Liberal Democrats and Social Democrats have a very wide range of opinions, including economics. However, despite our differences, it’s possible to discuss them in a good-natured, honest way, without polemic.
The time to reduce the deficit has been a matter of huge controversy over the last six years. Paul Krugman is, perhaps, the best known advocate of continuing stimulus. In 2012, he attacked the UK deficit reduction programme as ‘deeply destructive’. He said, “Give me a stronger economy and I’ll turn into a fiscal hawk. But not now”.
The deficit reduction between 2010 and 2012 was certainly controversial. Some Keynsians believed the UK had no choice, because its structural deficit was so enormous, others disagreed.
However, from Spring 2013, the UK has now grown at over 2% for 10 consecutive quarters. Growth prediction is an uncertain science, but the OBR’s best estimate last November was that this will continue.
Two per cent is close to our historic growth rate: the 30 year average from 1980-2010 was 2.19%.
If we had a balanced budget, I could understand the argument for more stimulus. But we still have a substantial structural deficit, and therefore we are already, in effect, running a substantial stimulus.
There are still high levels of youth unemployment. Some think this means we have room to grow, that the UK economy is many years from the next recession, and we should therefore continue with the stimulus. But is this true? Remember, there was still substantial youth unemployment just prior to the great recession.
What if we hit another recession, with UK government debt having already leapt from around 40% to 80%. How would the markets react if we needed another period of stimulus? Would they lend us the money we needed?
Some believe high debt is not a worry, because higher government debt just leads to lower private debt, so its net effect on total UK finances is neutral. I fear that’s not true.
I fear that a continued government deficit will suck in yet more imports, and increase our trade deficit. I am very concerned that we do not reach a situation where the only way to recover is severe protracted austerity, of a kind that would make the last five years look like a golden age. I don’t want us to risk that.
When do you think is the right time to reduce the deficit?
* George Kendall is the acting chair of the Social Democrat Group. He writes in a personal capacity.
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56 Comments
Agreed. Sooner rather than later.
George – you have spent years posting on economics, but are still failing to grasp some basic concepts. Deficit spending does not automatically equate to a conventional Keynesian stimulus – this much should be obvious. From a mainstream Keynesian perspective, cutting the deficient through cuts in a recession is simply a false choice. You are somehow trying to square a circle by justifying fiscal conservatism in a recession while being social democrat, all when the actual cause of the recession was private debt. I think you have a challenge in your hands, because what you are trying to argue is incoherent. You might find it easier to simply say you are fiscal conservative. The above is a poor advert for social democracy in the Liberal Democrats – if for no other reason than it’s not really social democracy.
So do you reduce the deficit by making growth more difficult because you have not made the required infrastructure investment or is the key to reducing the deficit to increase tax revenue by cutting loopholes, encouraging companies to invest in this country and ensuring workers are paid wages that they can live on either by reducing the cost of living or ensuring wages rise.
I believe low pay and lack of social support for the most vulnerable in our society contributes to Government having a deficit because it provides the safety net that the rest of society is not conscious of.
Another reason for the deficit I believe is that military intervention costs vast sums of money which then goes up in smoke as soon as a weapon is fired.
Finally we seem to have forgotten that a very large sum of money was used to bail out the financial services industry and as a voter I do not recall seeing the state getting a large proportion of that money back.
Paul , whatever George is arguing , I think your tone a little patronising to a man very able to see , as a social democrat , I am sure ,that as the late Emperor Marcus Aurelius said “all things in moderation , including moderation itself ! ” This could apply to social democracy too ! The whole point of Liberalism and social democracy is flexibility and freedom within a perspective generally widely set ,but understood . Not a one size fits all and for all time .Some now claim President Kennedy was not the Liberal ,in the British sense , which he said he was , but a conservative , precisely because he was something of a fiscal conservative . This is to say five plus five equals twelve , it goes too far !
George,
You ask a sensible question right at the end with your “When do you think is the right time to reduce the deficit?” The simple answer to what I think you mean is when inflation is too high.
But let’s take a step or two back. We can start by making the point that there’s really no such thing as “the deficit”. There is “a deficit”, which I think the one you mean, which the government runs and is the difference between what it spends into the economy and what it receives back in taxation. But that government deficit is, penny for penny, the surplus of non-government or everyone else.
As no-one else but government is allowed to create the currency, the only way that everyone else can have any currency is for government to run a deficit. It has to run a deficit or be in debt for us to own those debts. If we tot up all the world’s national debts they come to some $60 trillion. We don’t owe that money to the Martians!
Yes there are times when it is necessary for debts and deficits to be reduced but equally there are other times when they need to be increased. We need to understand why we have those debts and deficits and the relationship between them and the money creation process. We need to understand the nature of money, in other words.
Money functions as a unit of account, medium of exchange, store of value, and record of debt. Every debt has a corresponding credit denominated in the unit of account of that jurisdiction, so that all debt as someone’s liability is someone else’s asset, which nets to zero.
Since money is not only someone’s debt (a payable) but also someone else’s credit (a receivable), it is just as true to say that the world owns over 60 trillion in financial assets expressed in USD, as it is to say that the world owes 60 trillion in financial liabilities.
If there were no credit-debt relationships, that is, if all financial liabilities were extinguished, then there would be no money, and exchange of goods and services would be reduced to barter.
