real GDP per capita and average incomes are growing at a slower rate. Simon-Wren Lewis uses the ONS data series from 1955 to 2007 as a reference when he notes “UK GDP per head of 2.23% growth p.a. is a pretty good measure of average prosperity”.
    The Brexit scenarios do not predict an 8% drop in GDP in the first year. They assume the economy will continue to grow and that net migration (and therefore population growth) will be substantially reduced. What they predict is the difference between what output would be without Brexit and what it would be under the scenarios modelled i.e. the long-term loss of output that will occur as a result of trade barriers regardless of what monetary or fiscal policy interventions are undertaken.
    As regards a crisis arising from a no-deal Brexit, Vince Cable’s essay notes: “In future, perhaps sooner than we think, the authorities may be forced into more extreme alternatives. Even if the international economic outlook is benign – which is increasingly unlikely – a disruptive Brexit could trigger a serious downturn requiring emergency action. One possibility discussed during the financial crisis, but not acted upon, would be for the government to finance its spending – either boosting spending through a tax cut, or handing out vouchers to spend, or investing in capital projects – by borrowing from the central bank. This is, in effect, “printing money”, the original “magic money tree”.

    “Were we to find ourselves in another major financial crisis, or a deep depression caused by other factors, such unorthodox measures would prove necessary. But it would be essential to maintain the separation between monetary policy, managed by technocrats on our behalf, and budgetary (fiscal) policy run by politicians.”

    “If it were not, it is not difficult to see how populist politicians, if in power during the next crisis, could manufacture short-term popularity by seizing control of the Bank of England to harvest the “magic money tree”. Debasing the currency is bound, in due course, to have the same baleful consequences as it did for medieval monarchs and modern dictators. We should not be looking to the likes of Venezuela and Zimbabwe for a template for monetary policy.”

  • Peter Martin 20th Jun '19 - 8:51pm

    @ Michael BG,

    “This seems to suggest that you don’t accept that the economy would grow from a fiscal stimulus and that it is unlikely that the revenue generated from a fiscal stimulus will equal the stimulus”

    No I do accept that it will grow. Probably! The point is that the Govt creates the money and spends it into the economy. It gets some of it back in tax. This is then destroyed. The difference is the deficit which represents the net savings of the Private Domestic Sector and our overseas trading partners (in the form of M-X) .

    The Government keeps on creating the money, getting some of it back in taxes then destroying it. The ‘problem’, if it is a problem, is what to do about the amount of money that doesn’t come back. This is the total debt. The debt is just the accumulation of deficits and isn’t a stimulus.

    So the point is that the debt and each deficit is, theoretically, just as much a matter for the the non government sector as the government sector.

  • Joseph,

    I have often wondered if you actually read what you post links to. Chart A shows a drop of GDP from about 106 to about 96 at the end of 2020 from the May 2016 trend forecast, which is 9.4%. The upper line falls to 102, which is about 3.8%. When compared to the November 2018 Inflation Report the smaller decline is 2.8% and the higher is 8.5%.

    The pure average economic growth for years 1955 to 2007 inclusive is 2.73%. The pure average for years 1993 to 2007 inclusive is 2.98%.

    It is good to see Vince recognises that there is a magic money tree. Also he might be talking of an economic stimulus to counter the economic effects of a no deal Brexit.

    You wrote, “We may well have to introduce a job guarantee as an automatic stabiliser to tackle mass unemployment in the wake of a no-deal Brexit”. In this context it is an economic stimulus.

    I often wonder if you actually read what I write. In previous posts I have talked about targeting the economic stimulus into the regions with the highest unemployment levels, however the maximum for the amount of extra government spending in the economy still applies which is the difference between the forecast economic growth and 3% minus the multiplier effect.

    Paying the unemployed more would also count as a policy for targeting the stimulus to areas of high unemployment.


    The revenue generated to the government is not destroyed, it reduces the deficit as you pointed out earlier, but you also seemed to suggest that this increase in government revenue will equal the stimulus. I believe this cannot happen unless the government increases taxes.

    In MMT I didn’t think there were any concerns about the size of the national debt.

    The money which doesn’t come back is the good part of the process especially if you assume that the money going to Savings (S) and Imports (I) comes back to help fund the deficit.

  • Joseph Bourke 21st Jun '19 - 12:19am

    Michael BG,

    the reference I have given above is the difference in trend growth after five years. GDP is between 7¾% and 10½% lower than the May 2016 trend by end-2023. Relative to the November 2018 Inflation Report projection,GDP is between 4¾% and 7¾% lower by end-2023.
    This is not a consequence of a short-lived cyclical recession that demand stimulus can address. This is structutal changes in the terms of trade that involve a permanent loss of output.
    The initital shock potentially involves a fall in GDP approaching the levels experienced in the financial crisis. As with the financial crisis it will likely require emergency action and all the disruptive effects that has on public services, asset inflation and inequality.
    Part of that response may well be a job guatantee program. Once economic stability is established that job guarantee program can be tax funded. There is no maximum amount. That is the point of an automatic stabiliser. Spending increases as needed during a slowdown and reduces as private sector employment growth returns. The job guarantee is a political tax and spending decision just as working tax credits and other benefits are; and yes the advantage is that it directly targets funds to where unemployment is concentrated. That does not require a stimulus anymore than tax funded capital spending requires a stimulus. The job guarantee also targets non-cyclical long-term unemployment.
    The important point in all of this is distinguishing between when a discretionary stimulus is needed and when it is not. As long as the government maintains a level of investment sufficient to utilise the normal level of savings in the economy, most of the work of demand management is done by automatic stabilisers with no need for discretionary stimulus outside of recessions.
    There remains the issue of capital flows inflating house prices, but this is best addressed by mandating sensible loan to value ratio and income multiples for mortgage lending as well as heavy investment in public housing to bring house price inflation more in line with consumer price inflation.

