David Cameron’s latest foray into economic policy is much, much worse than his decision to back Andrew Lansley’s “cut everything but hospital spending” strategy.
Cameron told the LGA
“I do think it is wrong to be going into 2010 with actually quite aggressive spending increases for 2010 when we should be starting to make savings now… I do think that one of the ways to avoid very deep cuts in the future is to make a start now.”
So if the argument a couple of weeks back was for cuts in 2011-13, David Cameron now wants to make cuts now.
Yet we need to spend the money now if we want to get out of recession. Roughly speaking, the current increase in spending comes from three main areas.
First, delivering public services, which employ people and face higher demands in recession. Second increased capital spending to replace lost private sector demand. Third support for the economy through programmes that help businesses and families through recession, whether grants to businesses or help for people who become unemployed*.
Cutting this spending as we head into 2010 would be a catastrophically stupid idea. For a more detailed explanation as to why, can I pass you over to President Obama’s chair of the Council of Economic Advisers, who is an expert in such matters. It turns out cutting spending at the first signs of the economy emerging from deep recession has been tried before. Results were not so impressive.
As she says:
“dealing with the current crisis required increasing the deficit substantially. To switch to austerity in the immediate future would surely set back recovery and risk a 1937-like recession-within-a-recession.”
Think about this for a moment. David Cameron is saying that you can avoid future spending cuts by not spending the extra money now.
This is true, in the sense that if you spend £1000 this week, spending £1000 next week isn’t a cut. Yet if you need to spend £200 more this week to pay your rent, restraint in current spending leaves you homeless. This is not a very good idea.
Better to keep your home and manage your spending in future weeks. (Of course, if you can secure very cheap borrowing, you can make that process a lot less uncomfortable by borrowing the money you need for your short term rent and paying it back as your income grows).
What David Cameron is proposing is short term cuts in services at exactly the wrong time – when the economy needs the extra money really, really badly. Holding down public spending now, would reduce needed services, reduce investment, cut employment and offer less help to families and businesses and damage our long run chances of growth.
This is a much worse mistake than Lansley’s 10%, because it is a sign of a fundamentally flawed approach to growth. There’s a legitimate argument for holding down spending after a countercyclical surge. Indeed, the only question really is how tough to be and where the burden should fall if more money needs to be raised.
But to prevent cuts by not having the counter-cyclical spending? That’s cart before horse-ism on a massive scale. Yet it now appears to be Tory policy. If Camerons means what he said to the LGA, and it’s not just a bit of flammery, I’d be really worried. It would appear the Opposition is still taking the Irish Economy as a role model.
*there’s also the help to the financial sector, but let’s treat that as seperate for the moment.
34 Comments
July 3, 2009 at 11:41 am
Make interesting reading and this review is complimented by the goings-on in California.
http://news.bbc.co.uk/1/hi/world/americas/8129840.stm
There is growing anger and acknowledgement that private banking enterprises have been supported….. all at the expense of the public purse but people want their public services more than ever – right now.
July 3, 2009 at 11:51 am
We are taking your advice and on the basis that behaving in the most profligate way we can think of is in fact ensure future proftability we are going off to have a big expensive lunch. May employ a few people who do not do anything this afternoon just to really nail down that success.
I feel better already
July 3, 2009 at 12:41 pm
I congratulate you on your own personal stimulus programme.
July 3, 2009 at 12:00 pm
Couple of things. First, you say ‘we need to spend the money now if we want to get out of recession’ and I think that needs to be expanded – get out quicker, or with less damage done or whatever. There’s no such thing as an infinite recession, is there?
Second, in regards to ‘If Cameron means what he said to the LGA, and it’s not just a bit of flammery, I’d be really worried.’ – I’d note again the irony of some politicians benefitting from being seen to be insincere.
Third, isn’t it possible that it is preparation for the narrative of the next term under a Conservative government, and the pattern of the election after that, in exactly the same way as ‘Tory cuts’ is? That is, just as Labour’s plan may be to have people blame necessary tax rises/drops in spending on the Tories even though they would have to do something similar, the Tories are staking ground so that when they make the necessary changes (as well as umpteen unnecessary ones, ooh ladies and gentlement, little bit of politics) they can claim they wouldn’t have to do so if the cuts had been made sooner. If so, it may be a recognition that trying to blame the current situation on GB might not last the length of one parliament.