@Paul Pettinger: Keynesian stimulus doesn’t necessarily lead to real economic growth, either – it all depends on the magnitude of crowding-out effects. There’s a time for monetary stimulus and a time for fiscal stimulus, and unless a recession is deep evidence seems to favour the former.
George,
Just one more thing. I despair when I see this sort of thing:
“How would the markets react if we needed another period of stimulus? Would they lend us the money we needed?”
If you’ve read and understood what I wrote above you’d understand that money doesn’t come from the “markets”. Only the UK government can create pounds. Only the Swiss Government can create Swiss francs. The euro is the creation of the ‘European Government’. Only the US government can create dollars. Some Americans really do think that they have to go to China, cap in hand, to “borrow” the dollars they need to fund their spending.
They are simply delusional in thinking that.
@petermartin2001: The government doesn’t create units of a currency (or, at least, not very much) – it’s almost all created by private banks.
Peter, if you were right, in countries with no national debt (there are/have been a few) it would be impossible for anybody to have any money.
Yet they did. So your theory is wrong.
And strictly speaking you may be right that governments don’t have to borrow to cover deficits – they can print money and suffer hyperinflation. And some do/have done. But borrowing seems to be the better choice – at least until the books can be balanced. And you can only borrow, by definition, if you have a willing lender. Throwing the word ‘delusional’ in here seems extreme.
Lorenzo – I believe George’s politics (based on what he writes, including also his enthusiasm for centrism) do relate to an inherent desire for moderation. But this is an inherently conservative approach, which runs counter to the instincts of most liberals, social democrats and other reformers. A political party that subscribes to the wisdom of the crowds – as George seems to want us to do – need not exist.
Simon – I don’t think we are really at odds. George is the one talking about pursuing stimulus when the budget is balanced/ healthy.
@Paul Pettinger
Hi Paul,
Re-reading my article, it would have been clearer if I had explicitly distanced myself from George Osborne. I agree with Vince Cable, that the level of cuts that Osborne is now planning is unnecessarily severe. My article was mostly in response to the narrative coming from supporters of Jeremy Corbyn, that we should reverse the cuts of 2010-2015, and continue to run a deficit, even though we are into the expansionary phase of the economic cycle.
As I said in the article, social democracy covers a vast range of opinion. I’m not speaking for anyone by myself. However, I think a lot of Keynesians, and a lot of social democrats, would probably agree with what I’ve written, including social democrats in the Labour party. Even, dare I say it, Ed Balls.
Regarding my not being a social democrat, and instead being a fiscal conservative, in the right circumstances, all Keynesians are fiscal conservatives. Even the arch-Keynesian Paul Krugman, as I said in my article.
I get a little annoyed when it is assumed that those on the centre-left are fiscally irresponsible, and those on the right are the ones who balance the budget. Roy Jenkins ran a surplus. Bill Clinton ran a surplus. In his early years, Gordon Brown ran a surplus. In contrast, G W Bush was utterly irresponsible with the finances of the USA.
Have a read of: http://independentreport.blogspot.co.uk/2012/03/john-maynard-keynes-was-right-and-not.html
A large number of economists (including Keynesian economists), agree that we are out of the depression, and into the expansionary phase. See what the IMF, the OBR, the Bank of England, and many others are saying. I’d be interested to know if you disagree, and if so what your reasons are.
Regarding the cuts that happened just after we left recession but were still in the depression phase, in 2010 to 2012, I said: “Some Keynesians believed the UK had no choice, because its structural deficit was so enormous, others disagreed.”
You seem to be saying there are no trained economists with the former view. There are others I could quote, but surely you know that Vince Cable, Keynesian, and former chief economist at Shell, is of the former view. Isn’t that enough?
@ian james
Hi Ian,
I’d agree with you that the coalition shouldn’t have cut capital spending in the early years, just as Alistiar Darling shouldn’t have proposed it before 2010. But that’s all in the past, and I’d prefer to talk about the present and the future.
Regarding low pay. I agree in part. I’m opposed to the cuts in tax credits. But not because of the deficit, I’m sure cutting tax credits will reduce the deficit. It’s just I believe in what Cameron said he believed in, but clearly doesn’t. That we should all be in this together, so we shouldn’t be cutting the deficit on the backs of the poor.
In my view, cutting the deficit will always involve hard choices. In my opinmon, doing so on the backs of the poor would work, it’s just morally reprehensible.
@petermartin2001
Hello again, Peter.
Great to read another of your detailed replies. I’ll try to respond more fully later. I might be about to hit my limit of posts for a little while. So, if my fully response is delayed, apologies.
For now, I’ll give a brief response. As we’ve discussed many times, your theory might make some sense if we had a single world government, with a single currency. However, we don’t. And the substantial trade deficit we are running with the rest of the world means we are borrowing from China, Germany and a number of other surplus countries.
As of 2011 around 35% of the national debt was owed to overseas governments and investors. I imagine the current figure is similar.
@ Joe Otten
“Peter, if you were right, in countries with no national debt (there are/have been a few) it would be impossible for anybody to have any money.”
That depends on how we define National Debt. Apparently in the USA someone forgot to include the coinage. So in principle their National Debt would be reduced to zero by the creation of 18 trillion dollar coins. (you might like to Google that concept). Other countries use assets like Gold reserves to offset their stated National Debt.
But if all liabilities of Government are counted, and aren’t offset by assets like land, then the National Debt has to be owned as a financial asset by someone.