  • Peter Martin 21st Jun '19 - 6:57am

    @ Michael BG,

    “The revenue generated to the government is not destroyed”

    Money is both an asset to the holder and a liability to the issuer. So we, as holders of money, usually consider only the asset part. MMT also considers that money is the creation of the state and any attempt to separate the central bank , the BoE, from the Govt is entirely spurious.

    So what happens when the Govt gets back a sum of money which it had created in the first place? Yes it has the asset but it also has the liability. The two exactly cancel and that’s why I said it is destroyed. It’s the same principle in a casino which issues the chips. The chips are valuable to everyone else but the Casino owner. Naturally the casino owner wants to collect them. This removes his liability.

    Therefore it follows that the Govt can neither have, nor not have, any money in the normal sense of the term. Any claim by Philip Hammond to have a ‘war chest’ to spend in the event of Brexit is simply nonsense.


    “In MMT I didn’t think there were any concerns about the size of the national debt.”

    I’d put it that there isn’t an over concern. But it is recognised to be the savings of everyone who wants to save with Government. Therefore the Government does have a liability to those savers. We argue that it the interests of savers is best secured by keeping the economy healthy. The healthier it is the more savers we are likely to see which will of course raise the ‘National Debt’.

  • Joseph Bourke 21st Jun '19 - 11:38am

    Michael BG,

    This recent analysis from NIesr does model various policy responses to different forms of Brexit https://www.niesr.ac.uk/sites/default/files/publications/NiGEM%20Observation%2014%20-Modelling%20the%20short%20and%20long%20run%20impact%20of%20Brexit.pdf
    With respect to a fiscal polict response to no deal Brexit they write:
    “The response will depend on the scale and specific nature of the disruption and the reaction of financial markets to it. We focus here on the macroeconomics, i.e. the response of inflation and output to the Brexit shock and the mitigating action that the Chancellor and the Monetary Policy Committee might take to stabilise the economy. Our main conclusion is that policymakers have room to inject monetary and fiscal stimulus in order to stabilise output if inflation expectations and wage growth are anchored at a level that is consistent with the medium-term 2 per cent inflation target, and if fiscal rules are adjusted to allow for higher government spending. Our findings suggest that policymakers are in a position to help stabilise GDP growth in the short term but not in the medium and long term. This option would not be available in a scenario where wage growth picks up and policymakers believed that inflation expectations would be dislodged if monetary policy did not actively and immediately offset a Brexit-related spike in inflation. As such, the focus in this section lies on the short run and how policymakers can ease the transition of the economy to a new trading equilibrium by delaying some of the economic impact that is bound to materialise in the future. It complements our analysis of the long-run economic impact of a no-deal Brexit. The long-run impact arises mainly from a slowdown in capital, employment and productivity growth and therefore leaves little room for monetary and conventional fiscal policy to respond.”

  • Joseph,

    You wrote “The IMF has estimated that a no-deal Brexit could cost the UK economy somewhere between 5% and 8% of GDP, representing a loss of thousands of pounds per household” on 19th June at 5.27pm.

    It is this that I was countering with the correct information.

    When there is money in the economy which is looking to be invested and there is a lack of private investment then the government should borrow this money. I am glad we agree on something even if you word it very conservatively.

    The whole point of the “automatic stabilisers” is that government expenditure increases and government revenue reduces producing a stimulus. Of course this stimulus is not enough to reverse the downturn. For this the government needs to spend even more with what you call a “discretionary stimulus”.

    I have no idea where you get the false idea that Keynesian economics only work during a cyclical recession. They were produced after the great depression in the 1930s. I don’t understand why you think more domestic demand could not replace foreign demand.

    A fiscal stimulus is only needed when the economy is not growing to its full capacity. Unlike increasing the money supply which is needed most of the time.

    Thanks for the link to the National Institute of Economic and Social Research which clearly states that fiscal and monetary policy should mitigate the effects of a no deal Brexit. In the long run it seems they don’t believe that the UK economy could return to 3% annual growth rates. I couldn’t see why they think productivity would increase slower if we left the EU. They might be correct about net migration and foreign investment in businesses. It is the removal of foreign businesses from the UK which I think are the worse effects of leaving the EU.

  • Peter,

    The government does not destroy any money it receives in revenue.

    I think it is unlikely that the government even pays back any of its debt with the money it receives in increased revenue from the economic growth which resulted from its fiscal stimulus.