July 3, 2009 at 12:41 pm
CS,
On your first para – you’re absolutely right. Consider my post amended!
On para 2, I am torn. Osborne and Cameron have been talking up this ononsense recently (Osborne’s post election cuts meeting springs to mind) but other things they’ve said make me think they’re not that stupid and merely wish those who equate spending cuts with virtue to see them in a favourable light. But perhaps I shouldn’t credit them in this way – Tory posters might have a better sense of what this means.
On Para 3, I think a Chancellor Osborne would rapidly become one of the most unpopular men in politics under a tory government. Having someone else to blame is therefore a good idea and of course the tories will blame Labour for spending too much.
imo the short term sucess of this tactic would depend on the state of the economy – if inflation is edging up, borrowing is getting expensive and theres still no sign of growth, blaming profligacy will work more effectively than if the consensus is that stimulus spending and investment is working to keep unemployment lower and help businesses in manufacturing, construction and so on survive.
Which is one of the many, many reasons that having this argument now is important.
July 3, 2009 at 12:34 pm
Just read the above piece and it made me so angry I wanted to chew my own hand off. But, without resorting to slanging, let me try and make some points;
Firstly, you argue for Keynesian counter-cyclical spending. Apart from the fact that Keynes proposed this in a closed system (which the UK economy is not), lets look at what Brown did. Instead of reducing Govt. debt during years of growth, it increased. As tories are so fond of saying, he left the cupboard bare. You can’t have it both ways. You can’t run budget deficits in BOTH parts of the cycle, as Brown is so intent on doing.
Now we are in a situation where the budget deficit is racing to almost unparalleled levels. This has effects on the economy on several levels. Primarily, it will stifle future spending and growth, as interest payments grow, but perhaps more importantly, when the Govt. becomes the primary debt issuer in an ecnomy with tight credit, you see a massive crowding out of corporate debt issuance. Which slows down companies’ growth.
You can already see this happening in the US – private and corp debt is being paid down, whilst Govt debt explodes. If you don’t believe me, I can happily send you charts showing the progression from a public source.
In reference to cutting spending causing the great depression….it could, and has been argued that protectionism and trade barriers were a bigger cause. Regardless, there are many examples where cutting spending and deficits has enabled an economy to come out of recession faster and stronger at the cost of short term pain. Off the top of my head, Canada in the early 90’s and UK in the early 80’s. The problem with huge spending profligacy, and running massive deficits, is that it inevitably increases the cost of debt issuance (hence the interest costs) as markets reprice the risk, and the debt at some point has to be repaid. These both act to stifle growth in the future through various means – not least through higher interest rates…..
….and before you argue that goverments can affect long term interest rates; they can’t. The market makes the price, and even massive Govt. intervention can have little effect, as we have seen with quantative easing.
The Govt cannot spend its way out of recession. Private industry is the driver of growth, and the tax reciepts Brown so relies on. The Public sector (which has been the biggest source of job creation since 1997) cannot survive without those tax reciepts, and the balance of the economy has shifted to the unsustainable. Simply, if you can’t balance the books in times of good growth, you can’t do it at all when times are bad.
Lets get back to the the nub of the argument though, before I go back to watching the tennis or playing on bloomberg. The WHOLE REASON we are even talking about cuts, is because the budget deficit is racing towards 14% of GDP in our economy which is still spending far too much after being built on 7 years of debt fuelled growth. Where we saved nothing. So no Keynesian counter-cyclical spending for you, sonny Jim.
Might I also remind you who was at the helm for all those years?
D
July 3, 2009 at 1:19 pm
thank you for not slanging. I appreciate it, and welcome the effort to respond..
“Now we are in a situation where the budget deficit is racing to almost unparalleled levels.”
Lots of parallels of debt levels well above these. Some good (1950 America), some worrying (1990’s japan) some terrible.
“This has effects on the economy on several levels. Primarily, it will stifle future spending and growth, as interest payments grow,”
Which is why the cost of borrowing is such an important factor here. As yet, there seems little sign that state borrowing is very expensive, though I agree this need to be watched.
“but perhaps more importantly, when the Govt. becomes the primary debt issuer in an ecnomy with tight credit, you see a massive crowding out of corporate debt issuance. Which slows down companies’ growth.
You can already see this happening in the US – private and corp debt is being paid down, whilst Govt debt explodes. If you don’t believe me, I can happily send you charts showing the progression from a public source.”
