When we use the word ‘austerity’, what do people hear?
Do they hear a reasoned argument for why Tory cuts are ideological and unnecessary? That cutting slower will prevent the economy stalling, will allow a faster recovery, and will reduce the deficit faster.
I fear not.
More likely, they hear someone who wants to get us into a never-ending spiral of debt.
Have you heard the quote: “If you’re putting the rent on the credit card month after month, things need to change”.
If you think that’s rightwing nonsense, have a read of who said it.
To many in the UK, “anti-austerity” means failing to follow the warnings of Mr Micawber. Spending for today, and ignoring ruination tomorrow.
Perhaps a slower rate of deficit reduction is a good idea. Perhaps now is the right time for a massive increase in capital spending.
But if ordinary people are going to believe these arguments, progressives need to start using language they understand.
The above is a summary of an article an article on Compass here.
What do you think? Should we stop using the term anti-austerity? Does the term mean people misunderstand the argument? Or doesn’t it matter?
* George Kendall is the acting chair of the Social Democrat Group. He writes in a personal capacity.
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84 Comments
I suggest we all read the book ‘the moral consequences of economic growth’ by Benjamin Freeman. (Published in 2008) Its analysis of how social cohesion is cracked if people do not have sense of ‘getting ahead’ is to my mind a better insight into todays discontents that the party-political rhetoric on austerity.
Sorry, George, but listening to one taxi driver isn’t sufficient evidence to design an economic policy based on radical Liberal principles…. and I think you’re quoting McDonnell out of context.. I also seem to remember a cavalcade of taxi drivers supporting Enoch Powell.
What the party needs to do is to formulate a radical economic policy based on equality of opportunity and real social justice and then to get the leadership to expound it with real conviction. As we saw last year, a timorous chorus of “Me, too” rarely convinces.
Ah, taxi drivers; a group well know for reasoned moderate views…
What next; golf club musings on social services?
@David Raw @expats
Hi David and Expats,
Thanks for the comments. But I think you’ve missed the point of the piece.
It’s not whether to support Osborne’s policies or not, but that arguing for a different set of policies is very difficult. It’s not just my anecdotal experiences, but the huge amount of polling data which shows that Labour was way behind the Tories on the economy.
If Labour and anyone arguing for an alternative set of policies want to convince voters to think again, if they use language people understand, they’re going to struggle.
As Owen Jones pointed out a few weeks ago, in the leaders debate last year, one of the most googled phrases was “what is austerity?”
Or do you think I’m wrong, and that “austerity” is widely understood, and that there’s no need to use different language?
For the five years of the coalition The Labour party was blamed for a worldwide recession started in the American housing market. It was a quite ploy to discredit critics of right wing economics and to nobble them as an opposition force. That is why Labour are not trusted with the economy and the rhetoric of benefit cuts feeds into some people’s prejudices as do attacks on the public sector. Weirdly, Anti Austerity seems to be perfectly well understood in Scotland and wales and Greece, but seems to confuse some section of the English electorate!
The thing is it’s an argument about semantics. However, when or if the term changes it simply means the attack on the idea will change with it. Owen Jones, like a lot of people on the left seems to think that if you change the language then perception changes with it. But it doesn’t seem to work like that. It’s like the fashion for calling IS daesh , it doesn’t really alter anyone’s perception at all,
@Glenn
“For the five years of the coalition The Labour party was blamed for a worldwide recession started in the American housing market.”
I don’t think they were, really.
However I do agree with you about the American housing market being one of the main starting places for the worldwide recession. One of the things that frequently gets ignored is the responsibilty of American politicians on the left for that housing market crash.
Glenn is quite right. It was those two extreme American left wing reds under the beds sub prime lenders Freddie Mae and Fannie Mae who kicked of the world economic crisis in September 2008. Now I would expect the Tories to practice Porkie Pies about this by blaming the Labour Government – but to their eternal shame our lot jumped on the band wagon too. So much for evidence based politics.
It will be interesting to see what a Tory Government will do if it all goes pop again. It looks like raising its head again given the latest news. Headlines on 2 May 2016 :
Freddie Mac may need another taxpayer bailout this week …
http://www.marketwatch.com › Economy & Politics
@Simon Shaw “One of the things that frequently gets ignored is the responsibilty of American politicians on the left for that housing market crash.”
Were there any American politicians on the left?
Still, it gives me some insight into what you might have meant in the past when you described Lib Dems as being in the “centre”. 😉
Yes, the party should develop some economic policy of its own.
Austerity is a broad term – much of what has passed for austerity has not been about cutting government expenditure but tokenistic political messages. If austerity is about eliminating the budget deficit, then the question is how this is done, rather than whether that is a good thing. Having signed up to Osborne’s policies to eliminate the deficit by 2015 that failed even to half the deficit by 2015 (the aim set by Labour in 2010 which remember Osborne/Clegg said would be economic disaster) The Lib Dems have done no economic thinking since May 2010.
@Glenn
I agree that changing the language isn’t enough on its own. But it’s a start.
If the campaigning left are talking in a way that’s imcomprehensible to the general public, no wonder the Tories won the last general election.
Does anyone know what the anti-austerity movement mean by the word austerity?
Does it include tax rises? Some economists say it should, in that tax rises tend to reduce demand in the economy.
Do they mean any cuts at any time? If so, presumably Keynes believed in austerity, in that he advocated cutting the deficit while the economy was strong.
Or do they think austerity is cutting the deficit while the economy is weak? In which case, when do you define the economy as weak?
This isn’t just quibbling about minor differences. I don’t know what is meant by the word austerity, and so I don’t really know what the anti-austerity movement are arguing for. My suspicion is that it’s just a slogan to attack the cuts, without a clear definition.
And if I, a political obsessive, can’t understand it, how can they hope to communicate clearly with the general public, who take almost no interest in politics?
@ Simon Shaw ” the responsibilty of American politicians on the left for that housing market crash.”
So is George W. Bush (President, 2001 to 2009) left wing in Southport ?
You also go on to say – re. The Labour party was blamed for a worldwide recession started in the American housing market. “I don’t think they were, really”.
Interesting you say that, Simon. The Huffington Post, 16 January 2014 reports :
‘ Nick Clegg has accused Labour of being “single-handedly responsible” for the 2008 banking crash, in an attack that has been met with derision by actual experts. Speaking this morning on his LBC 97.3, the Liberal Democrat leader poured scorn on Labour’s attempt on Wednesday to urge the government to stop RBS paying its bankers twice their pay in bonuses.
“I almost admire the chutzpah of these people who created this mess going around to tell people how to clear it up. It was verging on the bizarre that the Labour Party thought they had anything to teach anyone about the banks because they are single handedly responsible for the biggest collapse in our banking system in the postwar period.”