    If there is an economic stimulus of 10 and the government receives 4 of it back in taxes even if we assume a time lapse of a year, the government doesn’t destroy the money. In the following year. If government expenditure remains at the new higher rate the deficit is no longer 10 but 6. The national debt for the two years is increased by 16. (This assumes no multiplier. If there is a multiplier then the deficit will decrease by a bit more over the time it takes for it work through the economy.)

    Even if the fiscal stimulus was funded by the creation of new money I don’t see how the government can reduce the money supply by destroying 40% of the extra money and expect the economy to grow. Monetary theory states that the economy should reduce by the decrease in money supply assuming no inflation.

  • Peter Martin 21st Jun '19 - 5:13pm

    Even if it destroys it it’s debt decreases. Before it collects the ££ it has the liability. Afterwards it doesn’t.

  • Joseph,

    Pavlina R. Tcherneva writes, “He (Keynes) favored public employment schemes, generally in the form of public works, which were to be implemented both in recessions and in economies near full employment” (my bold). Therefore we can conclude that Keynesian economics can still be operated when an economy is near to full employment.

    From reading Tchernea’s article it sees that it is important who ends up with the money from a government stimulus. Therefore a job guarantee which pays more than the benefit level seems to be a good idea; as would increasing benefits. As we have discussed before when the government builds something this directly increases GDP and some of this will increase aggregate demand. This new demand should be met from either increased domestic production or from increased imports.

    As I have said it is important for the government to target its economic stimulus spending in the regions with the highest unemployment levels, just as Tcherneva states Keynes wanted. So I do wonder why you think Tcherneva’s article is an argument against my position.

    Tcherneva rejects the noninflationary level of unemployment believing that frictional and structural unemployment are not acceptable when defining full employment (p 10).

    I like this implied quote, “But we need cleverness to design public employment schemes for true full employment”, which implies the government should design work for the unemployed which is suitable to their talents.

    I also like the idea that the capacity gap or “output gap” is not useful in achieving full employment as you consistently tell me. And “some measure of potential output is necessary, but such a measure can only be “an impostor,” as it cannot usefully tell us what the potential level of spending in the economy is. This is because the economy is a living organism where the character of investment and consumption changes continuously. Potential output is a malleable definition that fluctuates with the technique of production, the composition of demand, the intensity of work, labor force participation, as well as other factors, therefore, potential output offers no useful guide about the capacity of the economy beyond some instantaneous and brief period of time”.

  • Joseph Bourke 22nd Jun '19 - 2:20am

    Michael BG,

    the paragraph is “So it is constructive to revisit Keynes’s view of employment policy once again to see what role aggregate demand policies played in his analytical approach. Much has been written on what Keynes meant or did not mean and what he would have made of contemporary policies carried in his name. Although there is much disagreement on his theoretical contributions, there is a general agreement across the theoretical spectrum that boosting aggregate demand is the Keynesian solution for full employment.This paper argues against this view and suggests that while aggregate demand has an important place in Keynes’s analysis of the business cycle, “filling the gap” is not his method for fiscal policy. Rather, he had a targeted demand approach to full employment of a specific kind. He favored public employment schemes, generally in the form of public works, which were to be implemented both in recessions and in economies near full employment”
    This is the whole thrust of the paper. It is not fiscal stimulus that is required. As she writes in the abstract “Modern policies, which aim to “close the demand gap,” are inconsistent with the Keynesian approach on both theoretical and methodological grounds. Aggregate demand tends to increase inflation and erode income distribution near full employment, which is why true full employment is not possible via traditional pro-growth, pro-investment aggregate demand stimuli. This was well understood by Keynes, who preferred targeted job creation during expansion.”
    This is why a targeted job guarantee program is preferable to aggregate demand stimulus which does more harm then good when the economy is near full employment, as Keynes well understood. This is the real Keynesian economics.

  • Joseph,

    Pavlina R. Tcherneva is presenting a case for her supposition. What she writes should not be treated as “gospel” as if it contains the whole truth and anything not included in it must be false. She clearly states her view is not the mainstream Keynesian view.

    If we look at a fiscal stimulus as being a tax cut, Keynesians may argue this is a good way of stimulating the economy because it creates extra demand in the economy. When it is predicted that there will be no economic growth this might be a good idea, but it is not a targeted approach. As Tcherneva writes it “tends to increase inflation”.

    If we paid people more for being unemployed and the unemployment was regional then the fiscal stimulus would be targeted to the region and should not affect demand adversely in those regions which do not need any more demand.

    Tcherneva does not say that the public works should be financed from taxation. This would mean removing demand generally to increase it in a particular place. Of course you could argue that if we are experiencing a boom with inflation rising and there are still pockets of high unemployment we could both remove demand generally from the economy by increasing taxation and then increase government spending in a particular location with a scheme to employ those who are unemployed at that location.

    To be clear when I use the term fiscal stimulus I just mean that the extra government expenditure is not be planned to be financed from increasing taxes (while accepting part of it might be financed by increased government revenue due to the resulting economic growth).

    When I think of measures that the government should take to reduce unemployment I think of regional aid. This can be of two kinds: firstly to employ the unemployed directly doing something that utilises their existing talents and skills and I advocate a job guarantee scheme as a modest way of doing this (my scheme might be too modest but we need to start somewhere); and secondly by giving incentives to businesses to open in the regions of highest unemployment. (I believe that Nissan set up its car plant in Sunderland because of the assistance provided by central government and it is this type of assistance I am thinking about.)

