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May 19, 2010

Comments

Prateekbuch

Hmm. forgive my ignorance, but doesn't it depend on how many jobs are lost as a result of these or any other cuts? It isn't about the fraction of GDP the cuts signify (0.6% or otherwise), it's about how many contracts and projects will be cancelled, how many employees will be laid off as a result.

If Osborne (and Laws) manage to make £6bn worth of savings without anyone losing their jobs, then I can see how the net effect may be neutral at worst or stimulatory at best - but if cutting central government spending means cutting jobs, doesn't that mean more unemployed people (hence greater welfare spending unless they all find alternative emploi elsewhere), reduced demand on the economy and therefore greater private sector contraction...? If bureaucracy is the enemy then so be it, but evil though their pen-pushing may be, a jobless bureaucrat still sucks demand from the economy no...? That is at least me simplistic understanding, and why I am somewhat nervous about the drastic spending cuts to come... [prepares for a lesson in economics 101...]

Roger

Lets assume that most of these 'efficiency savings' are the salaries of either govt employees or private sector workers who will lose their jobs because govt contracts will be cancelled.

To pluck a figure out of the air lets say £50,000 of efficiency savings = 1 such job.

That implies the loss of 120,000 jobs.

You can airily point out that this is only 0.4% (-ish) of the workforce but its still a lot of lives that are shortly going to be seriously fucked up.

Now I am hoping that you are going to be able to trash my £50k = 1 job figure and its not going to be quite that bad - but having personally lost a job this year myself due to govt contracts being cancelled I hope you'll forgive me for being less sanguine about it all than you are...

Tom

Businesses may be waiting for the Budget, so they may begin to invest more afterwards; but consumers may well respond in the opposite direction. If the Budget is all doom and gloom and cuts, then that may well cause a feeling of insecurity that leads to lower household spending. The £6bn may not matter much in itself; but as an indicator of things to come it could have a greater psychological impact.

Alex

"To pluck a figure out of the air lets say £50,000 of efficiency savings = 1 such job.

That implies the loss of 120,000 jobs."

The government spends something like £600 billion, and there are roughly 6 million public sector workers, so to use a very crude way of looking at this, your £50,000 is half as much as it should be. That means 60,000 jobs lost.

patrick

Alex - Except, as others point out, some of that government spending will be paying for private sector workers to undertake contracts for the government, so it may be 60k public sector jobs plus perhaps as much as another 30k private sector jobs dependent on government contracts...

Alex

There are 3 ways to proceed:

1. Cut now.
2. Cut later keeping spending roughly the same for now.
3. Cut later, with further stimulus for now.

Now, as you rightly point out, £6 billion of cuts (1) are not going to make a lot of difference to growth prospects compared to the status quo (2). However, this works the other way too: it means that £6 billion of cuts this year aren't necessary for growth. Therefore, in evaluating between 1 and 2, you don't really need to look at the status of the economy.

So how do you choose between 1 and 2? You look at what will be cut under 1. If it's efficiency savings so that waste would be cut, then it makes sense to do it. Maybe jobs are lost, maybe they're not, but you shouldn't employ people to do wasteful activities in government. However, Cameron has previously derided efficiency savings as "one of the oldest tricks in the book". Are these savings really from waste? I don't know, but if they're not, then there's no need to cut non-wasteful spending just yet.

Saying all that though, if someone thinks it's likely that we could end up back in recession under scenario 1, then because it's only £6 billion difference, there's also a good chance of that happening under scenario 2. Such a person then, should be advocating a move to scenario 3, with more stimulus.

So when someone like Gordon Brown blathered on about £6 billion o cuts and a possible dip back into recession, it was hard to take him seriously, since he made the decision to have no stimulus in 2010.

Bloc d

I agree totally that as large as £6 Billion sounds or indeed is (i'd struggle to get that many £20 notes under my mattress) in the great scheme of things or more particularly GDP and borrowing deficit it is not exactly a huge amount.

Job "losses" will probably be considerably less than those mentioned above. Just as relevant to future economic growth public sector pay will be reduced- be it through recruitment freezes or less than index linked pay rises. We are going to have to take our medicine of less pay for the common good of the country in these difficult times (sic).I suspect you miss 5% of your pay packet considerably less when you are a cabinet minister than a nurse.

Ralph Musgrave

Prateekbuch: you needn’t apologise for being “ignorant” or “simplistic”. You ask a good question. Same applies to Roger who asks pretty much the same question. Here is my answer.

First, there is the question as to whether the cuts will be matched by an equal reduction in govt borrowing.

Assume they are. We are now in “crowding out” territory. That is, it is debatable as to what extent government borrowing and spending is stimulatory because arguably the deflationary effect of the borrowing negates the reflationary effect of the spending (i.e. you’re messed up by “crowding out”). Likewise, it is debatable as to what extent REDUCING govt borrowing and spending has any effect for the same reasons.

Alternatively, if govt simply cuts spending and leaves everything else constant, then this certainly WOULD be deflationary. Unless there was a serious risk of inflation, doing this would be madness, because as you point out, the only result is unemployment.