Samuel Tombs, UK economist at Capital Economics, told the Huffington Post UK that Clegg had offered ‘quite an extreme interpretation of the financial crisis, which had various causes”. “You could say he’s letting the bankers off lightly with this assessment. But he’s clearly making it for political reasons.”
A simple explanation of what can be termed austerity can be found in the concept of sectoral balances. Its not that difficult.
If the Government sector is in deficit by £N.pp the the non government sector is in surplus by £N.pp
OK so far?
We can split the non government sector into Domestic Private and Overseas.
So Governement Deficit = Domestic Surplus + Surplus of our Overseas Trading Partners.
(the second term is also our current account deficit)
Still OK?
So austerity as a fix for the government deficit means reducing the domestic surplus, ie getting everyone to spend more on home produced products, or reducing the trading deficit.
It doesn’t necessarily mean increasing taxes and reducing spending. That usually just depresses the economy and so reduces taxation revenue.
@David Raw
Hi David,
I quoted McDonnell as saying “If you’re putting the rent on the credit card month after month, things need to change.”
You said, “I think you’re quoting McDonnell out of context.”
If so, what do you think McDonnell did mean by that quote?
“If you’re putting the rent on the credit card month after month, things need to change”
Yes, they do if, the credit card is owned by a currency user. However, the UK government is a currency issuer. If the government can be said to have a credit card, it is a Platinum ++++ card issued by the central bank which it owns anyway.
No-one can force the government to clear its bill. In fact, the pound is just an IOU of the British government. We all own some pound denominated assets and so someone, usually and ultimately government, has to accept liability.
Sovereign governments have, therefore, to always be in debt!
@petermartin2001
Peter, I know you think that. We’ve discussed this many times. I’m not sure I have anything new to say about why I think differently.
I have two questions. First, to David Raw, if I’ve q
My question is for those who use the word austerity, but believe there are situations where that John McDonnell quote is applicable to the UK. And, if so,
@petermartin2001
Peter, I know you think that. We’ve discussed this many times. I’m not sure I have anything new to say about why I think differently.
I have two questions:
First, to David Raw, if I’ve quoted John McDonnell out of context, what did he mean by the quote?
And second to anyone who uses the term austerity. When the general public hear you use the word austerity, do they understand what you really mean? And if they don’t, why not use a different term?
George,
In my experience Taxi drivers have a tendency to say things like :
“If I ran my taxi business like politicians run the country, I’d go bankrupt!”
Ok but is the Government like a business? It really isn’t. The purpose of a business is to accumulate capital. Or pounds, in the UK.
But why would government want to do the same? Why would government want to collect its own IOUs? It can write out as many as it likes!
Of course, it shouldn’t write out too many or else we’d have high inflation. On the other hand if it doesn’t write out enough we have high levels of business failures and unemployment.
I’d say if you were putting the rent on the credit card month after month, it’s probably because you’re not being paid enough to live on. In the long run it has more to do with handing control of money to the banking system than not living within ones means. Banks are built on turning debt into profit. They need people to pay by credit so they can collect interest. Interest rates are low to ensure that folks keep borrowing.
In current sense, at least to me, austerity is cutting public debt by shifting as much as possible to private debt. So the government lets services slide. puts pressure on councils or whatever to balance the books. Thus instead of paying for things like higher education through taxation or even money creation people are encouraged to borrow privately on earning potential, which inevitably spirals the cost upwards and is the kind of thing that causes problems in the first place.
@petermartin2001
Peter, I know you think that. We’ve discussed this many times. I’m not sure I have anything new to say about why I think differently.
I have two questions:
First, to David Raw, if I’ve quoted John McDonnell out of context, what did he mean by the quote?
And second to anyone who uses the term austerity. When the general public hear you use the word austerity, do they understand what you really mean? And if they don’t, is there another term you could use that would avoid that misunderstanding?
I’m not sure what point you were trying to make, George.
I would like to see us engage with alternative economic views in the way John McDonnell is doing.
Just seen Denis’ post – has answered the point and said it for me.
Not sure that a sectoral balances focus leaflet would create a huge groundswell of new support.
@Dennis Mollinson. The point is that George is trying to address our electability and make us appeal to the dort of voters who get concerned when they see borrowing every year that amounted to £1 in every £4 the government spends.
They know that that level of borrowing is unsustainable because eventually interest payments grow so large that they overshadow every other item of expenditure and it becomes impossible to borrow more.
George rightly recognises that those are the voters who would have voted for us in 2015 but were more worried by a Miliband/SNP coalition. He also knows that chasing left wing voters who are attracted to Corbyn, the Greens or the Nats is a hiding to nothing.
So that is the point. We won’t outflank Labour from the left so we need to talk the language of the centre.
@Denis Mollison
Hi Denis
I tried in this article to confine myself to one point, and one point only:
That voters misunderstand when politicians talk about being anti-austerity, so it’d be wise to avoid the term.
Unless, that is, they think the government should never take measures to reduce the deficit, even in a boom.
Interestingly, it looks like McDonnell is starting to do this. Instead of attacking austerity itself, he attacks “Osborne-style austerity” or “Tory austerity”.
The wsws don’t seem to like it, anyway:
https://www.wsws.org/en/articles/2016/03/15/mcdo-m15.html
Jeremy Corbyn, however, still seems to be attacking austerity in the same way he always has.
That’s not to say I’m warming to McDonnell. Frankly, I don’t trust his apparent conversion to responsible finances. But I’m a forgiving sort, and I’ll watch what he say, does, and who he appoints as advisors with interest.
I wanted to get people thinking about this, partly for clarity, but partly because I think there’s a lot of sloppy thinking in this area, where people attack austerity without thinking through what they are attacking.
It’s my hope (perhaps forlorn hope), that if we think harder about this language, we might understand each other better.
(@David Raw – thanks for your comment on sectoral balances. Looks like we may understand each other a little after all)
Austerity is the word the media use so I think a lot of people understand it means being hard up because they are relying on food banks, have no home, have to choose between heating and eating etc so they know the Government is trying to balance the books by spending less.
I think it’s far more important for us to do some vigorous economic thinking, questioning what has become an almost reflex reaction by the Tories and rigorously examining whatever evidence they use to back up their policies. For example is it true that raising taxes reduces the revenue from those taxes? It sounds like a highly convenient bit of data to me which enables them to get the sort of society they want. We must look at alternatives which would help us to arrive at a Liberal Democrat society not try to patch up the edges of a Tory vision.
An economics working party will soon be set up because Mark Pack has been telling members that the role of Chair is being advertised. I do hope that those members of the working party will be prepared to think the unthinkable and use economics as a creative tool rather than as an excuse for treating the most vulnerable in our society so cruelly.
@Sue Sutherland “For example is it true that raising taxes reduces the revenue from those taxes? It sounds like a highly convenient bit of data to me which enables them to get the sort of society they want.”