You don’t have to look at the US. Chris Dillow has the same chart for the UK.
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2009/06/why-is-brown-lying.html
But as Chris says, Isn’t this really the other way round? Rather than Public Debt crowding out lots of willing private sector lenders, Gov’t debt is having to explode because banks are holding onto money, consumers are saving and the result is a huge deficit of demand which government is having to make up… Do you feel that the correct picture of today’s economy is that Banks are not lending because the government is borrowing too much?
“In reference to cutting spending causing the great depression….it could, and has been argued that protectionism and trade barriers were a bigger cause.”
I wasn’t talking about the great depression but the 1937 recession within the recession. Smoot Hawley was a stupid bill and undoubtedly worsened things, but it was passed in 1930, not 1937.
“Regardless, there are many examples where cutting spending and deficits has enabled an economy to come out of recession faster and stronger at the cost of short term pain. Off the top of my head, Canada in the early 90’s and UK in the early 80’s.”
Aren’t we talking about different solutions to different problems? The early 80’s tightening in the UK was designed to get inflation and industrial ineffiency out of the system – at the price of unemployment. After that was done the contractionary pressure was eased and the economy began to grow again. The problem the Callaghan/thatcher government faced was inflation and stagnation, not a collapse in asset vales and plummeting global demand. I’ll have to look at Canada, but it sounds pretty similar to the UK strategy from 1995-2001 or so.
“The problem with huge spending profligacy, and running massive deficits, is that it inevitably increases the cost of debt issuance (hence the interest costs) as markets reprice the risk, and the debt at some point has to be repaid. These both act to stifle growth in the future through various means – not least through higher interest rates…..”
Here we agree – there has to be a plan to return dbt to GDP to a sustainable level over the medium term to prevent this happening (interestingly this didn’t happen in the post WW1 environment, but did after WW2, how and why is a question worth asking) .
The question is how best to do that. Immediaely and sharply or on a gradual path of restraint.
“The Govt cannot spend its way out of recession.”
It can, in the short term. A pound spent by the government on building a house is just as effective at employing builders as a pound spent by Sarah Beeny. As I say above it is the path back to normality that matters.
“The WHOLE REASON we are even talking about cuts, is because the budget deficit is racing towards 14% of GDP in our economy which is still spending far too much after being built on 7 years of debt fuelled growth. Where we saved nothing. So no Keynesian counter-cyclical spending for you, sonny Jim.”
See, to me this makes no sense. Our Debt to GDP ratio going into this was lower than France, Germany, Japan, etc etc. If we were sitting in Tokyo having this discussion it might make some sense, but to argue that the UK was somehow profligate is nonsense.
We were benefitting from a decade of sustained economic growth, which we used to improve our health service, build schools and improve infrastucture while keeping debt to GDP at c40%. To pretend that we were somehow at 100% of GDP debt levels coming into this, so could not afford action seems willfully masochistic.
Oddly, if we’d been in the Euro, we’d have been bound in different ways to the same effect. For the life of me I can’t understand why the conservatives are not celebrating the one policy choice they got right over the last decade!
July 3, 2009 at 1:48 pm
ok here goes – i’ll try to make my reply relatively brief.
1. Cost of borrowing. If you look at Taylor rule real rates, cost of borrowing is really high. This also partly answers why banks aren’t lending/holding on to money – they are buying into Govt debt instead (to be fair, partly because of liquidity requirements against hard to value assets, partly because balance sheets are smaller), as the relative return for holding onto some treasuries beats the pants off almost everything else on an RV basis….certainly if you are talking level 1 (liquid) assets.
As such, on paper state borrowing is not every expensive. In REAL terms, it is very.
2. Don’t hugely want to discuss the great depression, my point was more to say that there is more than one way to get out of a recession (my view: time, good fiscal sense and inevitably, a lot of pain). You could easily argue that neither cutting or spending will help, we are in a Kondratieff winter and time and deleveraging will be the only cure.
3. Lets be clear about the relative debt/GDP ratios. To do that we have to compare apples with apples. Japan has roughly 198% debt/GDP (IMF), while the UK had 44% at the end of last year, which is rapidly heading towards 70% this year. HOWEVER, in the UK we keep our public sector pensions, as well as other liabilites (such as bank bailouts, PFI) off balance sheet – Japan doesn’t. Lets estimate £1bio for pensions, and PFI/banks is another £600m. Given GDBP was around £1.4bio last year….we find that we can add roughly another 100% to our debt/GDP ratio. That is also before you look at total debt of the economy; savings rates in Germany, France and Japan are significantly higher than in the UK.