For this reason, I believe (as do numerous others) that Keynsian “borrow and spend” is an complete farce. I am a supporter of a set of ideas that rejects Keynsian borrow and spend. This latter set of ideas is sometimes called “functional finance” and sometimes called “modern monetary theory” (MMT). MMT enthusiasts are currently small in number, but the MMT crowd is rapidly growing.

Put another way, you’ve unwittingly spotted the flaw in the conventional wisdom which MMT enthusiasts have been shouting about from the roof tops for a long time.

For a much more detailed answer to your question, see this blog of mine: http://cutdebt.blogspot.com/

Two of the leading proponents of MMT are Bill Mitchell and Warren Mosler. They are both hyperactive individuals and their blogs attract a lot of interest. See respectively, http://bilbo.economicoutlook.net/blog/ and http://moslereconomics.com/

Charlesbarry.wordpress.com

@Ralph Musgrave

I really have no idea about MMT, I've never heard of it before. It sounds highly esoteric to my mind. But I do know that the idea that 'Keynesian “borrow and spend” is an complete farce' is a complete farce in itself.

Look, Keynesian borrow and spend works. But it only works if and ONLY if these two criteria are met:
1) Government borrowing will not increase interest rates.
2) Government spending will increase productivity.

Government borrow and spend was appropriate for the past two years because interest rates were low, government debt was in demand ( = low cost of borrowing for governments) and the recession in the private sector was causing output to decline.

It's not that complicated. To argue that increased government spending (ceteris paribus) has no stimulatory effect is to also argue (ceteris paribus) that decreased government spending has no destimulatory effect.

If this is indeed your line of argument, I would simply say: Look around!

----------------------------

If there's one thing my observations of politics and the UK political world has taught me, it's that journalists, politicians, newspapers and even the great british public has great difficulty understanding the notion of the "counter-factual".

In all likelihood as Chris points out if there is an uptick in private sector investment caused by reasons entirely independent of George Osbourne, nobody will ever talk of how it could have all gone horribly wrong, but instead "George's Golden Era" will enter the popular lexicon.

Likewise when David Cameron opposed the VAT Cut calling it a "criminal waste of money" and blaming it for single handedly causing the deficit, he failed to realise that the stimulatory spending probably reduced the deficit by causing output to be higher than originally anticipated.

But there won't be any data of the alternate reality were the VAT cut never happened, so we can't check David Cameron's remarks against the facts.

Ralph Musgrave

Charlesbarry: re your point No 1, I agree that borrow and spend only works to the extent that it does not result in an interest rate rise (or at least, given an interest rate rise, b & s is hindered).

Re No 2, I’ve never before heard the suggestion that an increase in productivity is needed for borrow and spend to work. Put another way, given constant productivity (output per person) I fail to see why this should stop borrow and spend working.

You claim that “Government borrow and spend was appropriate for the past two years because interest rates were low...”. Agreed. But how are low interest rates brought about? They are brought about by the central bank doing a bit of quantitative easing, or printing money. I.e. I would argue that it is the latter that has the real stimulatory effect. The borrowing is just plain irrelevant. Which is one reason for my claim that b & s is a farce.

Re your 4th and 5th paras, I am most certainly not saying that govt spending has no effect. Quite the reverse (as you’ll have gathered from the above para). One of the basic claims of MMT is that when stimulation is needed, governments should spend. As to the borrowing: just forget about it. It’s an irrelevance – i.e. just print money. Conversely, when inflation looms and deflation is called for, do the opposite, i.e. raise taxes and extinguish the money collected.

Re your criticisms of Cameron’s economic competence, I fully agree. Bill Mitchell (the author of one of the blogs I referred to above) actually did an amusing post on David Cameron’ economic illiteracy a month or two ago: http://bilbo.economicoutlook.net/blog/?p=5518

Charlesbarry.wordpress.com

@Ralph Musgrave

Ahh, but you misunderstand which interest rates I refer to.

There are short term interest rates, which are set by the Bank of England, there are long term interest rates, which are set by market forces (primarily inflation expectations), and there are government bonds (gilts), whose coupon rates are set by the government but their prices are set by the market.

While short term interest rates were slashed to stimulate the economy (they are of course the best economic tool the government has), long term interest rates have been on a long term decline since the 1980s. The threat of possible deflation in the UK and US also pushed long term interest rates down.

Additionally, the blow-up in the repo market and an increased level of risk adversity led to a surge in demand for government debt. The government found it had a ready and willing customer to cover its borrowing.

For these reasons, it was market forces and not the bank of england that made government borrowing cheap and easy. The *average* maturity of government debt is 14 years, consider that the loans the bank of england makes last 6 months normally, and you can see what I mean.

Although I agree with your point that the bank of england's QE did buy up a lot of government debt.

As for the need for government spending to increase productivity so borrow and spend can work, of course this has to happen.

If it didn't, ricardian equivalence says that the government spending would be offset by future taxes, so there would be no point to borrow and spend.

But because borrow and spend in recessions can raise productivity (ie long term growth), it can be an effective policy.

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