This is called the Laffer Curve and there are plenty of articles about it searchable on the net. Put it this way, if you knew that for every extra £1 you earned or realised in profit on disposal 98p was going to the Treasury, would you make the effort to earn that money or invest time in ways to not make that profit taxable?
David and George,
There seems to be some guffawing at the idea that the public might ever understand the concept of sectoral balances. I tried it out in the pub with some friends last night after one of them raised the issue of us all being in so much debt.
I did get a few quizzical looks, but that’s because the idea was so new to them. They understood well enough what I was saying though! Especially when I said that if the UK is in deficit as a whole, because of its trading imbalance, then someone in the UK has to fund that deficit by borrowing.
If you’re concerned at so much borrowing in the economy, whether it be from the Govt or the private sector, then the trade imbalance has to be of top priority.
What’s so hard about that?
Austerity derives from the rather joyless word – austere. Most people know fine well what it means. As for sectoral balances, it can’t have been much fun in the pub last night.
Dictionary definitions of austere :
Severe or strict in manner or attitude. synonyms: stern, strict, harsh, unfeeling, stony, steely, flinty, dour, grim, cold, frosty, frigid, icy, chilly, unemotional, unfriendly, formal, stiff, stuffy, reserved, remote, distant, aloof, forbidding, grave, solemn, serious, unsmiling, unsympathetic, unforgiving, uncharitable; having no comforts or luxuries. strict, self-denying, self-abnegating, moderate, temperate, sober, simple, frugal, spartan, restrained, self-restrained, self-disciplined, non-indulgent, ascetic, puritanical, self-sacrificing, hair-shirt, abstemious, abstinent, celibate, chaste, continent; More
having a plain and unadorned appearance.
In other words its not a Laffer minute but a miserable way of life. I’m surprised TCO wouldn’t be much happier in the company of the Redwoods of this world.
As a traditional social Liberal and unrepetentent Keynsian I don’t need to do a net search to know it’s a convenient theory to give the rich an excuse to keep their hands in their pockets.
@ George Kendall “I don’t really know what the anti-austerity movement are arguing for.”
Recently a new LibDem member posted of his despair with Wirral Council (Lab) decision to close a respite centre.
As a Wirral resident, I received the council’s public consultation pack listing a range of priority budget options. It was a most depressing document. The ‘choice’ was between closing or charging for essential services or other ideas such as scrapping school crossing patrols, abandoning park maintenance, closing libraries etc.
There wasn’t one option I could support. So George, what do I want? Well not this. I do not want to be faced with choices driven by an ‘austerity’ agenda as a fait accompli. I want to see services protected not decimated. I do not want to see public services that have served the communities starved of resource or closed down such that future generations will never benefit from what has been built up over decades. This isn’t progress.
Should we given another choice to maintain these services? In my opinion, yes, of course we should!
As a new earner in the 1970’s I remember Tory and Labour budgets where taxes, especially income tax, varied as and when needed from budget to budget. It was expected.
But it seems to me that from the 1990’s onwards all parties have colluded to duck honest and responsible budgetary control. They all want to be elected on a ‘No increase in income tax guaranteed’ basis and have long since abandoned campaigning honestly. Not only do that, they want us to believe that whilst holding income down income tax no matter what, they can simultaneously improve services. Of course when pushed they fall back on using vague language to disguise intended cuts or alternatively they muddy the waters by hiding in the budget small print, the assumption that huge efficiency savings will be made knowing full well, as in the NHS, these are simply unachievable.
Don’t get me wrong. I am not against looking for efficiencies. I am not against low taxation. But I am most certainly against austerity programmes that cut vital services to the point where they cannot possibly deliver what need. Given the choice I would rather pay to save these services than watch them
Up until Corbyn’s election and possibly Tim Farron’s too, we simply have never been given the choice. Hope it’s not too late.
@ Dave Orbison. Great post, Dave. I share your anger about political parties being unable to think outside the box. The Atlee Government certainly could despite all the problems they inherited – and so, to a point, did the Asquith government.
@ George,
“I don’t really know what the anti-austerity movement are arguing for.”
If we have people who want to work full time, but can’t, or are working in jobs which don’t make best use of peoples’ talents and abilities then we have to unnecessarily do without the benefits of their making a full contribution to society. And of course they feel the frustration of not being able to make that contribution and receiving the benefits that would bring.
So we are arguing against that.
@David Raw “I’m surprised TCO wouldn’t be much happier in the company of the Redwoods of this world.
As a traditional social Liberal and unrepetentent Keynsian I don’t need to do a net search to know it’s a convenient theory to give the rich an excuse to keep their hands in their pockets.”
Perhaps you would care to enlighten us as to where the taxes come from to pay for all these public services if there is no private sector economic activity to be taxed?
And why is it that it’s always the “traditional social liberal [s] [sic]” who want to place economic liberals in another party?
“I share your anger about political parties being unable to think outside the box.”
Sadly whenever a Lib Dem dares to do so, some commenters inevitably tell them they’re Tories and should go away and join that party. If those in positions of power in the party and the shouties on social media are constantly screaming about Yellow Tories, you shouldn’t be surprised when there’s consequentially a dearth of thinking within the party that in any way deviates from the tired, tried and tested policies and ideas of the comfortable ‘left’.
@TCO
“Perhaps you would care to enlighten us as to where the taxes come from to pay for all these public services if there is no private sector economic activity to be taxed?”
Has David argued in favour of communism? I don’t think so. I think he believes in a mixed economy like any sensible person does.
As for “where taxes come from” – they come from anybody who is helping to create wealth in the economy, public and private sector alike :-
http://timharford.com/2011/12/youre-wrong-we-are-all-wealth-creators/
TCO 4th Jun ’16 – 1:57pm……………This is called the Laffer Curve and there are plenty of articles about it searchable on the net. Put it this way, if you knew that for every extra £1 you earned or realised in profit on disposal 98p was going to the Treasury, would you make the effort to earn that money or invest time in ways to not make that profit taxable?…………
Oh, the Laffer curve; that ‘supposed’ gospel for the wealthy to hang on to more money….They ignore later work that tends to show that raising taxes would raise further revenue and that, if tax loopholes and tax shelters are readily available, the point at which revenue begins to decrease with increased taxation is likely to be lower……
BTW…I’m old enough to remember that 98% rate…The argument used by, ‘those at the top’, was that they needed massive salary increases because they received so little of any rise…Amazingly, when the tax rate dropped, their salary increases remained much the same…
@Stuart “Has David argued in favour of communism? I don’t think so. I think he believes in a mixed economy like any sensible person does.”
I never said he was a communist – you’ve raised that point.
He does seem to be arguing in favour of the sort of punitive tax regime favoured by the Labour government of the 1970s (and which the current Labour leadership seems to want to return to).
That worked out well if I recall correctly.