  • Peter Martin 24th Jun '19 - 9:58am

    @ Joesph BG

    “This is why a targeted job guarantee program is preferable to aggregate demand stimulus which does more harm then good when the economy is near full employment….”

    I think we all agree on that. I wish you’d stop implying that the MMT position is to deliberately increase aggregate demand to the point that inflation does rise to unacceptable levels. Having said that we don’t share your ultra sanguine view about the closeness of full capacity.

    Warren Mosler cuts thorough much of the mainstream Economic gobbledegook, which is designed to obscure rather than enlighten with:

    “Think of the economy as one big department store full of all the goods and services we all produce and offer for sale every year. We all get paid enough in wages and profits to buy everything in that store, assuming we would spend all the money we earn and all the profits we make. (And if we borrow to spend, we can buy even more than there is in that store.) But when some of our money goes to pay taxes, we are left short of the spending power we need to buy all of what’s for sale in the store. This gives government the “room” to buy what it wants so that when it spends what it wants, the combined spending of government and the rest of us isn’t too much for what’s for
    sale in the store. However, when the government taxes too much – relative to its spending – total spending isn’t enough to make sure everything in the store gets sold. When businesses can’t sell all that they produce, people lose their jobs and have even less money to spend, so even less gets sold. Then more people lose their jobs, and the economy goes into a downward spiral we call a recession.”

    We can also imagine that there are US stores, German stores etc and everyone is relatively free to shop in their stores too. So if we do that more than they shop in our stores the Govt has room to tax less or spend more itself to ensure everything clears.

    See page 27


  • Peter,

    It is strange that Joseph believes that there is no space in the economy to have targeted programmes in areas of high unemployment funded by borrowing when he has quoted Tcherneva so extensively and she is presenting the case that such programmes are needed even when the economy is near to full employment. And he believes that the government should borrow to build infrastructure (a fiscal stimulus) across the whole country even when he keeps saying the economy is at full capacity.

  • Peter Martin 24th Jun '19 - 4:09pm

    @ Joseph B,

    “There is no shortage of spending across the London economy (if anything there is an excess of consumption spending)……. ”


    “…….and there is no shortage of infrastructure investment in London.”


    “Yet London has the highest rate of rough sleepers, homelessness and the largest number of those living in a poverty than any other region of the country. ”

    I’m not sure you’d say that if you lived in or visited Middlesbrough more often, but I know what you are getting at.

    So how about that London is seen as an oasis in a desert? It attracts people from all over the world. Those who have money or can make enough money can afford to live there. Those with lots of money can afford to buy property which will appreciate in value. Those who don’t have it can’t afford to live there can afford it even less if they have to compete with the overseas wealthy.

    So no-one is saying that more fiscal equalisation between the regions is the complete answer. But it will at least do something to keep those from the depressed regions winding up in London, looking for their fortune, failing and ending up on the streets. In addition we need to have laws to discourage property being bought up for speculative reasons.

    Your much touted LVT may even play a role but, on its own, it’s not the magic solution you claim.

  • Joseph,

    A fiscal stimulus is any budgetary measure which increases GDP by stimulating the economy. This is why government capital spending is a fiscal stimulus and why it was wrong for the Coalition government to cut capital spending within months of taking office. It has nothing to do with the different rates of increase between national debt and GDP. If the government increased its spending by 1% not funded from tax increases this would be a fiscal stimulus even if the economy grew by more than 1%.

    If there is not the space capacity in the economy it would be wrong to increase spending on capital. New government capital spending does increase aggregate demand, but you have just stated this is not what we should do when you quoted Tcherneva. Indeed if there is spare money to be invested (which is being spent on assets such as houses and causing their price to rise) then the government should borrow it instead and spend it on a fiscal stimulus.

    We have agreed that general aggregate demand increases would be unlikely to solve regional unemployment. However, for reasons which I don’t understand you believe that government infrastructure spending does not increase total demand in the economy. You should be agreeing with me that infrastructure schemes should only be undertaken in regions of high unemployment when there is not a huge amount of space capacity in the economy.

    Poverty in London is a lot worse than the rest of the country because the cost of living in London is higher and those of working age not in work living on benefits suffer because the benefit levels are not even set at the national poverty level plus the benefit cap which makes finding somewhere affordable to live very difficult.

    London has the fifth worse unemployment figures in the UK, equal with the East Midlands. Building more homes, employing more people in child and adult social services, policing and transport are not the answer. Finding jobs for the unemployed where they can use their talents and skills is part of the solution along with providing them the training to do the jobs with the highest vacancies. It is of course possible that one of the problems is that the National Living Wage at £8.21 per hour is £3 less than 60% of medium earning of London (in 2018).

  • Parts of London are wealthy. Other parts of it are amongst the most deprived areas in the country. The myth is that London is this great successful bustling hub that other places should emulate. When really its some wealthy postcodes surrounded by a great deal of poverty, with the attendant problems of poor housing and high crime rates. It’s the difference between the gloss of concentrated money and living standard. Rather than measuring success by things like GDP we should be looking at how people live. London has some very good points, but it’s far from the idealised version of the various PR drives.