@ Simon Thorley,
“it’s almost all created by private banks.”
Private banks can only create liabilities measured in pounds. They can’t create pounds per se. So the sovereign unit of currency in the UK is the pound. The high street banks issue liabilities measured in pounds. In France they’d create liabilities measured in euros. In the US measured in dollars. The UK govt has a monopoly in real pounds. The US govt a monopoly in real dollars.
But you and I can issue our own liabilities in pounds and dollars if we like, and if we can back them up with the real thing on demand.
Joe Otten : “they can print money and suffer hyperinflation.”
But isn’t that exactly what the Coalition Government did post 2010 with Quantitative Easing amounting to £ 375 billion over the piece by an act of legerdemain ? Fortunately they managed to avoid the hyperinflation.
At the time they cancelled the school building programme affecting 700 schools and cancelled 1000 flood relief schemes. As I understand it only about 8% of the £ 375 billion ‘trickled down’; the rest went into the stock market and the pockets of the super rich.
If I’ve got that wrong, please do tell.
@ Peter Martin: this is an academic distinction: for all practical purposes, cash and bank deposits are equally considered currency. M0 is a tiny proportion of that currency, and has no more or less value than bank deposits, anyway – currency has no value beyond that which its users accord it. Therefore money (the medium of exchange, store of value and unit of account) is created by private banks.
David, if there was hyperinflation, I must have slept through it. But then QE at the ZLB was strictly monetary policy and not used (well not used initially) as a way of financing the deficit. The sharp distinction was blurred somewhat towards the end.
As for the rest, yes you have it all wrong.
@ Joe Otten “David, if there was hyperinflation, I must have slept through it… As for the rest, yes you have it all wrong”.
Sorry Joe, but it was you that mentioned hyperinflation not me. So what, then, is the difference between printing money and quantitative easing ?
If, as you say, I’ve got the rest of it wrong how come Robert Peston of the BBC in October, 2014 agreed with my figure of £ 375 billion for quantitative easing. It’s on the BBC website if you want to look it up.
I am sorry to intrude on a thread that seems to be economists engaging in their favourite pastime of finding other economists and arguing with them.
Has anyone else noticed that our wealth creating capability is melting away before our eyes?
The only response political parties make is to proudly declare that they will create millions of high tech manufacturing jobs. Our own manifesto is the familiar hubris and no worse than all the others. This expansionary phase is just sucking in yet more Asian imports. When and why does our productive capability increase?
Lots of comment here using the words currency and money, as if they were interchangeable when they’re not. The very last time actual money was in circulation was in 1971, when $35 was interchangeable with 1 oz of gold. Nixon reneged on giving France its justified quota of gold in payment of USA debt. That was the beginning of the end of actual money. Ever since then each country has been forced to use ‘currency’ [not money]. Understanding the difference is crucial.
The upside [from 1971], is that ditching the ‘peg’, allowed nations to borrow into the future and enjoy today, …that which had to be paid for into a far distant tomorrow.
The downside is that greed and hubris allowed unfettered currency to run riot and borrow exponentially [and irrationally], into a future that the borrowers would not even be around, to pay back.
This un~pegged~currency experiment [since 1971], is not going to end well, because if global exponential debt cannot be paid back, it logically,.. won’t be paid back. And the people expected to pay it back [our grandchildren], will certainly give it short shrift. Forget the currency debt/deficit maelstrom,… its beyond hope. If you don’t want your grandchildren to despise you, you need to convert any residual transient currency you have, back into fungible money which you can pass on as real tradable value. [ IMHO ]
George – you still do not seem to understand the basic logic of Keynes’s argument, of economic interdependence. It is simple concept, with quite radical implications. What do you think Keynesian analysis would advise when this apparent expansionary phase is slow and drawn out, and inflation and interest rates are almost zero?
Indigo – wise words indeed. I might take out a big Wonga loan and buy gold.
Barry,
” their favourite pastime of finding other economists and arguing with them.
I sympathise with your sentiments but the truth of the matter is that there insufficient discussion and argument about economics. So much just goes by default. Like the assumption that deficits and the National debt are a bad thing. Why are they a bad thing? It needs someone to say they aren’t right now!
Yes you are quite right about the vacuousness of promising millions of high tech jobs! It’s not the right answer. Simply, we need to use what we’ve got to best effect. That may not necessarily mean all our young people work in IT. We wouldn’t want them to do that anyway. We need to think what we do want them to do and at least make sure they do something useful instead of hanging about on the dole or in poorly paying ZHC jobs.
@ Simon Thorley,
It’s an important distinction. If you’re the government and you issue George, Rob and I 10 crowns each in our four person economy, then the National debt is 30 crowns. Because you are the government, neither George, Rob nor I can force you to repay your debt and neither would we want to because that would mean you’d have to tax those crowns away from us.
If I issue Rob with an IOU for 10 crowns then I have a liability for the same amount and he can use that as “money” to spend with George. But it’s not money as you have issued it. It isn’t a liability of govt.
See the difference?
Rob,
” we are borrowing from China, Germany and a number of other surplus countries.”
We are only borrowing in the sense that Barclays bank might be borrowing from us when we pay our wages and salary into our accounts.
If Mrs Merkel likes to go on -line from time to time and check her country’s account she’d no doubt see at least a couple of hundred billion pounds. What can she do with it? Buy Rolls Royce engines or Scotch whisky maybe? She’d rather Germany make their own.