@expats let me ask you the same question: if you knew 98% of any increase in your income generated by extra productive effort was going to the Treasury, would you make that effort?
@Stephen Howse “Sadly whenever a Lib Dem dares to do so, some commenters inevitably tell them they’re Tories and should go away and join that party.”
Yes, I’ve always found that rather puzzling. You’d think that if “traditional social liberals [sic]” such as Mr Raw were secure in their beliefs they would feel confident in their ability to win the argument without feeling the need to expel anyone with a different point of view.
Personally I welcome a strong challenge to my perspective on the world that I get from the different groups within the party as this healthy debate and challenge makes our policies stronger. It’s when you get groupthink that you end up with unworkable policies like free tuition fees.
David Raw
Your comments re TCO and Redwood are insulting , not because to be associated with a Tory is discreditable , I would happily be so with Sir John Major , Lord Hesiltine , or Ken Clarke on specific attitudes or ocassional policy, but your implying he does not or should not be in our party .
Why are you , if following that approach , not with Corbyn or like your favourite Democratic Socialist , Bernie Sanders , not an independent socialist ?!
I am on the centre left on economics , the radical centre on most things and on the centre right on crime and punishment for the wicked .I am a Mill supporting , harm principle oriented Liberal Democrat !
Me too Lorenzo, you’re not alone.
As someone who has always been on the left of the party and thinks of himself as a social Liberal I am appalled at the constant snide attacks on those in our party who want to have a different view or who actually make an attempt to develop economic policy that takes account of the need to keep deficits down. People who quote Keynes very often know little about his views. He was actually very much against high debt by government or anyone else. That is why he argued for paying for the war through high taxation rather than borrowing. His policy of spending in times of hardship to keep up employment was never designed to lead to high government deficits as it was supposed to be followed by higher taxation and lower spending when times were good. Of course this is the bit governments were never keen on! One of the reasons we got into the mess we did was that the last Labour government borrowed heavily even when times were good to avoid putting up taxes.
So I would make a plea to David Raw and others of his ilk. Stop categorising people as Orange bookers or yellow Tories and try dealing with the arguments instead. Lib Dem Voice would be a much better place than it is now where insult and name calling far too often replaces debate.
TCO
what makes you hit on 98% and if low taxation increases productivity by incentivising high earners why is productivity going down? What if the productivity it increases is dodgy like, say, I dunno, pushing sub-prime loans.
The other thing about the Laffer curve is it doesn’t actually state what the ideal tax rate is as it is based on the idea that at one end of the scale a 0% rate of tax raises no tax and that the other end 100% tax raises no tax. So the ideal rate of Tax according to the Laffer Curve is somewhere unspecified between 0 and 100 %
Austerity is an inappropriate word in the context of public or private expenditure. From the private individual to the largest organisation there is always a need to review spending to ensure that it is still relevant. Things that were once necessary often become pointless as needs and circumstances change. Ordinary people see stupid and wasteful use of public money, for instance maintaining bus services where the need for them has vanished because the users have moved away and the affluent incomers all have nice cars. I can understand authors campaigning to keep local libraries open but even years ago they were often little used and now they are sometimes virtually empty. We have to look at ways to serve people’s needs which are relevant to modern life, not live in a past which has long gone. There are lots of steam railways operated by enthusiast volunteers but mercifully we do not still use filthy steam engines on commuter trains.
On another point, at what level of income would a 98% tax rate seem immoral, let alone counter productive?
TCO I think we are far away from the problems of 98% rate of tax, so far away that the argument is about 50% rate of tax on higher earners. When someone is told they are fit for work, when they later win an appeal, they lose 100% of the income they need to scrape by. Do I want this to happen? No, I do not and if it requires me to pay more tax then I will do so. Thatcher legitimised greed and the rich will always resent taxation. I remember the “brain drain” that resulted from higher levels of taxation, clever people who preferred to emigrate rather than pay those taxes, but most people stayed and paid because in those days most people understood what it meant to have a fairer society. We will have to persuade people that a Liberal Democrat society is worth paying for, it won’t be easy but it will surely be worth it.
@ Lorenzo Cherin
It’s characteristically noble of Lorenzo to defend TCO, but I’m afraid it reveals a lack of knowledge about the Laffer Curve, it’s main protagonist John Redwood and the importance of Laffer to the right wing of the Tory Party.
For example, on 14 August, 2010 the Conservative Home website led with the headline, “Happy Birthday, Arthur Laffer !” Mr Cherin is clearly unaware that Redwood is Laffer’s chief proponent in and out of the Commons (e.g Question Time, 2 March 2012). Did you know Lorenzo that Sir John Major had a choice epithet for Redwood classing him and others in his cabinet as of doubtful legitimacy. Redwood is a brexiter and member of the Tory right.
Redwood has serious critics amongst reputable economists. Laffer concluded that cutting income tax encourages people to work harder, and increase revenue. We now know where on the curve revenue is maximised – it’s far away from 50 per cent.
In 2012, Romer & Romer found the maximizing rate on the highest earners is extremely high—over eighty percent. Either way, if you want to maximise revenue, the 50p tax rate is about 25p too low. Among the top 0.05 percent of the income distribution they find an elasticity of taxable income of 0.19 percent which implies “that tax revenues would be maximized with a tax rate of 84 percent; that is, you could raise taxes up to 84 percent before people’s reduced incentives to make money would compensate for the higher tax rates.”
Diamond and Saez (2011) put the peak yield closer to 76 per cent.
If TCO wants to support right wing Tory economics that’s his privilege. I ask only that he reflects on where he would feel most comfortable.
As for Lorenzo I suggest he reflects on Denis Healey’s comments about an attack by Geoffrey Howe. I don’t share a birthday with Denis, Lorenzo, but I went to the same school.
PS I don’t want astronomical rates of income tax. I do believe in a mixed economy – BUT I ALSO BELIEVE THE TOP 1% SHOULD PAY THEIR SHARE. Tax Havens and non doms want everybody else’s cake as well as their own to eat. Philip Green and his tax arrangements with his wife in Monaco are a recent case in point.
@Sue Sutherland
Hi Sue,
It’s true that the media use the word ‘austerity’, but that doesn’t mean those opposed to the cuts are wise to use it. It can mean too many contrary things.
There are some in the anti-austerity movement who opposed all cuts and any cuts, at any time, even when we were borrowing a pound for every four pounds being spent. A handful of these are communists, who don’t believe in private property.
However, I think, most people opposed to the current austerity want to defer the pain. They are like Paul Krugman “give me a recovery, and I’ll become a fiscal hawk, but not yet”.
If they aren’t careful, and use exactly the same slogans as the communists, they’re going to be tarred by association.
@expats
The Laffer Curve is a pretty widely accepted concept. If there’s a 99% tax rate, people’s work incentive is dramatically decreased, to a point where wealth creation plummets, and less tax is raised than if you had, say, a 60% rate. Added to that, it may mean profitable businesses relocate overseas.