That might as you say, seem willfully masochistic, but its also, very unfortunately, true.
4. I agree with you about the Euro. Politics aside, I think its a terrible idea because almost by definition it allows imbalances to build up, as monetary policy can’t act to stfile them. cf Germany with Ireland over the last decade…one with rates too high, the other too low.
July 3, 2009 at 1:16 pm
Daniel,
A few point.
(i) “You can’t have it both ways. You can’t run budget deficits in BOTH parts of the cycle, as Brown is so intent on doing.”
Why not? I don’t think Britain should. But I can envisage circumstances where that would be very sensible. Say if corporates and households have very high savings rates. The government deficit would not only provide a ready store of gilts to invest those savings in, but would also provide growth for the economy. Can’t happen forever, but can happen for long periods of time.
Also, what is this cupboard that is now bare? I mean seriously, where is it?
Do you think there is a set quantity of ‘money’ in the cupboard and the govt has spent it all?
(ii) “Primarily, it will stifle future spending and growth, as interest payments grow, but perhaps more importantly, when the Govt. becomes the primary debt issuer in an ecnomy with tight credit, you see a massive crowding out of corporate debt issuance. Which slows down companies’ growth.”
Will we? When I look at the BOE’s monthly lending figures, the crowding out seems to be coming from financial corporations (generally tied to banks and components of the shadow banking system) shallowing up the flow of credit.
Lending to non-financial corps in May -0.3bn.
Housholds: 1.2bn
Financial Compnaies: 22.4bn!!!
Figures here:
http://www.bankofengland.co.uk/statistics/fm4/current/index.htm
More on this, here:
http://duncanseconomicblog.wordpress.com/2009/04/23/money-credit-quantitative-easing/
Interest payments as % of GDP are currently less than 2.5%. Lower than at ANY time 1945-1997.
(iii) “In reference to cutting spending causing the great depression….it could, and has been argued that protectionism and trade barriers were a bigger cause. Regardless, there are many examples where cutting spending and deficits has enabled an economy to come out of recession faster and stronger at the cost of short term pain. Off the top of my head, Canada in the early 90’s and UK in the early 80’s. ”
The UK early 1980s point is am afraid nonsensical. Debt grew during the recession and fell afterwards. Indeed that is pretty much the pattern of debt/GDP ratios since 1945. It goes up in a recession and comes down afterwards. Cutting spending is not the simplest way to reduce deficits. The mutliplier effect can mean it leads to lower growth and hence a higher debt/GDP ratio.
http://duncanseconomicblog.wordpress.com/2009/05/11/everything-you-need-to-know-about-the-public-finances-in-two-charts/
(iii) “The problem with huge spending profligacy, and running massive deficits, is that it inevitably increases the cost of debt issuance (hence the interest costs) as markets reprice the risk, and the debt at some point has to be repaid. ”
Again, really?
Markets don’t look to be rpricing in a default to me:
http://duncanseconomicblog.wordpress.com/2009/06/09/the-bond-market-politics/
The yeild on Irish debt, which is following your agenda, has risen from 4.9% to 5.6%. Meanwhile the yeild on our debt has fallen from 5.0% to 3.8%.
(iv) “The Govt cannot spend its way out of recession. Private industry is the driver of growth, and the tax reciepts Brown so relies on.”
I agree over that the private sector is the important driver of growth. But it’s not the only one. I am not arguing that the State should be the sole motor of growth for all time!
(v) “The WHOLE REASON we are even talking about cuts, is because the budget deficit is racing towards 14% of GDP in our economy which is still spending far too much after being built on 7 years of debt fuelled growth. ”
Because we are in a recession and tax revenue has fallen perhaps?
We have a structural deficit of maybe half that level and the best way to close it is growth.
http://duncanseconomicblog.wordpress.com/2009/06/10/austerity-versus-growth/
Duncan
July 3, 2009 at 2:05 pm
aaargh. very quickly.
1. No. There is no fixed quantity of money. There is a limit to what the market can and will fund.
2. You just proved my point – lending to corps has fallen, as it has to households, and banks has increased. Banks, bailouts aside, are holding huge amounts of Govt bonds now – QE is skewing the numbers.