  • Peter Martin 24th Jun '19 - 6:07pm

    @ Glenn

    “Parts of London are wealthy. Other parts of it are amongst the most deprived areas in the country. ”

    Yes. Paradoxically wealth for some can create poverty for others. Primarily this happens with London housing. The less well paid simply cannot compete with the very affluent.

  • Peter Martin 24th Jun '19 - 6:27pm

    @ Joseph B,

    “Warren Mosler’s argument is based on leakages and injections to the circular flow of spending in the economy…..”

    Maybe, but I still can’t work out if you’re agreeing or disagreeing!

  • Peter Martin,

    I don’t agree with the basis for this assumption – “We all get paid enough in wages and profits to buy everything in that store, assuming we would spend all the money we earn and all the profits we make. (And if we borrow to spend, we can buy even more than there is in that store.)”
    The income approach to GDP equates the total output of a nation to the total factor income received by residents. The main types of factor income are:

    Wages, Interest, profits + Rental and Royalty Income. However, this excludes capital gains. As this article highlights http://evonomics.com/capitals-share-of-income-is-way-higher-than-you-think/
    “When economists talk about household income — including this “primary” income measure — they’re talking about a particular stylized accounting definition of “income” that ignores a huge part of…household income: capital gains, or holding gains — money that people, households, families, and dynasties receive and accumulate as wealth over years, decades, and generations.

    The thinking is, capital gains aren’t “real” income; they haven’t been “realized,” or they “generate no cash for their owners,” or they’re merely based on “expectations.” Your stock portfolio or home value might go up this year, but go down again next year.

    That’s certainly true for any given year — or even three, five, or seven years.

    But over any longer period, household capital gains are very, very real income indeed. They deliver very real assets and net worth — wealth — onto household balance sheets, which individuals can easily swap for “cash” when they want to spend, in our liquid financial system. That’s what retirees with nest eggs do — swap their various assets for cash, and “spend down their assets.” (Got lifetime income hypothesis?)

    In fact, capital gains are among the main ways that modest households build significant personal nest eggs for retirement and eventually long-term care and bequests to their children (mainly through owning homes), and — especially — the overwhelmingly dominant way that rich households, families, and dynasties, who own most of everything, get rich(er).”

  • Peter Martin 24th Jun '19 - 8:58pm

    @ JoeB,

    “But over any longer period, household capital gains are very, very real income indeed…..”

    Ok but if you realise a capital gains on your property someone somewhere will have to put the money in from their own income or borrow from someone else. Warren Mosler does acknowledge that extra borrowing has to be taken into account. You then will, potentially, be spending the money someone else has borrowed.

  • Joseph Bourke 24th Jun '19 - 10:46pm

    Peter Martin,

    “borrow from someone else”. This is not the case though is it? Banks create the money required to finance propery purchases that enable the seller to realise capital gains or enable borrowing against property equity. No one has put the money in from their own income, but they will over the next thirty years or so as they make mortgage repayments that are absorbing an increasingly higher proprtion of disposable income.
    The market value of bonds that pay higher rates of interest than the amount that can be obtained from new issues of bonds will increase. Lower market rates of interest allow governments to borrow more without increasing the amount of public spending devoted to servicing debt. However, governments cannot increase deficit spending in a resource constrained economy without generating inflation.
    Like bonds, lower interest rates increase house vaues and the amount that buyers can borrow to pay for housing. Some of these capital gains are realised in retirement and money is spent into the economy that is financed by the increased borrowing for housing. The bulk of capital gains are reinvested in income producing assets that will generate higher yields putting downward pressure on the share of value produced that is avalable for wages and returns on productive capital.
    In this way, rent-seeking activities that accumulare capital are increased; real wages are depressed; and profits attributable to production are squeezed depressing productive investment.

  • Malcolm Todd 25th Jun '19 - 12:48am

    Joseph Bourke

    I don’t know about you (or Peter M, for that matter) but that doesn’t sound like real “income” to me – in the sense that it doesn’t arise from any actual production or exploitation of new resources. It’s just inflation, of a particular sort. So one group of society gets a sort of double-your-money, without any change in the total amount of resources available, which means everything costs a bit more, but that propertied group is overcompensated for it and therefore is relatively richer. I think what PM is talking about is the total resources available for consumption to any generation, which is essentially the total amount of resources produced (including by extraction) by that generation. Your “capital gains” are simply a financial trick by which the distribution of those resources is skewed away from wage earners and towards the idle rich (to borrow a phrase).

    Of course, there really is a sense in which the present generation can “borrow” from the future, a debt that our descendants will have to “repay”: when we use up finite resources and/or pollute or destabilise our environment in order to power our current way of life, we are almost certainly destroying the welfare of future generations. However, that’s got nothing to do with the “national debt”, or even the price of housing.

  • Joseph,

    I think it was very clear that I was talking about government capital spending financed from borrowing and not tax increases when I wrote, “government capital spending is a fiscal stimulus”. Of course any government spending financed from increased taxes is not a fiscal stimulus.

    Inflation does not count as economic growth. I am only interested in real economic growth.

    I have never found it suggested that the government can increase its spending by 1.165049% of GDP every year and this is not a fiscal stimulus. This percentage is the increase in the size of the deficit in monetary terms when the economy grows by 3% and the deficit remain at 3%.

