Cripps' message

Boris Johnson's reference to the "hair shirt, Stafford Cripps agenda" raises more mischief than perhaps he realises.

This is because Cripps' austerity - even more than the 1980s tightening is an example of expansionary fiscal contraction.

Cripps' fiscal policy was certainly tight. His 1948 Budget, for example, called for "an exceptionally large Budget surplus*." The primary budget balance - which was in deficit of 12.4% of GDP in 1945 - was in a surplus of 3.9% in 1947 when he became Chancellor, and he increased this to over 9% of GDP by 1950.This is a bigger tightening than Osborne is planning; the OBR envisages the primary deficit falling from 5% of GDP in 2011-12 to 1.8% in 2015-16.

However, this tightening - which was achieved mostly by a rise in the share of taxes in GDP - was accompanied by an economic boom. Between 1947 and 1951, GDP grew by 3.5% a year, investment by 5.6%, exports by 11.1% and industrial production by 5.8% a year, whilst the unemployment rate stayed below 1.5%.

Such growth was, of course, facilitated by the massive backlog of investment opportunities which was opened up by the war - including the need to rebuild houses.

And herein lies Johnson's mischief-making. This episode draws our attention to two points.

First, the failure of Osborne's fiscal policy shows not merely that he is a lousy economist, but a poor historian too. A good historian would have asked: under what conditions has fiscal austerity been accompanied by good economic growth in the past? Whether he looked at the early 80s or the post-war period, he would have seen the same thing - that the circumstances in which austerity works are very different from those that exist now.

Secondly, strong growth during the post-war reconstruction period has caused commentators for years to exaggerate the "natural" vigour of capitalism. Between 1948 and 1973, real GDP per head grew by 2.5% a year. But this was exceptional. Since then, it has grown just 1.8% a year, and in the 118 years before 1948 it grew just 1% a year.

In this sense, those who talk about modest growth being the "new normal" are lacking historical perspective. A sluggish economy is in fact the old normal. 

* The motive for this was to reduce inflation, rather than to repay debt as an aim in itself.

Comments

[Agog]

Right, it was a far-from-"natural" thing. Fast increases in living standards don't happen by accident. You need good institutions and good policy. And we can clearly do much better on both counts right now.

[Keith]

I have no idea what Bojo really thinks about economics but I do agree that talking about cuts is bad for the economy. If you really think a recovery can happen via private sector demand only constant talk about austerity is likely to reduce confidence and growth. So be self defeating.

The real problem about the Cabinet is that its policies actually have nothing to do with improving the economy in any way. The rhetoric about debt is a cynical smoke screen to allow huge cuts to the welfare state which will impoverish millions of people and allow cuts in tax for the wealthy. It has a vicious class ajenda.

That class policy will also be bad for the economy; as well as the rise in rent arrears, evictions, and cuts to housing investment consequent on the former and income falls for millions reduces human welfare and future productivity. But for the Cabinet the "Economy" only means the wealth levels of a few hundred thousand rich people rather then the other people who compose society.

[Blissex]

«The real problem about the Cabinet is that its policies actually have nothing to do with improving the economy in any way.»

There may be a rationale in the government's action other than protecting the interests of their sponsors.

The main problems of the UK economy are that a 25 year period of strong pound and low personal taxes due to net oil exports has come to an end, and that there is a lot of private and some public debt, a lot of it house price related, as there has been extraordinarily strong political demand for massive tax free capital gains to benefit the 60-70% of voters who are house speculators.

If house prices go down a lot of mortgages blow up, the entire UK banking system blows up, interest rates blow up, and interest payable on the immense amount of outstanding UK debt goes up a lot, making the balance of payments worse (note: most public debt is fairly long term, but private debt isn't).

The Coalition government may be trying hard to keep imports low and interest rates low by continuing a deep recession; because a recovery would most likely lead to much higher imports and higher interest rates.

This I think was also the goal of the Labour government, and both are trying to protect rentiers, but with an important difference, that the Coalition want the main cost of the recession to fall on low wage workers and the unemployed, and Labour was more prepared to let part of the cost fall on higher income groups.

«The rhetoric about debt is a cynical smoke screen to allow huge cuts to the welfare state which will impoverish millions of people and allow cuts in tax for the wealthy»

Well this seems rather disagreeable, because the UK has a giant debt problem indeed.

The misleading rhetoric is about making public debt the main issue, while it is private debt, and in particular financial sector debt that is the big problem.

As to the politics of welfare cuts, the issue there is that they are extremely popular with low income women voters who are mostly also rentiers, for example from The Times, 2011-09-17, Janice Turner:

«The C2 women who voted Conservative last time did so because they, in low to middling-paid roles such as nurses, secretaries and carers, believed welfare had grown too generous, that benefits rewarded the do-nothings while they toiled. They hoped the Tories would crack down.»

The story here is striving working women voting to throw shirking unemployed men in the gutter during a deep recession... :-)

[Andrew]

Another good post that made me think - thanks.

I always end up thinking about how destroying houses can create these "investment opportunities" of which you frequently remark the current lack.

What is the best way to think about that, because broken window fallacy or not, it seems correct?

I guess one way to think of it is that if you break all the windows of a town, you decrease its wealth, so provide an easily identifiable opportunity to increase it back up again! You would certainly get "growth".

