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September 25, 2011

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Nick

Regarding your 5 points:

1) Simply disagree. The "too far, too fast" argument has been articulated constantly over the last 12 months.

2) Financial metaphors are always simplistic (though Ed M was also using the credit card analogy today on Marr programme, though in different sense from the "maxing out" point of view). However, there is a perfectly literate argument that government's must live within their means, which means borrowing in times of recession, but also means that in times of boom if you want to increase government spending you also need to increase taxes to pay for it. You can't just borrow through good times and bad.

3) Every party ran at the last election promising cuts. No one thought that a near 12% deficit was sustainable.

4)It may be in the interests of a 70 year old to want higher interest rates but that 60 year old also probably has children with a mortgage . People do have family "self" interest.

5) True. But then just this week we have seen £6bn admitted to have been wasted on IT systems. If Coalition austerity just means that this sort of stuff is cut, rather than front line jobs, then I doubt anyone would complain.

Charles Wheeler

"2. The Coalition has a vivid metaphor - that we have “maxed out our credit card.” Although this is economically illiterate, it is a clearer, simpler message than the alternative."

This is a major hurdle for the left. The right's economic message: tax is bad, keep what you earn, government action reduces freedom, balanced budgets, etc. is much simpler to understand than the social democratic alternative.

The fact that it's complete bollocks and is driving us off a cliff seems irrelevant.

anon

(1) "Loose" monetary policy is not bad for savers. Short-term interest rates may fall marginally as a result of monetary easing, but long-term "natural" rates will rise. Equities will rise as well; the only losers are current holders of long-term bonds, and even then they will see reduced default risks.

(2) If fiscal austerity is matched with monetary easing, the "strong argument" against it collapses.

(3) The metaphor of "maxing out on a credit card" is debatable, but it's more plausible than David Blanchflower pretends in his column. The net present value of goernment infrastructure is very hard to measure, and investment is only 10% of government expenditure anyway.

Gary

I followed the New Statesman link you offered that expanded on why the Credit Card analogy was wrong.
The piece basically has Blanchflower saying "Let me explain. There is an asset side to the balance sheet and a liability side. The national debt is not analogous in any way to a credit card. The debt has been used to pay for the infrastructure, roads, schools, ports, the Houses of Parliament and even Downing Street...The next generation will receive not only the debt but also the assets."
Blanchflower was ripped a new one in the comments by folks pointing out the rather obvious point that, since capex is less than 10% of Govt expenditure, over 90% of the liability has no corresponding asset.
The credit card has been spent down the pub, not on a new suit for a job interview.

CahalMoran

@ Nick

'2) Financial metaphors are always simplistic (though Ed M was also using the credit card analogy today on Marr programme, though in different sense from the "maxing out" point of view). However, there is a perfectly literate argument that government's must live within their means, which means borrowing in times of recession, but also means that in times of boom if you want to increase government spending you also need to increase taxes to pay for it. You can't just borrow through good times and bad.'

Labour's borrowing was modest - they were well within EU limits and George Osborne actually said he was going to increase spending. The bond markets were never panicking and we've had debt far far higher than now.

And you are wrong about 'living within our means'. Because we measure debt as a % of gdp, in a growing economy the government can and should be in the red the majority of the time.

Also: the government can simply print money to pay down debt. (If 'inflation' pops into your head then you misunderstand the nature of our banking system).

Nick

@CahalMoran:

"in a growing economy the government can and should be in the red the majority of the time."

Long term trend growth of the UK economy is 2.5%.

There is thus a vast difference between running a deficit of 3% and one of 12%. 3% is living within your means, 12% isn't. Otherwise why not just run a permanent deficit of 20% and buy all the things governments and voters would like ?

Running a deficit of almost 3% prior to the crisis was unsustainable because it was funded by a bubble in financial services and housing with all the taxes that generated.

From the precautionary principle alone government spending should have been lower. The super normal tax receipts of 2005/06/07 should have been used to pay down debt.

And it's neither here nor there what Osborne said at the time. He would have been as wrong as Brown had he been in power and pursued the same policies (tho I suspect he wouldn't have done).

PaulB

I don't follow your argument that the government was right to run deficits in the mid-00s. "Across all sectors of the economy (which includes foreigners) net borrowing must be zero" - yes, obviously. But that doesn't force the government to run a deficit whenever the domestic corporate sector runs a surplus. Instead the government can let the foreigners run the deficit, i.e. it can pay back some debt. That would make it safer to increase borrowing when growth becomes small or negative.

Metatone

You can see the illiteracy in the comments here. People really like simplistic morality plays about debt.

It's going to take the coming depression before we relearn the necessity of ignoring people who think you run government spending like a household.

Nick

"It's going to take the coming depression before we relearn the necessity of ignoring people who think you run government spending like a household."

No one here has said you run an economy like a household budget.


Gary

Nick, I answered with another household-type analogue ("the deficit was spent down the pub, not on a new suit"). My guess that was the offending remark.

There are clearly several important differences between household and macro finances (not least the role of import/export, inflation and printing money). In my experience though, there is an easy 'faux intellectual' win by emphasising the differences and ignoring the similarities e.g. spending is not necessarily investing, so while new broadband infrastructure may well have been a deficit worth bearing, pissing away our gold at the bottom of the market, spending £12bn on a failed NHS IT system and almost doubling our welfare bill without addressing the Welfare Trap *was* an unecessary waste of money. And it is therefore not legitimate to discard the credit card/household analogy to the extant that most (and increasingly large?) proportion of Govt expenditure is spending, not investment.