Suppose we were like the High Street Banks and we started to add bank charges to her account. Suppose we charged her £20 billion on some pretext. What can she do? Declare war? There’s no need to upset her by doing that though. She really can’t do anything with her surplus pounds anyway. If she spent them then Germany would have a trade deficit and they’d never want that!
Peter, Thank you and as to your two paragraphs
1) Or not, as the case may be but this endless ’tis / ’tisn’t of bickering economists is obscuring the view. Both Keynesians and Anti-Keynesians are dependent on the eventual ‘future miracle’ of wealth creation actually happening within our borders, I am just appealing for their powerful brains be deployed in proposals to deliver that.
2) The LibDem manifesto on economic revival is no better than the others. It is just warmed over leftovers and dependent on those twin miracles – unspecified ‘training’ and ‘green technology’. It has clearly been written by someone whose technological attainments are such that they think Ohms Law is a detective series.
@Paul Pettinger
Hi Paul,
Sorry. I don’t understand. Are you saying the OBR, the IMF, the BofE and Vince Cable don’t understand the basic logic of Keynes’s argument. But I can’t believe you mean that. Were there things in the independentreport’s interpretation of Keynes you disagreed with?
http://independentreport.blogspot.co.uk/2012/03/john-maynard-keynes-was-right-and-not.html
You say I am “talking about pursuing stimulus when the budget is balanced/healthy”. I’m confused. Where did I say that. If I did, it’s probably a typo. We’ve not had a balanced budget for 13 years, so it’s not relevant to our present situation.
Regarding my politics, have a read of the following. I regard myself as centre-left.
https://www.libdemvoice.org/why-i-am-a-social-democrat-47486.html
But why don’t we go back to the question of this thread. I’ve given my opinion. Paul, when should we be reducing the deficit? If not now, in what situation should we?
@Barry Snelson
Always happy to read your comments, Barry 🙂
I presume you’re talking about our trade deficit. I agree that’s a concern. I do worry that our economic policy is based, too often, on stimulating demand which, as you say, sucks in east Asian imports. In my opinion, many of the solutions are extremely difficult. They include improving education in technical disciplines and foreign languages, and the benefits won’t been seen for a decade or more. It’s very difficult to get politicians to take meaningful action on such a long time scale, but we must do what we can.
I agree that manifestos tend to be simplistic, but let’s leave them aside. Do you have any suggestions for a faster solution to the trade deficit?
@indigo
I’m not so pessimistic. I’ve faith in the good sense of UK voters. They might have elected a pre-Corbyn Labour government, but they won’t be taken in by John McDonnell’s leftwing populism. I don’t think the country elect a government that increases our debt-to-GDP ratio above 100%. The UK has a pretty good record of paying off its debt. I think that’ll continue.
George,
Maybe Paul will come up with his own disagreements but your link claims:
“The Independent Report provides an independent, non-partisan, non-ideological analysis of economic news”
Yet it says without the slightest shred of justification :
“Yet, in both instances, the government is handcuffed by its enormous debt.”
The so-called “independent report” can make unsupported unexplained statements like this or it can be “non-ideological” etc etc but it can’t be or do both.
We need reasoned argument for that.
George,
“suggestions for a faster solution to the trade deficit” are what it’s all about. My belief is that if the LibDem party, or at least a capable and imaginative sub group thereof, can present the British people with a convincing set of proposals on that theme (together with its existing credibility in the areas of fairness and humanity) then it could claim the gap that has opened between dark blue conservatism and bright red labour.
I have proposals of my own but they are very radical indeed and I would only share them in the right environment and only to an open minded audience (who I would expect to have equally radical ideas of their own to stimulate a creative debate). There are many voices on these blogs but some seem to have their Transmit/Receive buttons firmly welded on “Transmit”.
The calls for ‘infrastructure’ debate leaves me a little cold. I do not see how we benefit from Japanese trains, running on French metals through holes drilled by German tunnelling machines. Whose economy are we trying to revive, exactly?
@David Raw
There was a lot of controversy about QE, but it’s not quite the same as printing money. The BofE buys government bonds which have to be paid back. There were fears it could be inflationary, and inflation did hit 4.5% in 2011, but inflation has been very low for the last year. However, the Bank of England doesn’t want inflation to overshoot its target.
Anyway, David, regarding the question in this thread. When should we reduce the deficit? If not now, in what situation should we?
@Barry Snelson
I know of one ray of hope regarding our manufacturing base. With the growth of robotics, a lot of manufacturing is less in need of low wage economies. That means that manufacturing near the market becomes more attractive. So we may see manufacturers returning to Europe, to avoid the inflexibility and transport costs of shipping goods from the far east.
If that happens, of course, it’ll be nothing to do with whoever is in government. But I’m sure they’ll try to take credit for it!
@Barry Snelson said: “There are many voices on these blogs but some seem to have their Transmit/Receive buttons firmly welded on “Transmit”.”
Sadly, all too true. I’d be interested to hear your ideas in the private members forum, or by private message. I’m not sure I have particularly radical ideas of my own, but I like to think my Transmit/Receive button isn’t welded.
@petermartin2001
Hi Peter,
I’m always a bit cynical when I hear words like “independent, non-partisan, non-ideological”, so I sympathise. But I wasn’t stating that the report was beyond contradiction. I was specifically asking Paul what parts he disagreed with. Apart from anything else, discussing that report would move away from an analysis of whether I am ignorant of Keynes, incoherent, inherently conservative, a Lib Dem and/or a Social Democrat.