3.1 Fiscal Buffers/structural deficit. You expect debt to increase during a recession as tax reciepts decline and benifits increase. The point is HOW MUCH it increases and how fast it falls after.
3.2 Markets aren’t pricing a default, but you aren’t looking at the right instrument to price it anyway. You would hope bonds would rally while rates were bing cut from 5% to near zero. If they didn’t there would be a *huge* problem.
You need to look at CDS. Cost of insuring UK debt for 5y has gone up roughly 0.5% in the last year. So effectively we pay 0.5% more on our debt.
Sad but true: its cheaper to insure McDonalds debt than UK Government debt.
4. Public sector provides services necessary for the running of a functioning society. It does not in itself create wealth.
5. See 3.1. Problem with UK is we were running a relatively large deficit (public, but also private – its called a credit boom) in times of good growth.
I agree that GDP growth is the best way to reduce deficits, but large amounts of debt only work to stifle long term growth, and unless you hadn’t noticed, we are in the biggest recession for 50 years – leaves cutting spending as the only certianly as yoou JUST CAN NOT BANK ON THE RECESSION ENDING AND GROWTH RETURNING.
Sorry, too shout, but its a very important point.
Glad its a US holiday today…… ;
July 3, 2009 at 2:15 pm
I’m glad it’s a US holiday too… And I’m also busy.
But a quick response…
I don’t buy that CDS markets are the right way of pricing default. I mean seriously if the UK or US, government defaulted their is no way a pay out would happen. CDS markets are mainly driven by speculation rather than fundamentals.
Now I agree that the UK underwent a credit boom. I’d go further a call it a bubble. As did the US and Ireland and Spain.
I think though that the fundamental driver of the credit boom was that wages didn’t rise as fast as they should have done. The power of capital held wages down, hence profits reaching record levels of GDP in the UK/USA. The only way for many people to keep up consumption (and corporates to safe guard revenue) was for consumers to borrow.
Now, Britain post recession is likely to have structurally less credit for a varieaty of reasons (dimininished risk appetite, greater regulation (good idea!), less inflows from Asia/Petro states, etc). So how do we maintain demand in its absence? One way is greater equality of income. Higher marginal propensities to consume mean more spending and greater demand in the economy.
Daniel I don’d deny that a 12.5% deficit is big. It’s huge. And yes it will have to be closed over the medium term. But closing now risks, in my view, depression and debt-deflation. Avoiding that is the first priority.
July 3, 2009 at 2:21 pm
Hopi can you explain what the 40% golden rules was all about then ? I thought it was supposed to be “Over a cycle”. Was it then actually the bare minimum below which it was not permissable to go even at the top of the cycle ?.I had no idea
You appreciate all that stuff about other countries having just as bad debts was dragged out the last time the IMF came a calling . Is it possible that diffrent countries are different ? Could be
Do you still believe “as you said “that we sacrificed growth for equality for ten years and does that swap not look a pretty stupid one now , ( even if it worked which it did not )
Duncan are you saying that its good thing we ran deficits in a boom because we were saving too much , I think the opposite is actually true . Are you suggesting that it was a good idea to create armies of permanently unemployed and dubiously sick dependents , over pay teachers rack up unsustainable pensions et al and so as to provide an excuse to run beneficially huge deficits when receipts collapsed ? Can that really be right ? I mean it all sounds very clever but seems to imply that the less work you do and the more inefficient you are the more debt you have and therefore ( somehow ) the better off you become .Is this the Paul Daniels School ? Incidentally my mortgage payments are lower than they have been in years now , would you advise I try and double my mortgage as well as stopping work and flinging any spare pounds I come across out of the window .Its all very Liberating Duncan I have already divested myself of all my clothes and performed a folk dance naked in the office , I trust that (counter intuitively ) it will help my career …Tra La ….
I suppose the fact this borrowing and not paying until after an election being just about the right timing is a happy coincidence for the Labour Party.
Well I`m convinced
July 3, 2009 at 2:51 pm
Newmania,
I’d think Britain saved too much. I was simply saying there are situations when long term deficits are a good idea. Who knows, if savings rates soar from here, that might apply to Britain.
I do think that we should not have borrowed so much or the last decade. Although I more think taxes were too low (and too dependent on the city/property) rather than spending being too high.