    The purchasing of assets (including second hand homes) does not count as an economic activity for GDP purposes. Therefore we should not consider the purchasing of these things when discussing economic growth. However, when discussing the money supply they should be discussed. As I have pointed out there can be spare or idle money in the system which instead of being used to increase production is used to purchase existing assets and so adds nothing to the economy. This is why the government should borrow the money instead and use it to stimulate the economy either generally or in particular areas. When there is this idle or spare money and asset prices including house prices increase should we not see this as a failure of monetary policy?

  • Peter Martin 25th Jun '19 - 6:28am

    @ JoeB,

    You are right to pick me up on the phrase “borrow from someone else”. Firstly, in a macroeconomic sense, ‘borrowing’ is synonymous with de-saving. So, anyone drawing on their own savings can be said to be behaving exactly the same way as someone taking out a loan – although, of course, that’s not the everyday meaning.

    Yes the banks create money when they lend. BUT they aren’t creating BoE money. They aren’t creating Government money. They aren’t allowed to. Bank money is simply an IOU of the bank and isn’t any good to pay your taxes. The taxman wants the ‘real thing’. Other banks don’t want to hold it for any length of time either. They’ll cancel off their own IOUs against other banks IOUs, ie by contra, as a first option and then ask that any imbalance is met from the other bank’s BoE reserve account via the clearing system.

    Therefore commercial bank money tends to be quite short lived and doesn’t really change anything in the economy. If a buyer and seller use Govt money to settle a transaction it’s no different, on a macroeconomic level, to using commercial bank money. You can figure that out quite easily by considering that the buyer might in one case go the banks ATM and hand the cash over, in the other he does a bank transfer on the internet. The outcome is exactly the same.

    In this case, if the mainstream aren’t counting capital gains as income then I’d say they might have something right. For a change!

  • Peter Martin 25th Jun '19 - 6:41am

    @ Michael BG,

    “I have never found it suggested that the government can increase its spending by 1.165049% of GDP every year and this is not a fiscal stimulus.”

    Suppose inflation is 2%. We have a shortfall of 0.834951%. Is it still a fiscal stimulus? OK, lets adjust that for inflation. Suppose, now, the population is also growing at 1.165049% p.a. Is this still a fiscal stimulus?

  • Peter,

    Inflation should not be considered. However, when I looked at the figures again and I have reduced the increase in government spending by the increase in revenue the GDP grew by 0.087379% of GDP. I have assumed inflation of 3% to use the same figures, but once I removed the 3% inflation I still end up with an increase of 0.002545% of GDP in real terms! (This is not what I expected. I can provide the figures from my spreadsheet if you think the issue is with the maths.)

    If the deficit increases in real terms I think this is a fiscal stimulus. In the same way that if the deficit decreases in real terms this is deflationary. I think we have to be talking about totals and not percentages. I think it is a stimulus in the same way as the multiplier is on previous economic growth.

    If I look back at my example:

    C + S + T + M = C + I + G + X
    15+5+40+40 = 15+5+42+38

    15+5+40+40 ? 15+ 5+ 52+ 38 Government Spending G increased by 10

    16.5 +5.5 + 44+ 44 ? 16.5 +5 + 52 +38

    Consumer spending has increased by 1.5 part of the multiplier effect. This is still stimulating the economy to grow. (Perhaps the reason is that there is no marginal propensity for the Government to increase Government Spending. This would mean that any increase in Investment (I), Government Spending (G) or Exports (X) would stimulate the economy. None of these values change in relation to the total.)

  • Sorry,

    “However, when I looked at the figures again and I have reduced the increase in government spending by the increase in revenue the GDP grew by 0.087379% of GDP.”

    Should read “However, when I looked at the figures again and I have reduced the increase in government spending by the increase in revenue the increase grew by 0.087379% of GDP.”

  • As I said the result wasn’t what I expected so I have done the inflation calculation again with simpler figures and with 3% inflation the deficit increased by 3% which is what I would expect. My earlier figures were just wrong. Therefore in my simple example government expenditure increased by 1.5% of GDP and revenue by 1.2% the increase in the difference between the two is 3% of the deficit. This must be an increase in GDP because if the increased expenditure had all be met from increased taxes the GDP would have been smaller by 3% of the deficit.

  • Peter Martin 25th Jun '19 - 6:52pm

    @ JoeB,

    “It is agreed by most economists that government deficit spending and bank lending create “money” (or “assets”) in ways that are impossible in the simplified spending-equals-expenditures money circuit diagram..”

    Yes for Govt deficit spending. Bank lending does this in the short term but banks do, as those of us who have paid off bank loans will know to our cost, do require to be repaid. Govts don’t. Therefore the longer term effects of bank created money are quite different. We get a period of debt deflation, which can sometimes be a bust, to follow the initial boom.

    As to your point about the “simplified ….diagram” , who are “most economists”? Can you give some examples?

  • Peter Martin 25th Jun '19 - 7:11pm

    @ JoeB,

    Ok I think I now see what you’re getting at. I’ve just looked up the book value of the UK’s housing stock and it’s about £7.5 trillion. The book value of all UK land is £5 trillion.