As @Glenn says, there is disagreement as to where the top of that Laffer curve is. The IFS have produced several papers in recent years, and they’ve admitted they don’t precisely know. I know previously they thought a 45% tax rate would be counterproductive, they think that the 50% tax rate was counterproductive, but they aren’t sure.
The actual Laffer rate is a lot higher than 45/50%, but you have to add all the other taxes as well, including VAT.
But just because we don’t know precisely where the top of the curve is, doesn’t make the concept useless.
See http://www.ifs.org.uk/publications/7066
@petermartin2001
We already discussed sectoral balances in great depth on Facebook. I’d point you back at that thread. Unfortunately, it got deleted. I was massively frustrated by that. I put a lot of time into those posts, and then they vanished.
I’ve often wondered what happened. Did you delete that thread? And if so, why?
@Dave Orbison
I understand the frustration. One of the worst things about the Tories is the way they’ve treated local government. Which is the major reason why I don’t think success at a local government level for the Lib Dems is sufficient. Westminster controls the purse strings, we can’t leave them in Tory hands.
That said, I believe the deficit in 2010 was extremely serious, and we still have a significant challenge. It would be easy, now we’re in opposition, to forget about the pressures on government finances, but I think it would be a mistake.
Firstly, I think it would be dishonest. The UK has a government debt of about 80%, it still has a structural deficit, and is faced with increasing pressures from an ageing population. If we don’t grapple with the difficult implications of that, then we aren’t being straight with the British people.
Secondly, I think it would be politically foolish. The electorate have a very cynical attitude to politicians. If we say we can close the deficit without pain, and without risk for the future, they’ll say: why should we believe you? If we can’t name a single country that’s adopted such policies without a collapse a few years later, they’d be right not to believe us.
I think the Tory plans to cut the deficit are probably unnecessary, and I’d support Vince Cable’s alternative. But that’s not an alternative that’s without pain. As for the Corbyn alternative is, it seems to be to oppose “austerity”, but I don’t know exactly what that means.
@Lorenzo thanks for your kind words of support. I am relaxed if Mr Raw wants to call me a Tory; that is his prerogative if he to desires and appears to be based on an understanding of politics formed in the 1930s and not modified subsequently. I know that I am a Liberal and that is sufficient.
The party needs to be challenged out of a tendency to head to its comfort zones, one of which is a reflex to tax and spend without thinking about the effect of that taxation and the utility of the spending.
David Raw you are a Laffer minute !
@George,
I haven’t deleted any thread on FB. But I did delete some of my own comments. I too was a little frustrated at the time. I’m quite happy for someone to say I’m wrong if they explain why they think that. But all your replies were along the lines of your earlier comment on here where you wrote “I’m not sure I have anything new to say about why I think differently” but without actually saying why you thought differently!
And I was so annoyed with you that…
In June 2010 there were compelling arguments against increasing the pace of fiscal consolidation – ie ‘austerity’ set by Alistair Darling’s March Budget and supported by the Lib Dems in their election manifesto. These arguments were ignored and Tories and Lib Dems argued that ‘fiscal consolidations can be expansionary. The result was the reverse. Recovery was delayed and in fact the countries debt grew by more than it would have done had Lib Dems stuck to their guns.
Here http://www.imf.org/external/pubs/ft/fandd/2016/06/ostry.htm is how an IMF paper regards the arguments
“Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment. The notion that fiscal consolidations can be expansionary (that is, raise output and employment), in part by raising private sector confidence and investment, has been championed by, among others, Harvard economist Alberto Alesina in the academic world and by former European Central Bank President Jean-Claude Trichet in the policy arena. However, in practice, episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage point and raises by 1.5 percent within five years the Gini measure of income inequality (Ball and others, 2013).¬”
We should not alter our opposition to ‘austerity’ because we are losing the argument, we should argue it better and more forcefully. We should also recognize the potential for monetary policy to increase the pace at which the nominal economy grows and therefore bring down more quickly the debt to GDP ratio.
And of course dismiss the siren voices of those who supported accelerated deficit reduction in 2010.
The IMF paper linked to above is well worth reading – especially the section on ‘Size of the State’ where it is clear that in a country like the UK the cost of ‘austerity’ far outweighs the benefits. Here is an extract:
“It is surely the case that many countries (such as those in southern Europe) have little choice but to engage in fiscal consolidation, because markets will not allow them to continue borrowing. But the need for consolidation in some countries does not mean all countries—at least in this case, caution about “one size fits all” seems completely warranted. Markets generally attach very low probabilities of a debt crisis to countries that have a strong record of being fiscally responsible (Mendoza and Ostry, 2007). Such a track record gives them latitude to decide not to raise taxes or cut productive spending when the debt level is high (Ostry and others, 2010; Ghosh and others, 2013). And for countries with a strong track record, the benefit of debt reduction, in terms of insurance against a future fiscal crisis, turns out to be remarkably small, even at very high levels of debt to GDP. For example, moving from a debt ratio of 120 percent of GDP to 100 percent of GDP over a few years buys the country very little in terms of reduced crisis risk (Baldacci and others, 2011).¬
“But even if the insurance benefit is small, it may still be worth incurring if the cost is sufficiently low. It turns out, however, that the cost could be large—much larger than the benefit. The reason is that, to get to a lower debt level, taxes that distort economic behavior need to be raised temporarily or productive spending needs to be cut—or both. The costs of the tax increases or expenditure cuts required to bring down the debt may be much larger than the reduced crisis risk engendered by the lower debt (Ostry, Ghosh, and Espinoza, 2015). This is not to deny that high debt is bad for growth and welfare. It is. But the key point is that the welfare cost from the higher debt (the so-called burden of the debt) is one that has already been incurred and cannot be recovered; it is a sunk cost. Faced with a choice between living with the higher debt—allowing the debt ratio to decline organically through growth—or deliberately running budgetary surpluses to reduce the debt, governments with ample fiscal space will do better by living with the debt.¬”
@George @Glenn @David @TCO,
I don’t believe there is any real dispute between left and right about the Laffer effect on any one individual tax. If we have high rates of income tax, for example, then clever accountants devise ways of shifting income so it can be classed as Capital Gains or come up with some other manoeuvres to limit tax liability on that particular tax.
But what happens to the total tax take? If taxes on tobacco are high, then people may smoke less but they could divert their spending to alcohol so end up drinking more, and the total tax take could be unaffected. So the Laffer effect doesn’t work in a general sense. At least not as Laffer would have explained it. It can work if a reduced rate of tax produces an increased level of economic activity which then leads to higher tax revenues.