George,
Before we get too carried away with the ‘QE= printing money’ argument we do need to realise that all money is either printed or created digitally in a computer. That’s where it comes from!
So the question is “how much money should we print?” and not “should we print money?” Unless we are talking about going back on to a gold standard that is, or even using gold coins.
So what is QE? Technically it is the process by which the central bank buys back government bonds and other securities from the private sector. That all sounds fine until we realise that the Government is selling new bonds into the private sector. Its all a nice little earner for the banks who buy and sell bonds as an intermediary between the Treasury and the BoE as a work around against the prohibition of the Treasury selling bonds directly to the BoE.
Is it inflationary? Not directly. It is extra spending that may cause inflation, and it is no more and no less inflationary than any other form of spending including non-government spending.
In case anyone is interested, this article started life as part of a discussion on the Social Democrat Forum page.
See this thread: https://www.facebook.com/SocialDemocratGroup/posts/1698861657026645
Rob, petermartin2001 myself and others have been chatting in various threads on that page.
For those who are interested in thinking through the opinions of others, they’d be very welcome to join the discussions. Others, less so 😉
Good post George, very thoughtful.
@David Raw: “But isn’t that exactly what the Coalition Government did post 2010 with Quantitative Easing amounting to £ 375 billion over the piece by an act of legerdemain ? Fortunately they managed to avoid the hyperinflation.”
Actually it did cause a substantial amount of inflation. But because that extra money was injected only into the top of the economy in the big banks, very little of it percolated down to the “real” economy. Instead, those hundreds of billions swilled around in the property markets and equity markets, and triggered huge property-price rises (bubbles, realistically) across the industrialised world, and stock-market booms in many countries (some of which are now unwinding).
George, I wrote:
‘George – you still do not seem to understand the basic logic of Keynes’s argument, of economic interdependence.’
To which you have replied:
‘Sorry. I don’t understand. Are you saying the OBR, the IMF, the BofE and Vince Cable don’t understand the basic logic of Keynes’s argument.’
Funnily enough I meant you still do not seem to understand the basic logic of Keynes’s argument.
George Kendall wrote ‘You say I am “talking about pursuing stimulus when the budget is balanced/healthy”. I’m confused. Where did I say that.’
You wrote, in the opening post, ‘If we had a balanced budget, I could understand the argument for more stimulus.’
George Kendall wrote ‘Regarding my politics, have a read of the following. I regard myself as centre-left.’
But you have consistently argued, such as in the closed forums, for the Party to continue a centrist approach.
‘But why don’t we go back to the question of this thread. I’ve given my opinion. Paul, when should we be reducing the deficit? If not now, in what situation should we?’
Given the interdependence in the economy it’s not entirely in the Government’s gift.
If you have free markets and do not produce your own stuff, then you will have a trade deficit. Imports are not the consequence of governments running a budget deficit. They are a consequence of handing over the manufacturing of everyday items, clothes, pots. pans, pens, etc. to foreign manufacturers. Ghandi understood this when he blocked the importation of British cloth. We on the other hand think Primark and the various manifestations of pound shops are great business models. The only way to get the trade deficit down is actually tariffs and protectionism, but they have their own knock on effects. Most countries who develop their own arms by the way protect their defence manufacturing through heavily backed up protectionist government contracts.
Glenn makes a very good point on trade deficits and exports. We need to boost our exports, which is why I think the #SaveOurSteel campaign is a great one for Lib Dems to take up (but no blank cheques).
We are losing our steel jobs, our oil jobs, possibly our finance jobs. We need a hard-headed economic policy and not one based on theories about everyone being a rational actor. Instead we have things like government sponsored cartels (Opec) and people treating oil prices as a weapon of war. It’s definitely not profit maximisation at the moment.
As George notes, 10 consecutive quarters of growth over 2%, combined with unemployment at historic lows (Today 5.1% – http://www.bbc.co.uk/news/business-35359689 ) really means people still arguing now isn’t the right time to address the deficit are effectively arguing to never address the deficit.
I know I am adding to the distracting from the core topic but I think a point has been missed in one of the spur discussions.
David Raw
“But isn’t that exactly what the Coalition Government did post 2010 with Quantitative Easing”
Yes, but I think Joe was unclear. I assume he is talking about an un-ending print to spend policy causing hyperinflation. The QE programme did cause inflation but it was limited. It is also worth remembering the intention of the QE programme was to cause inflation to rise (in response to the concern that it would be negative by forecasts). So it did what was intended.
Your point about how it was done is correct and I would havce suggested that the mechanism would have been better by “helicopter drop” as it would have seen a direct effect and would have been easier to see the immediate effect where it was wanted. That is not to say that the intention of the BoE were wrong, they were just trying to be cautious.
Funding regular spending via money printing would ultimately result in hyperinflation but a set amount of money printing may just produce a limited bout of inflation (compared to where inflation would have otherwise have been).
@Cllr Mark Wright
Thanks. I guess you’ll now be accused of not understanding the basic logic of Keynes’s argument. Beats me how, though.
@Paul Pettinger
Apologies. I had a brainfade when repeating your phrase “pursuing stimulus when the budget is balanced/healthy”, another reminder that I shouldn’t comment on the web when tired.