    There’s no liabilities or nowhere near enough to cover these assets. That’s because they are based on valuations which in turn are based on what a small percentage of the the housing stock and land area sells for when it changes hands. There isn’t £7.5 trillion or even £5 trillion there which is even potentially available to the tax man. Once the taxman sets his sights on raising revenue from these assets they’ll simply vanish. The ££ attached to them are a mirage.

    That’s the flaw in your LVT thinking.

  • Mick Taylor 25th Jun '19 - 8:29pm

    Mr Martin

    and the flaw in your argument is that houses and land cannot vanish or be moved, so they are available for taxation on whatever basis the government decides. LVT is fairer than council tax or rates and can raise significant sums at a relatively low rate of tax and valuations take account of increases brought about by planning permission and other activities in the area where the land is situated that increase its value.

  • Joseph Bourke 25th Jun '19 - 9:34pm

    Peter Martin,

    “Bank lending does this in the short term, so not “. UK household debt is circa £1.6 trillion. Mortage debt is cica £1.4 trillion. Only 5 % of mortgage lending is for new build property. Mortgage loans are typically 25 to 30 years – far longer than a typical 10 year gilt, so not short-term at all.
    The value of property is determined by what you are prepared to pay in rent whether you pay rent monthly or pay a lump sum in advance for a freehold title in perpuity for your own occupation or use.
    I am going to pay an average on 37% of tax on my income one way or the other. Whether that is collected via PAYE as income tax and national insurance are; included in the price of goods as with corporation tax , excise duties and VAT; or billed directly as council tax and tv licenses are. With all these taxes I have an element of choice. How much income do I need or want to earn. Do I drive, drink alcohol or use tobacco. Do I want to live in a band A property or a much higher band.
    If a greater proprtion of that 37% is assessed on the basis of property wealth versus other direct or indirect taxes that just changes the choices I make in such a way as to incentivise the efficient use of land. The utility of the property to me as an owner-occupier is unchanged. So too if property letting businesses are assessed to business rates in the same way as other trading busineeses. The rates are a business expense to be deducted from net rents in the same way as any other business. The rents I can charge are based on market prices and determined by supply and demand in any given location.
    Stabilising house price inflation to bring it in line with CPI is the most important economic policy decision we can make. This of course runs counter to the practice of recent years to actively generating house price inflation to create ‘wealth effects’ ;and the accompaning borrowing against equity to keep a debt driven consumer boom going until the bubble bursts again and we are back where we started with banks in trouble and homeowners in negative equity.

  • Peter Martin 25th Jun '19 - 10:27pm

    @ JoeB,

    “Mortgage loans are typically 25 to 30 years – far longer than a typical 10 year gilt, so not short-term at all.”

    So I buy a house for say £300k with borrowed money from the bank. If its a new house that money pays the builders, the architects, the plumbers etc. If its an established house it may be put into the bank account of the owner and then spent on cars, foreign holidays or whatever. Not in all cases, but the point is that the release of money into the economy happens right at the start. The debt deflation comes later as I have to repay the loan and have less buying power than I would have have otherwise.

    This is nothing new. You might want to look up Fischer’s theory of debt deflation.

    “The value of property is determined by what you are prepared to pay in rent whether you pay rent monthly or pay a lump sum in advance for a freehold title in perpetuity for your own occupation or use”

    This is one factor. Another factor is the likely future price of property. If prices are increasing that’s a good reason to buy a larger property than needed even though renting a smaller property might be a better short term option. This reasoning then pushes up the value of property generally.

    “Stabilising house price inflation to bring it in line with CPI is the most important economic policy decision we can make”

    Yes. OK. House price inflation is an inevitable consequence of using monetary policy to control the economy. As interest rates fall property prices rise which encourages more borrowing into a rising market. Interest rates can’t go much lower so that bubble could well burst. The best (or maybe worst?) we can probably manage is to prevent it – in which cases prices will in any case remain relatively stable for the foreseeable future.

  • Joseph Bourke 25th Jun '19 - 11:19pm

    Peter Martin,

    loans are being repaid all the time and new lending is occuring all the time. That applies equally to public and private sector borrowing. In the UK the aveage maturity of gillts is 8-10 years. The typical mortgage is 25 years.
    In aggregate an economy can only spend on consumption and investment goods what it produces unless banks have recourse to foreign capital sources of financing to cover current account deficits.
    One of the key features of the period before the financial crisis was the strong positive correlation between house price appreciation and current account deficits, facilitated by a progressive relaxation of credit standards. Lower collateral requirements in terms of loan to value ratios and multiples of income, facilitate access to external funding and drive up house prices. Banks like Northern Rock and RBS relied heavly on short-term financing from overnight money market funds to finance long-term mortgage loans. That mismatch of asset maturities and sources of financing led to their downfall. The current account deficit increases as financial instiutions finance household borrowing by drawing on International funding sources.

    Yes, house prices will likely flatline for a while and increase more slowly in the future. There may also be a corresponding impact on the current account deficit as less funding is brought in from overseas financial markets and more of the capital account balance is made up of currency adjustments reducing domestic consumption of imports.

  • Peter Martin 26th Jun '19 - 5:59am

    @ JoeB,

    “loans are being repaid all the time and new lending is occurring all the time.”