Reaganomics was an interesting example of where Ronald Reagan did the right thing in Keynesian terms for the wrong reasons. He was persuaded by Arthur Laffer that reducing taxes would increase the tax take and reduce his budget deficit. That didn’t happen, but the stimulus to the US economy was just what was needed at the time. Of course the left would have preferred the same thing from more public spending but Keynesian economic principles can work for the right too, if they are smart enough to use them.
Bill le Breton,
“governments with ample fiscal space will do better by living with the debt”
Yes of course this has to be true. The UK, which has its own currency, has as much “fiscal space” as it chooses to use. Not so for any of the eurozone countries. They are much more limited in their ability to control their own economies. They use someone else’s currency so can’t set their own rules.
If the UK want quantitative easing it can have as much as it likes. If the Government want 0% interest rates it can have them. If it wants 10%. It can have that too. There’s really no problems of type that are popularly imagined.
All any truly sovereign government needs to do is steer a sensible middle course between having too much inflation on the one hand and too high a level of unemployment and business failures on the other. Everything else: government deficits, exchange rates, BOP figures etc will take care of themselves.
@Bill le Breton said “We should not alter our opposition to ‘austerity’ because we are losing the argument”
Hi Bill,
The main point of this thread is not to stop advocating one position or another, but to use language that people understand. Among academic economists, anti-austerity might mean reducing the rate of deficit or debt reduction.
I fear many voters, when they hear about “anti-austerity”, they don’t understand the academic usage of the word.
Instead, it sounds to them like a belief that we can always print more money, so debts and deficits don’t matter. Anyone who thinks debts and deficits do matter, might be wise to use different language to differentiate themselves.
Thanks for linking to the Ostry, Loungani & Furceri article. It was interesting. They point out that the IMF has changed its mind with regard to debt reduction. They don’t say that governments shouldn’t deal with their structural *deficits*, merely that it may be counterproductive to pay down the public *debt*.
As we still have a structural deficit, we’re not yet in a position to pay down our debt anyway.
They may be right that it’s best to use growth to reduce debt. I’m no economics expert, but looking at how opinion has changed, even over just a few years, there must be likelihood it’ll change again. So I’ll accept that opinion for now, but reserve the right to change my mind.
I would, however, strongly agree with their call for greater emphasis on education and on minimizing the adverse impact of deficit reduction on low-income groups. But that’s not for economic reasons, but because I think it is the right thing to do.
What makes me nervous is not the views the IMF and other economists are putting, but when others cite them as if the debate is over, and anyone who disagrees is an ideological rightwinger. I think we should be more tentative and nuanced in our opinions, and less ideological.
The IMF paper uses words like “could”, “might”, “suggest” and “nuanced”. I found that reassuring, and made me more inclined to trust what the authors were saying. Unfortunately, on the internet, when economics is discussed, too often nuance is forgotten, and opinions morph into fundamental dogma.
@petermartin2001
Peter,
When you delete a comment in Facebook, you delete all the replies to that comment.
I had spent a great deal of time on those replies, responding to the articles you had pointed me at, making my own arguments, and looking up links of my own. Towards the end, I did feel we were going round in circles, but only at the end. Unfortunately, I didn’t keep copies outside of Facebook, so my work is lost forever. I’m sure you can appreciate how enormously frustrating that was.
Re: Laffer Curve
It’s important to distinguish between the concept of the Laffer Curve, and Arthur Laffer himself.
The curve was named after Laffer, but the theory existed long before him. I believe the concept is widely accepted, what is disputed is what the peak tax rate is to maximise revenue.
@George,
Well I’m sorry about that! But whereas I felt I was engaging with the points you made, you were just giving me links to some right wing economists and say that there were other opinions too.
But at least I wasn’t as critical about this post as ellis winningham, who, incidentally, I don’t know, but was shared by a FB friend of mine recently on another economics blog.
https://www.facebook.com/ellis.winningham/posts/1108281785897335
@George “Re: Laffer Curve … The curve was named after Laffer, but the theory existed long before him. I believe the concept is widely accepted, what is disputed is what the peak tax rate is to maximise revenue.”
Indeed, which is why I’m struggling to understand why when I responded to Sue”s point that she didn’t believe there was a relationship between tax rates and tax take with a reference to the Laffer Curve, that it should trigger such opprobrium.
It’s clear that there is such a relationship and that it needs to take into account all taxes (not just income ) and that specific individuals will react in different ways.
To the poster above who commented that all rich people are greedy I would respond that that is stereotyping; some are, some aren’t, a’s is the case for people at all income levels.
The technical details of this whizz over my head.
However, what comes across is that before the election in May 2010 the party recommended one approach to deficit reduction, between that and the election in May 2015 it supported a different approach, and since the 2015 election, as with a number of important issues, it is very unclear what its position is.
@David Raw”If TCO wants to support right wing Tory economics that’s his privilege. I ask only that he reflects on where he would feel most comfortable.”
I don’t want to feel comfortable in a party, and no party should feel comfortable with itself if it wants to be elected.
The Tories tried comfort with Hague, IDS and Howard and kept getting defeated. Labour won three elections with the distinctly uncomfortable Blair.
Labour is now trying the comfort zone approach, first with Miliband and now, supremely, with Corbyn. The members love him and can’t understand why nobody else does; they think it’s a media conspiracy.
Parties that want to appeal to a broad enough constituency to be elected need to feel uncomfortable. Your path of expelling anyone who’s views you disagree with leads to irrelevance.
Lastly, rather than giving the knee-jerk “economic liberalism = neo liberalism = Tory” response to anything I write, may I respectfully request that you a) read up on the subject so you can have an informed debate and b) engage with the arguments and not the person.
@Peter Watson as I understand it the approach to deficit reduction actually followed 2010 to 2015 was what was advocated by Vince pre 2010. This also tied in with what Darling proposed in 2010, but for their own reasons the Tories and Labour both painted it as tougher than it was.
Allow me to put the question of the deficit another way. If the Government are borrowing then the rest of us are lending. Simply, that means we are saving.\
So if the Govt wants to reduce its deficit, it needs to discourage us from saving and encourage us to start spending.
And what better way than to deliberately create a bit of extra inflation? Nothing too excessive -say about 4%. We’ve all survived quite well on much higher levels of inflation than that in years gone by.
‘Use it or lose it’ might then be a thought uppermost in the minds of many.
@petermartin2001 “Allow me to put the question of the deficit another way. If the Government are borrowing then the rest of us are lending. Simply, that means we are saving.”
is that necessarily true? Can’t UK government bonds be bought by foreign nationals, companies and institutions?
Petermartin2001
We know what happens with tobacco. Some smokers stop, others move to the black market or to vaping. The tax return thus falls and in turns leads too further hikes to the point where it becomes counter productive. Puritan taxation is probably less effective as a means of stopping anything than legal changes like smoking bans. Ditto for drinking. Upping the price in pubs damages social drinking and pubs, but ups home drinking. Upping the tax on home drinking will increase duty free and other markets, so will ultimately will only damage the local drinks industry. It’s like sugar tax and green taxation. They don’t really work to decrease demand, but makes some people feel that they are doing a public good by punishing what could loosely be termed immorality.