What I meant is what Mark just said: if you’ve out of recession, into the expansionary phase, then you should get your finances under control. Independent report (
http://independentreport.blogspot.co.uk/2012/03/john-maynard-keynes-was-right-and-not.html ) believes this is what Keynes advocated. Presumably you disagree with them. Is that right?
Of course, once you’ve got the budget under control, if you’re running a surplus, and inflation and interest rates are almost zero, you have the freedom to spend extra money. But as we’re still running a very significant deficit, I argue (as do the IMF, the Bank of England, and Vince and other Keynesian economists) that continued deficit reduction is necessary. But presumably they don’t understand Keynes either.
@Psi
Thanks. You’re completely right.
At the time of the Great Recession, I heard about a lot of alternatives to Quantitative Easing. Helicopter money was one. What Corbyn calls Peopple’s Quantitative Easing was another. From what I’ve read, economists were very nervous about any of these options, but the circumstances justified them. There’s debate on what which have been the best option. But that’s hardly surprising. Economists often seem to agree on almost nothing 😉
@Glenn, @Eddie Sammon
Personally, I don’t like protectionism. In the end, it can have very damaging consequences on global trade and so makes everyone poorer.
There does come a point, if all your trading partners are systematically pursuing policies to produce large trade surpluses, that it becomes unavoidable.
But it’s only a minority of countries who are like that, so I think it’s avoidable. I’d like us to look at alternative ways to reduce our trade deficit. But I doubt any of those options will be easy or quick.
Cllr Mark Wright,
“Actually it did cause a substantial amount of inflation. But because that extra money was injected only into the top of the economy in the big banks, very little of it percolated down to the “real” economy. Instead, those hundreds of billions swilled around in the property markets and equity markets, and triggered huge property-price rises (bubbles, realistically) across the industrialised world, and stock-market booms in many countries (some of which are now unwinding).”
But isn’t what we’ve seen happening in the property and equity markets since QE essentially the same as we saw in the run up to the GFC and so before QE? And if QE wasn’t responsible for the bubbles then, why would it be responsible for the bubble now?
The GFC was largely blamed on ex
Cllr Mark Wright,
“Actually it did cause a substantial amount of inflation. But because that extra money was injected only into the top of the economy in the big banks, very little of it percolated down to the “real” economy. Instead, those hundreds of billions swilled around in the property markets and equity markets, and triggered huge property-price rises (bubbles, realistically) across the industrialised world, and stock-market booms in many countries (some of which are now unwinding).”
But isn’t what we’ve seen happening in the property and equity markets since QE essentially the same as we saw in the run up to the GFC and so before QE? And if QE wasn’t responsible for the bubbles then, why would it be responsible for the bubble now?
The GFC was largely, and correctly, at the time blamed at the time on excessive amounts of private sector debt that were created in the system. The Chinese have repeated that mistake recently. So why does excessive private lending cause a problem? The mainstream media are very poor at this. The best that they’ll do is to compare the lending with a party and say the slump is like the morning after.
Financial assets are created and then spent in the private sector when banks make loans. Whether we want to call this money is a moot point! But essentially the lending puts money into the hands of the spenders. This spending stimulates the market: shares and asset prices prices rise, growth spurts, but the newly created money dwindles in the economy as it is spent and respent with the Govt taking its tax cut on every transaction. But the debts remain and accumulate – slowing down the economy. So more bank lending is needed to keep it going and the same thing happens again. Steve Keen has shown that everything looks OK providing the rate of bank lending is accelerating. But as it can’t do that forever, the effect of the bank lending starts to have a net negative effect and then we can have a slump if the level of private sector debt becomes too high.
The immediate fix is for government to spend, large amounts of cash usually called liquidity, to keep the economy going. This is where QE comes in. This should always be possible but any crash or slump is still very disruptive. A better solution in the longer term is to rely on monetary policy (ie the variation of interest rates and the ease of bank lending) only to a very limited extent in the regulation of the economy.
Hi George, to answer your question about the budget deficit: I am happy cutting now, but not much more. It gets to the stage where we know the economy didn’t crash because the public sector was severely over-bloated, so we don’t need many more cuts in it, I don’t think. This was always my problem with Yvette Cooper’s analysis: she would the economy didn’t crash because of public spending and then recommend cutting it.
To get back to the point on protectionism: I don’t like protectionism either, but we need to know the motives of the actors in the market. It would be a disaster if artificially cheap goods put one of our industries out of business and then they exploited us by raising their prices again in the future.
George – you continually ignore what I say, but here’s goes!
“What I meant is what Mark just said: if you’ve out of recession, into the expansionary phase, then you should get your finances under control. Independent report (
http://independentreport.blogspot.co.uk/2012/03/john-maynard-keynes-was-right-and-not.html ) believes this is what Keynes advocated. Presumably you disagree with them. Is that right?”
That seems a strange thing to ask. For a country with a growing population we are experiencing a pretty feeble expansionary phase, but why do you presume I would disagree with reduced spending per se? Do you think the Keynesian approach is actually cover for crowbarring in profligate spending, rather than a helpful analysis that better explains reality? I know some people on the right suspect this (accepting that we are economically interrelated, rather than independent, challenges their world-view), as well as others who think managing public finances is akin to managing a house hold budget. I am confused by your question.