I also think that what is sensible for one household/firm is not always sensible for the economy as a whole. Paradox of thrift and all that.
July 3, 2009 at 3:21 pm
First bit should read ‘I don’t think Britain saved too much’.
July 3, 2009 at 2:32 pm
CDS isn’t a perfect way of pricing default. Its an indication only – a probability. It is partly spec driven. So are Govt bond markets (if anything, more so). Specualtion is the natural method of price discovery….QED.
What it definately is though, is a relative measure of interest costs someone is willing to take to hold your debt (over the risk free rate of return if yoou want to be pedantic). i.e. the UK is paying 0.5% more a year than it was a year ago.
On our national debt it means £6 bio a year more in interest ON TOP of the cost of simply having more debt. As an aside, a coherent plan to reduce the deficit would reduce the Govts funding costs….and save it, and us, even more money, which could then be spent on something worthwhile.
The fundamental driver of the credit boom was……wait for it…..too much too easy credit.
As for avoiding a depression….I’m sorry to say that I doubt the world can avoid one now. Govt. stimulus can only last so long. China can’t prop up world demand (money supply cannot indefinately grow 25% there, and the money that they have spent on stimulus seems to have mostly gone into a huge speculative bubble). This is something we can’t argue about at least – only time will decide it.
July 3, 2009 at 2:53 pm
Daniel,
Spreads over German bunds are down though.
Easy credit explains, partially, the supply of credit. Not the demand for it. The fundamental driver of credit demand was low wages.
July 3, 2009 at 3:19 pm
apples v pears again….what you have done is look at absolute yields in the local currency. Of course spreads are down…in the UK rates have been cut from 5% to 0.25% and in Europe they have only come down 1.5%.
BUT
you are not comparing like for like…as they are valued of different swap curves. If you swap all the cash flows back to one currency (or if you had EURO denomiated Gilts) yoou would find that Gilts are cheaper (i.e. higher interest rate) than Bunds and the spread has WIDENED.
I should know. Its my job.
We didn’t have low wages. Until Dec 08 the LOWEST they increased on a 3m rolling, YoY basis was 3%. Which outpaced CPI. Source: Bloomberg.
Demand for credit I think was a social issue, enabled by its free availability. Not because people were broke, or worried about the future.
July 3, 2009 at 3:27 pm
But we don’t have euro denominated gilts do we? Surelt gilts should yeild a lot more than euros given the currency risk? (I’m primarily an equities person).
But Daniel, corporate profits as % of GDP at all time highs, wage share at lows.
Suggests to me wages were not growing fast enough.
Equally, which ONS wage series are you using?
Mean incomes have risen quicker than median incomes.
Good data in this TUC report:
http://www.touchstoneblog.org.uk/2009/05/life-in-the-middle-the-untold-story-of-britains-average-earners/
July 3, 2009 at 3:53 pm
“(I’m primarily an equities person).”
That expains a lot.
You need to factor in the risk free rate of return.
Example (not using real data, for clarity)
For simplicity, let us take a one year gilt and the same maturity bund. As rates were cut in the UK, my 1y interest rate swap (which is effectively the risk free rate of return, given it is based no Libor) moved from 5% to 0.25%. My Gilt *should* have moved the same amount….but is hasn’t. It now trades at 0.75%. Euro rates have moved from 2.5% to 1%…but because Germany’s CDS has been static my Bund trades at 1%.
Relative to their OWN swap curves, the Bund has outperformed Gilts, despite Gilts having actually moved more in pure yield basis.
Relative is the key, oft forgotten word here. It is quite literally all important when valuing…well…anything.
UK Avg Earnings Whole Economy Headline Rate 3 Month Avg SA. Bloomberg ticker UKAENEWY
TUC report is hardly unbiased. I would find a better source of data. Seriously. They use statistics very selectively to prove a point, notably on wages and tax rates as a % of that. Amusingly though, they argue that wage increases have been above inflation for decades and that the debt boom was spent (86% of it) on housing……
I don’t see where corporate profits come into it. Other than that it funded, through tax, a lot of Brown’s public service spending.
In fact, I’ve just spotted a HUGE flaw in your argument. If wages increase faster than profits at a company, what happens?
Well….its profit margins continually decrease, go negative, and it eventually goes bust.
July 3, 2009 at 3:55 pm
if I may be so bold
Daniel 1: Duncan 0
July 3, 2009 at 4:02 pm
Too bold.