@TCO,
I was including foreign ownership of bonds as the “rest of us”.
@petermartin2001
Trouble is, Peter, we’re not an island to ourselves. We’re one of the most open economies in the world.
Overseas holdings of government bonds are about 30%, so how they react is very important.
We’re also the most popular place in Europe for foreign investment (just one reason why Brexit would be extremely damaging).
That’s why I’ve never understood the logic of your arguments about sectoral balances. And that’s what I tried, and failed, to communicate in our deleted Facebook discussions.
As far as I can see, no country has adopted a policy approach like the one you’ve described, without suffering serious consequences a few years later. As we’re so dependent on international trade, those consequences could be even more serious for us.
@George,
ALL sovereign economies work as I’ve described. They are all subject to the same accounting rules regardless of any particular political and economic differences. Regardless of the size of government etc. So, whatever anyone’s political perspectives, they need to understand how things work before they can know what are the possible options.
I must say when the penny does drop it can be a kind of “Ah-Ah” moment, and it becomes quite clear why such policies as cutting govt spending and raising taxes never quite work as expected. The deficit stays stubbornly just as bad as ever! Of course it does!
Were you able to see the FB link to Ellis Winningham? I can send you the text by message if you can’t but I’d just give you this quote:
“….politicians and people like Mr. Kendall are doing the public a great disservice”
He’s quite right and I’m sure you aren’t the sort of person who intentionally would wish to do this. So, if you didn’t follow what I was saying, then perhaps you do better by reading him?
@petermartin2001 so if government debt is partly in the hands of overseas holders then UK holders cannot spend their way out of the problem.
@TCO,
They can if the Government can persuade them to take on even more debt. That’s been the favoured method for the past 20 years or so. This has resulted in the asset bubble of very high house prices and possibly the stock market too.
But, unless interest rates actually go negative, it looks like we might have come to the end of the line in encouraging more private sector debt as a way to achieve economic stimulus.
Ultimately though, if the UK as a whole is in deficit to the ROW then someone in the UK has to fund that deficit by borrowing. That can either be the UK govt or everyone else in the UK.
I’ve read the piece by Ellis Winningham. I didn’t have permission to answer on his Facebook timeline, so I sent him a reply by direct message. I suggested he join this discussion
What was striking about Ellis’s piece was when he effectively said that nobel laureate Paul Krugman knows nothing about economics. Do you think the same?
It’s this absolute certainty that you are right, and a huge range of experts who have spent their lives studying the subject are wrong, that baffles me. Paul Krugman is hardly a rightwing economist.
My assumption is that this certainty comes from social media networks where like-minded people mutually reinforce their views on a subject together for so long, they become convinced that everyone, including the experts, are wrong. Sometimes, I’ve noticed people get very angry when these beliefs are challenged. In my opinion, I’m doing a public service in challenging those beliefs, and hopefully getting a few to question them.
As to all countries following your advice. I can’t think of any that have without bad consequences. Can you give an example of a country that has let their government deficits get out of control, without hitting a major crisis within a few years?
Ultimately, if a government relies on borrowing money to fund its programme, they have to retain the confidence of those they are borrowing from. Unless, that is, they are willing to take actions which will devalue confidence in their currency.
Even if the UK chose to inflate its debt away, there is still 25% of gilts that are index-linked, where inflation wouldn’t help.
@ George,
Ellis argues the case in his own way. I’m closer to Paul Krugman than he is but, having said that, I think PK was wrong in what he was saying on the effect that private borrowing has on the economy. He was involved in a fierce argument with Prof Steve Keen too about that. Later he was directly contradicted by a quite a famous paper on the subject from the BOE. Egos being what they are he’s never admitted he was wrong but from what I can make out he’s modified his views somewhat and what he’s now saying sounds pretty good to me.
I don’t know how many ways I can say this but I’m not offering any advice. I’m just trying to explain how things work.
You ask ” Can you give an example of a country that has let their government deficits get out of control, without hitting a major crisis within a few years?”
What do you mean by “out of control”? That’s been said many times about Government deficits in the UK, USA, Canada, and Australia. There’s always been this popular clamour to “return the budget to surplus”. As if surplus is the normal state of affairs.
Well it isn’t! The normal state of affairs for any country which doesn’t have a high export surplus is for the government to run a budget deficit. That’s where money comes from. The government spends the currency into existence giving those of us who own that currency a financial asset. The Government has to assume the liability.
Sovereign currency issuing governments have to be in debt.
@ George,
I know you’ve messaged Ellis, and I could give you a couple of pointers for what I might say to Ellis where I think he might have it slightly wrong. He’s not got it majorly wrong though IMO. When he talks about a “fallacy of composition” he’s meaning that the economics of a currency issuer is not at all the same thing as a currency user. If the government can issue currency why do they bother about being in debt? That’s a key thing to get your head around. There is only one reason and that’s the possibility of creating high inflation. There’s no other. None at all.
As with anything else it pays to understand what your opponent is actually saying, if you think Ellis and I your opponents, better than we understand it ourselves. Then, if there are any flaws, you’d be in a much better position to point them out.
@petermartin2001 “What do you mean by “out of control”?
Okay, let’s put it another way, I can point to examples of countries with their own currencies that have let their borrowing get out of control. If I’ve understood you correctly, this shouldn’t have happened, but it did.
As for “the possibility of creating high inflation” being the only concern. My concern is both inflation, and the perceived threat of inflation in the future. That’s what I meant by “devaluing confidence in your currency”.
If borrowers had confidence that you could get your borrowing under control (as they had in the UK in 2010), then, as long as you retain that confidence, they will keep lending to you at low interest rates, and you won’t have a crisis.
However, if they suspect that there will be high inflation in the future, there is a real risk that they’ll panic. Then the 75% of gilts which are not index linked would suddenly lose value, and any new borrowing would be at prohibitively high interest rates.
There are some economists who argue that, with interest rates so low, and inflation so low, we had room to borrow more. They may have been right. No one knows for sure. But egos being egos, some economists vehemently denounce others, and claim that no reasonable economist will disagree with them. Unfortunately, these small number of polemical economists get all the media attention. Their views also appear to dominate in some parts of social media, without any counterbalancing opinions.
In 1976, the UK government had a financial crisis. It borrowed a record sum from the IMF, and implemented drastic cuts to spending. It was perceived that the UK had lost control of its spending, was not regarded as a safe haven, and lenders demanded high interest rates. Inflationary pressures and interest rates remained high for the following decade.
In 2010, the UK had painfully acquired a reputation as a safe haven (from 1990). It had acquired this reputation because it was thought there was a political culture in both major parties which would ensure that borrowing wouldn’t get out of control.