I’m not unconcerned by public debt, but I think it has been unhelpful that there has been so much focus and debate around it, and so relatively little on private debt in the property market (which is what caused the crash). Given that the UK still has spare capacity in its economy; a backlog of much needed infrastructure projects; a growing population, and very low inflation and interest rates, I think it is a mistake to focus on reducing public spending at the moment, and especially reducing capital spending.
More generally, there are many things we could be doing to promote a healthier economy. I think we need to radically change the tax system, so that over time tax is rebalanced away from labour (hard work) onto land and, more generally, to incentivise greater investment in research and development (the UK invests a lot less of its GDP than the US or Scandinavia). I think we need to continue with an active industrial strategy that helps protect high tech supply chains and allows specialist hubs to grow (the EU should take a greater lead in this). We need to build many more homes – for social and economic reasons.
I think the narrow focus on the deficit in recent years has impoverished debate on macroeconomic policy, both in the Party and country. To some extent I think this is intentional, to help justify an ideologically motivated reduction in the size of the state that would otherwise be unpopular.
@Paul,
….. to help justify an ideologically motivated reduction in the size of the state that would otherwise be unpopular.
Yes, but the problem, from a right wing perspective, is that the kind of depressed economy we see develop when spending cuts are made and taxes increased, in a futile attempt to cut the deficit, creates a demand from many disadvantaged people for a larger state. They are more likely to vote for Jeremy Corbyn !
If politicians want a smaller state, they need to put more money in the pockets of those who would formerly rely on the NHS and State education services, for example, so they can pay for health and education themselves. This means tax cuts and ensuring that the economy expands sufficiently to once again create conditions of full employment.
@Paul Pettinger
Hi Paul,
There’s a lot I agree with in your last comment. We seem to have got off on the wrong footing. Shall we try again?
I’d agree that private debt is a major concern. I think there are things we may be able to do about that, but I want to think those ideas through more thoroughly before sharing them on the public internet. In brief, I think inhibiting private debt could mean a short term loss of GDP growth, particularly because of lower house price inflation, but it would lead to fewer crashes, and in the longer term I think it could lead to greater prosperity.
I’m also in favour of greater spending on infrastructure. Another of my criticisms of the Tories is that they’ve changed the deficit reduction goals to include holding back capital spending. Capital spending can occasionally do little for GDP. But it can, particularly in transport, be valuable in increasing GDP. With flood relief, it can preventing damage to GDP. I also think the state should be spending more capital on public sector house building in areas of high demand. That has the benefit of producing a valuable asset, and so should not be seen as increasing unsustainable debt.
If there were some straightforward way to do it (and there may not be), I’d like the OBR to include in their reports an analsyis of revenue spending that they judge will increase national wealth in the long-term. This might encourage the government to increase spending on research and development.
I know you don’t, but I think our economy enough to keep reducing the public deficit. According to http://www.tradingeconomics.com, UK GDP annual growth in the ten quarters between Apr 2013 to Jan 2016 had a mean of 2.54, and in the twelve quarters between Apr 2005 and Apr 2008 (just before the crash hit), it had a mean of 2.79. That seems similar to me.
Of course, we should keep this under review, with the world economy worsening.
…
…
As to whether reducing the deficit is ideologically based, that’s a matter of opinion. I don’t have a window into people’s souls, but it may be true of the Tories.
For myself, and for many moderates in the Labour party, I think it’s simply our honest opinion. In the Labour leadership debates, I heard Yvette Cooper, who is, of course, wife of Ed Balls, saying pretty much the same as I’ve been saying in the above article. I don’t think she was seeking to justify an ideologically motivated reduction.
I know @petermartin2001 appreciates what I’m saying, because he’s stated that, five years ago, he thought the same as I do now. He’ll know he wasn’t ideologically motivated. We disagree now, of course, but I hope we can acknowledge that we simply have different opinions.
George Kendall,
Can you just define what you mean by capital spending? What about the education of our young people? Can we define all that as capital spending?
And what about the health service? Can we define all that as capital spending too? Or do we have a situation where we class the spending on a hospital building as good capital spending, but paying the salaries of doctors and nurses who may be engaged in saving lives and getting people healthy again as bad current spending?
Regards
Peter
@ George,
We disagree now, of course, but I hope we can acknowledge that we simply have different opinions.
How about we acknowledge we were both wrong five years ago, but now you’re still wrong but I’ve made at least some progress on getting it right? 🙂
Hi petermartin2001
From a quick browse of the web:
*Revenue expenditure* is a cost that is charged to expense as soon as the cost is incurred
*capital spending* is “Spending for long-term assets such as factories, equipment, machinery, and buildings that permits the production of more goods and services in future years.”
Those’ll do for me.
I’m not saying that capital spending which does little for GDP is bad capital spending.
As I understand it, when statisticians try to estimate of effect that a good health service will have on future GDP, it increases it up to a certain point (for example because workers will take less time off work). But above a certain level, the cost is greater than the increase in future GDP.
Of course, as I’m left of centre, I certainly don’t think increasing GDP is the only measure of whether something is good or bad. There are more important things to worry about than future GDP, such as looking after the elderly.
What I want to challenge is the assumption that capital spending will always mean a long-term increase in GDP, and that therefore, if the country has poor finances, it’s always a way to improve those finances.
In my opinion, sometimes, a major school building project won’t result in a long-term increase in GDP. But, because it improves the quality of life of pupils and teachers, it can be well worth undertaking.