July 3, 2009 at 4:00 pm
Daniel,
I don’t want wages to rise faster than profits forever. Clearly that would be silly.
But we need them to go in the short/medium term.
Profit margins come down, but revenue grows (more demand, more spending). Actual profits will keep growing.
Even better I want more equality of wages. There will be more spending if £1mn is earned by 40 different people than if the same £1mn is earned by one.
If you don’t like the TUC figures you can get similar ones from the ONS.
Or indeed PWC who did some work on this last year (and the effects of inflation on different income groups).
I disagree on the bond point. I can see you are correct in a technical sense but I think miss the policy implications. I’m more concerned about 10 and 30 yrs than 1s too. But let’s be honest it’s a side issue isn’t it to the main debate? Agree to disagree as it were.
July 3, 2009 at 4:13 pm
OK.
A company with a lower profit margin is worth less to shareholders, can’t invest as much as therefore can’t invvest and grow as much. Which means it can’t employ as many people. Which covers part of your second point….which is nice that we agree on having more people earning makes sense, no?
I’ve just given you ONS figures. They show wages outpacing inflation since 2000. I checked my data before I made my argument.
I am totally correct on the bonds. End of. The one year bit was just an example, same is applicable down the whole of curve. Policy implication is this: the UK now raises debt at a MORE expensive level than it would otherwise do it if had lower budget deficits. Real interest rates are HIGHER. So we get hit by a double whammy of increasing interest costs.
Which takes us nicely to back to the main debate – if the Govt hadn’t got us into such a massive mess, we wouldn’t need cuts, and we would be able to spend on a fiscal stimulus, which we now can’t afford. At the moment Labour are hoping, nay, praying for growth to get the UK out of trouble.
If it doesn’t come, then cuts will be forced deeper, harder and nastier, just on structural issues.
July 3, 2009 at 6:17 pm
Mr Sen, do you honestly believe that deficit spending contributes to economic recovery. Have you ever heard of the 1921 depression in America. It was an horrific recession, with output collapsing in the first year as fast as it did in the Great Depression. Do you know what President Warren Harding did? He cut spending and cut taxes. The tax cuts allowed for business expansion, and the removal of the state (which consumes wealth, not create) created spare capacity for the private sector to fill. The recovery was the strongest recovery in American history until the Reagan tax cuts. The recession only lasted 1 year, and it led to the roaring twenties.
Contrary to popular belief, Herbert Hoover was a fiscal and monetary expansionist. He increased spending by 47% during his 4 years in office, and President Roosevelt increased it further. Yet the Depression was still there in 1939, when the war stimulated massive trade across the world, ending the depression. It wasn’t a public works programme, it was free trade. Gerald Ford tried a Keynesian stimulus programme in the 70’s during the oil crisis, and it failed, and the crisis only really ended with tight monetary policy and the huge Reagan tax cuts. Nixon tried a Keynesian stimulus. It never worked. Japan tried it, and it never worked.
You seem to be keen on quoting economists. Why not read Monetarism, Keynes and the Keynesians by Tim Congdon, or a Monetary History by Milton Friedman, who showed that Keynesian stimulus programmes are built on fallacies. Economists are famous for disagreeing. The economist you like to quote, Christina Romer, actually said deficit spending didn’t do much to alleviate the Depression. I have the paper somewhere.
So please stop peddling this ”investment in a recession” crap, because it dosen’t work. Can you provide me with an example of when a Keynesian stimulus programme has ever worked?
July 4, 2009 at 9:39 pm
You did notice that Romer quotes Friedman, right?
Romer’s point in that paper was that deficit spending needed to be bigger – it was WWII deficits that eventually broke that depression.
July 4, 2009 at 10:30 pm
International trade broke the depression. The Smoot-Hawley tarriff act and the monetary contraction turned the recession into a depression. FDR continued with protectionist trade policies, and continued the expansionary fiscal policies of Herbert Hoover, who despite popular myth, increased federal spending by 47% over 4 years.
We had to remove tarriffs and trade barriers during WW2 to move goods around the world. That broke the depression.
In Japan, the government implemented 10 stimulus programmes over 12 years, totalling 100 trillion yen. Yet the economy wasn’t stimulated by deficit spending.
George Bush implemented a Keynesian stimulus programme in early 2008 with a series of cash rebates. It didn’t work.