    As far as private lending goes, if the pattern were exactly constant then the effect of the lending and spending would be economically neutral. The ones doing the new borrowing and creating extra economic activity would be counterbalanced by previous borrowers who were in repayment mode and contributing to debt deflation.

    Borrowing doesn’t give any of us more to spend over the course of our lifetime. It just brings forward future spending power. But of course it never is constant. The government uses, or tries to, monetary policy to regulate the economy. It creates the conditions whereby we have lots of borrowers at the same time. Creating a boom. Later we’ll have lots or repayers all at the same time. That’s the bust.

    Government borrowing isn’t really borrowing in the same way. It’s just a swap of one type of IOU for another type of IOU.

    “In aggregate an economy can only spend on consumption and investment goods what it produces”

    This is known as supply side thinking. We could, on the other hand, say: ‘In aggregate an economy will only produce to match the available spending power for consumption and investment goods.’ So if I were thinking of setting up a commercial venture I’d be looking at the spending power of potential customers. Where I live, I might do OK with a Pizza take away but I probably would struggle with a Michelin standard restaurant!

    If we are smart we require a bit of both supply side and demand side thinking.

  • Peter Martin 26th Jun '19 - 5:59am

    @ JoeB,

    “One of the key features of the period before the financial crisis was the strong positive correlation between house price appreciation and current account deficits”

    Is this a surprise? If the UK is importing more than it exports then the difference has to be covered by someone in the UK doing the borrowing. It could be Govt. It could be the private sector borrowing for housing and cars etc. This doesn’t say anything about the cause. The MMT view is that current account deficits aren’t a bad thing. There’s more stuff coming in than going out which makes us better off. BUT it shouldn’t be funded by private sector borrowing. This creates the conditions for boom and bust.

    The problem will be that the world economy has too many wannabe large net exporters. They’ll manipulate their currencies and bend the rules to achieve that aim. So if we let our currency float, and play by the rules, we’ll almost certainly be a net importer. If the private sector can’t borrow more and the government doesn’t want “borrow” more we’ll end up in recession again. Chasing our tail by cutting govt spending, trying to reduce the deficit but without considering we are cutting govt income too.

  • Joseph Bourke 26th Jun '19 - 1:02pm

    Peter Martin,

    “Government borrowing isn’t really borrowing in the same way. It’s just a swap of one type of IOU for another type of IOU.”
    It tranfers purchasing power from the private sector and enables the acquisition of resoures by the public sector. In this way it acts in the same ways as taxes but defers the collection of those taxes to the future or until assets are actually consumed.

    “If the UK is importing more than it exports then the difference has to be covered by someone in the UK doing the borrowing.”
    Foreign sterling surpluses have to be either exchanged for local currencies (depreciating the value of sterling) or invested in UK assets – real or financial. The surpluses invested are intermediated by financial institutions and find their way through to residential mortage lending in a housing market with a restricted capacity for supply to increase to meet demand – hence the correlation between house price inflation and current accont deficits.
    The UK run’s a significant surplus with the US. That is not because the BofE is manipilating the pound against the sterling.
    When the foreign sector deposits surplus sterling funds to the UK banking sector, banks will increase their domestic lending as this article explains https://spontaneousfinance.com/2013/12/17/the-problems-with-the-mmt-derived-banking-theory/
    “Non-equity funding, [is] by far the largest component of banks’ funding structure (around 95% of funding), [it]mainly comes from two sources: customer deposits and wholesale funding. Banks primarily rely on deposits to fund their lending activities. They try to attract depositors as they provide banks with more funds to lend. Of course they don’t lend out the deposits but the increase in reserves that comes along with an increase in deposits allows the bank to lend more without risking a depletion of its reserve base.”

  • Peter Martin 26th Jun '19 - 2:14pm

    @ JoeB

    The pound is an IOU of government which doesn’t bear any interest. A gilt is an IOU that does bear some small interest. So, if the government sells gilts for ££ it is simply swapping one type of IOU for another. What’s to argue about that?

    “It tranfers purchasing power from the private sector”

    Well no it doesn’t. If I buy some Premium bonds I too am swapping one type of IOU for another. ££ for bonds. I haven’t lost any purchasing power. It’s very simple to swap them back again.

    As usual you are using a mixture of obfuscation and misrepresentation. I didn’t say the £ was manipulated. But it isn’t and that’s why we have an overall trade deficit. If we wanted a trade surplus we’d have to either enter the euro at an unrealistically low rate, ending up like Germany, or do what Denmark does and peg the pound to the euro at an artificially low rate.

    And, of course, having an overall trade deficit, with countries like Germany, Holland and Denmark largely responsible, doesn’t mean we have a trade deficit with everyone. Our EU trade is in large deficit. Our non EU trade (not just the USA) is in moderate surplus.

    I haven’t quite worked out why your reference thinks that German exporters recycling their pounds back into the UK market is contrary to MMT. Net exporters have to do this to recycle their surpluses back to their customers so they have the necessary purchasing power and can continue to be good customers. This inflow is considered to be part of the capital account which has to be equal and opposite to the current account. Otherwise the pound will change in value. Net exporters don’t want the pound to fall. That would mean we’d be less able to afford to buy their exports.

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