However, while the UK was a safe haven, many thought, if a more austere version of the Darling plan was not adopted, there was a danger that the UK could lose that reputation. This included Vince Cable, who proposed a plan in 2009 that was very similar to the first Coalition budget. (I can look up a link to it if someone wants it)
Later, the Coalition toned their plan down to become similar to the Darling plan. This made sense, because, by then, the UK’s reputation as a safe haven was relatively safe.
The Economist puts it more succinctly: “the risk, when a deficit is as high as 11% of GDP, is that the markets lose confidence and push up bond yields, making the fiscal situation even more desperate. The costs of such an outcome are so great that a government can hardly be blamed for trying to avoid it.”
http://www.economist.com/blogs/buttonwood/2015/05/fiscal-policy
@George,
“I can point to examples of countries with their own currencies that have let their borrowing get out of control.”
Can you? Which do you mean?
Just to clarify what I’m saying: The UK government has its own sovereign currency so providing that it only borrows in pounds, and providing it is happy to let the exchange rate float ie doesn’t try propping it up, the the only negative effect of too much borrowing is the possibility of creating higher than desired levels of inflation.The mistake made in both 1976 and 1991 was to borrow in a foreign currency to try to manipulate the exchange rate.
Also you should realise that government has total control of the level of interest rates. Both in terms of the overnight rate and longer term. It can have whatever levels it likes. It just sets the overnight rate by decree and buys back bonds as part of a QE program to lower longer term rates or sells more bonds to raise them.
@petermartin2001
Peter, can you point to any government that has had a significant fiscal deficit, that has followed policies that you think are good economics?
Maybe I’ve misunderstood you. So if you can give me a concrete example of a country that’s adopted the policies you like, maybe I’ll better understand what those policies are.
I can point to a number who have hit serious problems, but I presume those aren’t the examples you would point to.
I’ve already mentioned the UK in 1976, which had a budget deficit of about 7%, combined with a very high inflation rate. Brazil currently has a deficit of over 10%. Venuzuela’s is over 11%.
What model should we follow instead?
@George,
The model is simple enough. Govt needs to aim to have some inflation in the system. Nearly everyone accepts that. The Government and the BoE have a target of 2%. I’d argue for a slightly higher figure maybe 3% or 4%. At least for a short period to kick start the economy.
So how to we get a higher rate of inflation? There’s no mystery about that!
@petermartin2001
Peter,
From what you’ve said previously, I think your model is more than just a little inflation.
But, leaving that to one side, what country that has had an 11% government deficit would you hold up as a good example to follow?
George,
No my model (if you can call it mine!) isn’t significantly different from the treasury model. They might want 2% inflation. I’d argue that it should be slightly higher for a couple of years or so. That’s all.
When interest rates were much higher, the Govt always had the option of stimulating the economy by lowering interest rates. I accept that too. Except I’d just make the point that is ultimately counterproductive. We end up with too much private debt in the economy, unsustainable asset bubbles, which cause all sorts problems when they burst as happened in 2008.
So you mention the figure of 11%. That was seen immediately after that crash. People had stopped spending and had started saving (7% of GDP). They were scared. At the same time the UK still had something like a 4% trade deficit.
So 7+4 =11 That’s all there is to it.
http://www.3spoken.co.uk/2016/04/uk-sectoral-balances-q4-2015.html
Hi Peter,
I’m baffled. We’ve talked so long so often, and what you’ve just stated implies that I’ve completely misunderstood you.
If all you are suggesting in a 1% increase in the target inflation for the remit of the Bank of England, then why do you object in any way to the above article?
Both in the above, and in the Compass article, I wasn’t criticising a slight loosening of UK policy. That’s something I’ve suggested would be a good thing since way back in 2010.
The core of both articles is summarised by the following:
“Perhaps a slower rate of deficit reduction is a good idea. Perhaps now is the right time for a massive increase in capital spending.
But if ordinary people are going to believe these arguments, progressives need to start using language they understand.”
All that is saying is that anyone proposing a loosening of policy needs to change the language they use, if the voters are to understand what they mean.
But you’ve pointed to and liked a post which called my article: an “adventure into the realm of fantasy”, “probably the most painful article that I have read in recent memory”, “the nonsense is so thick that it deserves a line by line critique”, “The UK Government must immediately reverse its fiscal position of austerity and expand its deficit”.
I genuinely don’t understand.
George,
I did make comment as to my frustration in discussing economics with you on another blog and I’d always just thought that you were deliberately failing to engage, rather than you just didn’t understand. Maybe it’s my turn to apologise.
Neither myself nor EW are arguing that government should let inflation rip. We may argue for a slightly higher target than 2% but that’s about it.
The point we’d both make is that there is no direct link between the size of the deficit and the level of inflation. In fact we could have a government surplus and still have high inflation or a relatively high deficit and have low or no inflation. The government isn’t the only player in the economy. If everyone else is saving, and that includes our overseas trading partners who like to run a surplus with us, then the government has to be spending extra, to an equal amount to what they are saving, to keep the economy functioning at full efficiency and capacity.
So hence Ellis’s and my objections to your arguments about whether to reduce the deficit quickly or slowly. In fact, government certainly can’t reduce its deficit quickly. It can possibly reduce it slowly but that can’t be done by cutting spending and increasing taxes. That just sends the economy into a downward spiral.
Ultimately it can only be done by discouraging everyone else to save less. Perhaps somewhat ironically, a bit of inflation helps do that. It adds an element of use it or lose it to the monetary system.
Do you see what I mean?
Correction: The penultimate paragrap should read “…discourage everyone else from saving too much”.
Hi Peter,
Thanks for the conciliatory reply.
While I still don’t think I fully understand you, I suspect you also don’t understand me. My guess is that you assume that my opinion is exactly the same as your was, before you came to your current beliefs about economics. I think there are aspects to my position that you don’t understand.
I think it’s probably best that we continue this discussion on the Social Democrat Group Facebook page. That way, we’ll get notifications when a reply is posted.
https://www.facebook.com/SocialDemocratGroup/posts/1758554467724030
Because the LDV team are so good at quickly approving posts, LDV is an excellent place to discuss when an article is recently up. But, as you say, once the article has been up for a few days, its rare to get new contributors. So better, I think, to continue the discussion on Facebook.
Shadow Chancellor John McDonnell was asked “Who’s your favourite Tory?” thought briefly and replied “Next”.
So, does he have a regular pair? If so, have pairing promises always been kept?
Did he advise Jeremy Corbyn not to meet Theresa May?
He was then asked about Winston Churchill “Hero or villain?”
This provided the current shadow chancellor to comment on Winston Churchill’s performance as Chancellor of the Exchequer (although that has already been done by former Chancellor Roy Jenkins.)