Traditional Keynesian economics dosen’t take into account individual behaviour. The Rational Expectations theories, like Robert Barro and Bob Lucas, said that because there is no long run trade off between inflation and unemployment, people will expect future inflation. And they expect future tax rises if the government borrows lots of money. The purpose of Keynesian tax rebates is to get people spending because the Keynesians believe one of the causes of recession is a collapse of consumption (yet Keynes never explained why people collectively just decided not to purchase anymore). Yet because they expect future tax rises, they will save the money. Keynesian stimulus programmes are useless. Tax rebates are useless.
In 1921, President Warren Harding cut spending and taxes heavily, and a recession which equaled the first year of the Depression in terms of output loss rebounded spectacularly and led to the roaring twenties and the strongest economic recovery in history.
July 5, 2009 at 9:10 am
“We had to remove tarriffs and trade barriers during WW2 to move goods around the world. That broke the depression.”
Surely the vast majority of those goods (arms, supplies, etc) were purchased by governments, though?
July 3, 2009 at 11:50 pm
New Labour efficiency savings,Tory cuts.
Anyone know the difference?
July 3, 2009 at 11:54 pm
Josh
‘Mr Sen, do you honestly believe that deficit spending contributes to economic recovery.’
It’s that old adage,that if you keep repeating a lie enough times finally you will believe it.
Commonly known in New Labour speak as spin.
July 4, 2009 at 4:46 pm
Ha! Well, I’d like Mr Sen to explain why he has turned Keynesian all of a sudden. If he was a Keynesian, surely he would have been calling for spending cuts in the last 7 years when it has increased faster than the economy. Keynes’ basic idea was that recessions come about as consumer demand and investment falls (though he never explained why all consumers decide to stop spending at exactly the same time, and why people stop investing at the exact same time as each other) and that in the boom years, the government should develop a large budget surplus that can be used to supplement private sector activity in a downturn, and take over where the private sector cannot. We entered this recession with the 4th largest deficit in the developed world. So Keynes himself wouldn’t have agreed with Gordon Brown’s policy. I wonder what Mr Sen thinks of that
July 4, 2009 at 4:23 am
Points win to Daniel I think, and all most illuminating incidentally there is one area where wages have gone up at twice the rate they have elsewhere , the Public Sector .
Looking over this discussion there is at least one point of agreement which is that during New Labour’s period of power too much was spent . Duncan says taxes should have been higher , most people would say spending should have been lower but either way the agreement is that if we are going to enjoy the sort of levels of state spending we have , we must also have much higher taxes
New Labour are going to the next election denying that and that is the sense in which they are continuing even now to be deeply dishonest with the country.
July 4, 2009 at 4:43 pm
As you like quoting Christina Romer, I wonder what you make of her analysis of monetary and fiscal policy in the Great Depression; “monetary developments were very important and fiscal policy was of little consequence … Even in 1942, the year that the economy returned to its trend path, the effects of fiscal policy were small.”
July 5, 2009 at 11:08 am
Hopi,
I know the quote at the head of this post appeared widely in the press – but it is nowhere in the official text of David Cameron’s speech on the Conservative Party’s homepage.
He does use the word ‘cut’ a couple of times – but only dismissively. He also uses ‘10 per cent’ – but again in a completely different context. He says:
‘Imagine if they [Tesco's] just adopted the idle and outdated logic of Gordon Brown and said that every cost reduction must inevitably lead to a cut in front line services.Think of the commercials they would have to run on the logic of what the government tells us.
“Good food costs more at Sainsbury’s”.
“At Tesco every little bit doesn’t so much as help – in fact it’d be a 10 per cent cut in the quality of the food”.’
Now I admit I find the wording here a little tortuous, and he doesn’t explicitly say ‘no cuts’ – but I’m sure any average Jones reading this would say there is absolutely nothing here (or elsewhere in his speech) that even suggests that he will make any cuts at all – still less cuts of specifically 10 per cent. Where did this idea originate? Anybody know?
Pete
July 5, 2009 at 1:06 pm
Pete, As I say, my assumption is that it was either a Q&A or an ad lib. I wasn’t at the LGA conference, but I do trust journalists to get quotes right – might be worth dropping Kate devlin at the Telegraph a line for more info as she used the quote here:
http://www.telegraph.co.uk/health/healthnews/5724890/Tories-accused-of-hinting-at-NHS-pay-cuts.html