Dipper

Gary is right. every ordinary non-economist knows that it really does matter what you spend the money on.

And when was the debt going to be paid back? Or can we borrow without end? Because if we can, then what's the point in any of us getting up tomorrow and going to work?

Dipper

... and did the Germans get rich by borrowing large amounts of money and spending it on state bureaucracy? or by running their economy like a household budget?

gastro george

Dipper, if you have £20 more pounds in your pocket tomorrow, where did it come from? Literally.

Keith

Are we discussing here macroeconomics or the messaging problem of The Labour Party? The macro theory is that demand must be adequate at market prices and there are different ways of maintaining demand. Some components of demand are derived from the private sector and some from the public sector. If it is necessary to increase public borrowing and spending to maintain an acceptable demand volume thats fine and there is no problem of theory only a disagreement about the facts that justify it in a given time frame. All money in a modern economy is credit money, so someone is creating debt and money if the economy is growing. It is unlikely that real wealth will grow unless debt and money are increasing in total. There is no reason why public debt is more objectionable than private debt as all debt is a claim on future income. Why would the states future income be less reliable than that of a firm or private citizen? Surely as the state can levy Taxes by decree of the Law its future income is more credible than that of a natural person or firm? If I do buy lots of beer down the pub on my credit card so what? I do not have to pay my bank in beer but in money. So long as my income is large enough in the future I can buy as much beer on credit as I like. Or anything else that takes my fancy to buy. For demand in the whole economy beer or schools are equivalent. Its the total we are trying to balance between supply of real imputs and demand for them. Keynes explains it all in essays in persuasion and I thought they taught it for years to oxbridge undergraduates in PPE? So Cameron and Osbourne must be vaguely aware that they are talking rubbish.

Keith

As for the Labour Party: I blame Tony Blair. He spent years talking balls to get elected quite successfully; which involved him repeating "common sense" ideas to win votes. Now common sense is often wrong but repeating errors rather than correcting them was how he played the game. It is then harder for his successors to tell the truth when the truth is repugnant to common sense mistakes. Equally I think Gordon Brown has become a hate figure for the Blarites who they can blame for their ejection from power. I do not buy it at all. The idea that if only Tony had carried on or some other Labour figure replaced him the Labour Party would be successful is a pipe dream. Labour were slowly losing votes all the time they were in power as the neo liberal agenda for want of a better description was gradually alienating the public. All the social democratic parties that moved to the right to win power have fallen from power via alienating the groups in society they base their power on. Factional groups inside parties give too much weight to the importance of their faction and who might lead it. The real problem for the Labour Party is that there is such a limited choice of leaders who all have the same right wing conformist ideas based on the power of good Public relations to miraculously hide the useless policies. It is a approach of amazing unimaginativeness. Lets become the British Democrats and hope we can pretend to be social democratic while abandoning all our traditions.

Chris

There's another simple reason: the majority of the media supports the Conservative Party.

anon

Keith, its not true that "all money is credit money". The central bank can create monetary base by displacing (buying up) existing government debt. And yes, it's important to avoid an AD shortfall, but there's no obvious case for increasing the share of government expenditure.

gastro george

Getting back to the OP, I agree with (1), and you can see the problem when Balls talks about the past today.

Labour faces the problem that, yes, parts of their economic policy were wrong - most particularly in turning over the economy to the bankers. However, this is no different from what the Tories would have done. And confessing to fault plays along to the Tory narrative that "it was all Labour's fault".

Which is why they need to be much more specific about what aspects of economic policy were wrong.

Luis Enrique

this is interesting, along relevant lines ...

http://chrisblattman.com/2011/09/25/are-most-americans-unfit-to-govern-themselves/

Gary

Keith,
"If I do buy lots of beer down the pub on my credit card so what?"
The arguement we were directed to proposed that the deficit was legitimate because it was spent on assets which generated the necessary future income (and by inference the deficit would be less legitimate had it been spent on frivolity that would not help generate that future income).

The premise of that arguement is arithmetically incorrect. We by and large did not spend it on assets. By Blanchflower's own logic then, the legitimacy of the deficit is undermined.

Keith

Well, anon, who ever you are, I agree that base money is not strictly credit money. But I would say that at some point in the future large increases in base money will need to be reversed. Which will involve the exercise of claims on real imputs. Just like repaying debt from income, by a firm or natural person. When the past growth of high powered money produces inflation the Central bank must put on the break. Which is the other side of the Keynesian coin. I recommend the MPC buy Kandinskys or any fasionable artist to boost demand and then they can sell the paintings to reduce the expansion of the base monetary stock! At the appropriate time for a profit. They can put their favourite artists' painting on the wall until they need to sell it.

Gary the concept of investment needs to be wider. Feeding babies is an investment in the future productivity of society ( ask Ben franklin ) so is beer as it feeds my brain cells with energy! If we build pyramids that boosts demand; is that an Investment? Depends on your religious belief system! I like investment when it is in things I think desirable. But even if we dislike pyramids they still will boost demand if we erect them. But I would choose high speed rail and council housing instead.

ron

Every ruling party in each of the worlds democracies are in trouble and a fair number of non-democracies as well. Right, Left, and Center. The policy positions and personalities involved don't seem to matter much. Sometimes fate just deals you a bad hand.

ron

is in trouble

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