What I’m suggesting is that, if the OBR can measure the likely affect on the long-term finances of the country of particular kinds of capital and revenue spending, it’d be great if that can be included in their reports on Budget Responsibility. So the report gives the ruling party an incentive to invest for the long-term.
I’m sure any such estimate of the OBR would be very approximate, but it’d be better than a situation where the Tories can (and will) make short-term cuts which will damage the long-term prosperity of the country.
@Paul Pettinger said “But you have consistently argued, such as in the closed forums, for the Party to continue a centrist approach.”
Paul, for the record, I don’t argue we should adopt a centrist approach. I argue that we need to win over centrist voters, otherwise we’ll probably be condemning the country to perpetual Tory government.
If the Tories can rely on not just the rightwing and right-of-centre, but centre voters too, they’ll be running the country forever. In what way would letting that happen be anti-poverty?
PS The closed forums are supposed to be closed, and material written there is not supposed to be shared outside. So quoting, or in this case, misquoting me from them is not permitted. I’m sure you broke house rules in advertently, but please try not to do it again. Thanks.
petermartin2001
“Can you just define what you mean by capital spending? What about the education of our young people? Can we define all that as capital spending?”
No.
“a hospital building as good capital spending, but paying the salaries of doctors and nurses who may be engaged in saving lives and getting people healthy again as bad current spending?”
This is the problem where people get in to the habit of classifying:
Capital = Good
Current = Bad
And consequently people like Gordon Brown try and reclassify current spending as capital, debasing language to confuse discussion in the hope of wrong footing their opponents but simply look dishonest.
If I buy a house it is capital spending, which can be both good or bad as it provides me with a need (shelter) but may cause me significant future costs if it has serious structural problems. It also may restrict my geographical flexibility.
When I buy food it is current spending, this is good as I need it to live, though can be bad if I buy and consume lots of cream and lard, as it will adversely affect my health.
Teachers salaries are clearly current spending but doesn’t mean teaching children basic numeracy and literacy is “bad.”
Both Capital and Current spending can have better and worse uses for particular objectives. Educating adults who lack basic literacy and numeracy skills to bring them up to a better standard will be more useful for economic growth than funding more English Literature PhDs. It depends on what you are spending to achieve. In Health, treatment of the elderly for cancer which extends their life will cause more costs down the line with further treatments so is not producing economic gains but I don’t know any one who wouldn’t describe such spending as “good.”
Equally capital spending improving transport (road and rail) between the northern cities will produce more economic benefit than building lots of art galleries, but it depends on what you are hoping to achieve.
@PSI
Yes I agree with your approach. Spending is either useful or it isn’t.
Keynes mused on the idea of deliberately burying piles of cash with the idea that the hidden extra cash, in a fiat currency economy, would serve the same money creating purpose as gold deposits did previously, when it was possible to create extra money by finding gold in the ground and digging it up.
Keynes reasoned that this was no different to paying people to dig holes and fill them in again, which is of course quite pointless, so came to the sensible conclusion that it is better to pay people to do something useful like build roads and bridges.
This has come come to mean, in the eyes of some supposed Keynesians, that it is OK to create extra money if that created money is spent on capital projects. But just as mining gold was not necessarily a capital project, neither should the money creation process be restricted to that in a fiat currency economy.
But if it keeps people happy to fudge the issue a little bit, by calling it capital spending when it really isn’t, I’m all for that!
Government should create extra money and spend it sensibly, which may even be on museums and art galleries, PROVIDING that extra spending is just using up the slack capacity in the economy and isn’t causing extra inflation .
“Give me a stronger economy and I’ll turn into a fiscal hawk.”
I suppose Paul Krugman is saying this because he’s now considered something of a ‘dove’ on the deficit question.
A better way to look at it is to say we’re Owls. Not necessarily Sheffield Wednesday supporters, but we do have the wisdom to know that deficits do have to rise and fall to suit prevailing economic conditions.
Hi George, focusing just on short periods of recent growth, as you have done, doesn’t make sense. If you compare the last recession with all others in the UK in living memory, the one just gone has had the most anaemic recovery (the UK had a relatively strong Great Depression). Without acknowledging this I don’t know how you can expect me to engage seriously. I am afraid you appear to be being selective to suit your argument, rather than taking in the bigger picture (including looking at unused capacity in the economy).
You are also being selective in regards to centrism. We have just pursued centrism and it has been an unmitigated disaster. I find your views on economics and lib dem strategy irksome because I think they are flawed and damaging, and because even now when we can see consequences of these approaches (the anaemic growth in productivity and the 2015 election, where the Party got squeezed like a lemon) you don’t seem to change your opinion. Frankly, I find this rather irrational.
Indeed, you seem to be talking as if Yvette Cooper is someone we should join with or otherwise has the kinds of (authoritarian centrist) views that we should be catering to. Your ideas keep terrifying me!
Discussions on LDV are great, particularly because they engage lots of new people. But, in my experience, after a few days, people stop engaging and the discussion ends.
That’s not true on the Social Democrat Group Facebook page.
So if anyone wants to continue these discussions, we have one going right now here: https://www.facebook.com/SocialDemocratGroup/posts/1705355489710595 Whether someone is an expert, or totally new to the subject, doesn’t matter.
But with one minor caveat. In the Social Democrat Group we’re very keen on discussions where we engage with each other, learn from each other, and do our utmost to show respect for each other. We want it to be a place for respectful debate, and not argument. So some people may feel it’s not what they are looking for.