I wonder if it is the destruction of capital, creating sudden demand for labour that was beneficial as a whole? Like the destruction of labour in the Black Death that increased demand for (remaining) labour?

This seems to link back to income/wealth distribution. Increasing labour's share of either gets activity going.

Is there data or theory to suggest that more equal societies generate more wealth? One would think so, since invested wealth can generate a percentage return. In an equalish capitalist society all players would have skin in the game. If you've got an unequal society with a huge welfare class then their skin is in a rather different game , as is the skin of the plutocratic elite.

It seems to me that an equalish society works because actors have similar mutually compatible aims (wealth production) and none are so powerful that controlling and diverting wealth production becomes the dominant game.

I suspect that this latter game, now mediated in battles to control government corporatist and benefit class zombie welfare, is the important barrier to investment and growth. It is this game that has generated the current level of deadening debt choking the world economy.

[Andrew]

It is these considerations that make me sceptical that a radically redistributionist tax policy would work.

Sure, addressing inequality should lead to economic efficiency. But politically directed redistribution is exactly the game that got us into this mess in the first place.

Currently this redistribution is going to a financial, corporate and property owning elite via generation and sustainment of otherwise unsustainable debt, and manipulation of the monetary system, and land planning and taxation systems.

There is also distribution to an entitled class who have voted themselves unaffordable benefits and got in early with them, certain classes of public sector employees, and to a small extent, welfare claimants.

These resources are drawn from the (crudely I know) net productive middle ranking actors largely in the form of expenses - debt interest and taxation.

So to propose more taxation, easily avoided by the benefit bankers and benefit scroungers, is understandably unpalatable to those working, paying taxes and enduring soaring living costs.

Preferable would be to reduce the flow of resources being leached from the economy, particularly from the top. Key to this would be to radically reduce debt and land values. Of course the latter would accomplish the former.

So bollocks to increased redistributive taxation so long as crappy houses are costing us 9x times salaries, at bankers benefit, whilst savers pay for keeping the whole thing afloat.

This country need to get its overall costs down, in a structural change, not pretend we can suddenly seize back control of the political value skimming nozzle.

May I suggest land value tax paying for radical reduction in income tax, relaxation of planning rules, increased interest rates and generous benefits for limited period to get underwater debtors properly bankrupted and on the mend again. If you increased interest rates (just prior to abolishing a central bank) you could probably bung a printed 20k to every subject for mandatory paying off of any debt without crashing the currency.

This is what happens with wine, unfortunately. Sorry.

[Andrew]

P.S. I don't know what happened to my earlier reply (you probably sensibly deleted it) but the Labour Theory of Value is still, quite patently, UTTER BOLLOCKs.

Despite you previously suggesting that there was empirical evidence for it (there can't be, it is incoherent bollocks so doesn't actually make coherent predictions to test against evidence) and your linking to a couple of bods who obviously actually didn't support the LTV, you didn't say whether YOU though it was bollocks.

Do you? You seem very bright, I can't believe you do really.

So if you don't, then what happens to the (empirically disproved) idea that the marginal returns on capital diminish to zero leading to the demise of capitalism?

[Andrew]

PPS - Since then I've found a book by an economist who, like you, doesn't come across as incredibly stupid. He covers exactly my newly discovered concerns with Marxism! Apparently LTV has already been dismantled by iteration of a toy quantitive model economy. Of course the book is mainly a diatribe against mainstream neoclassical economics.

Steve Keen - Debunking Economics.

Are you familiar with this guy and are there some glaring flaws in his thinking that you could point me to? Frankly I was amazed at his account of neoclassical and wouldn't be surprised if it turned out to be a little mischaracterised. But his basic theme that an approach to a non-linear complex dynamic system like the economy should not be centred on analysis of various equilibria seems worthy of our standard IQ five year old, don't you think?

[chris]

@ Andrew - I dunno why you've got a bee in your bonnet about the LTV. Pretty much every important Marxist idea can be reframed so that it doesn't rest upon the LTV; see for example Roemer's theory of exploitation.
The idea of a diminishing rate of profit doesn't need the LTV - merely that diminishing returns will beat technical progress.
Yes, observed profit rates reject this idea. However, you could read the investment dearth as a sign that expected profit rates in the west have fallen.

[Andrew]

Chris - sorry about the wine-wittering. I've had one bottle of beer at this point.

I have a bee in my bonnet about the LTV for one simple reason - it is prima facie and trivially demonstrable nonsense. It's the kind of thing that stops one in ones tracks when reading about from a "great thinker". To see somone labour for pages and pages on such an obviously nonsensical notion kind of undermines any faith in the ability of the thinker, does it not? Nonetheless it does happe to great thinkers. In fact, I believe that Steve Keen argues that Marx in later writing disproved it himself and came to avoid it. I don't know.

Doesn't Roemer's theory depend on embodied labour for accounting of fairness? It it does, it can be trivially dismissed as nonsense very similar to the LTV. My oil patch value has nothing to do with embodied labour (although in a sense oil does embody labour!). And the labour embodied by my android employee is just as valuable as that of my serf.

Finally, yes we could read the currrent investment dearth as diminished profit rates.
But whether profit rates are currently rising or falling has no bearing on whether they have an intrinsic tendency to fall, or whether a theory suggesting they do is coherent.

Thank you.

[Andrew]

PS - re - Why you can't beat the market.

Of course some people and systems can and do systematically beat the market. This should be obvious in principle and has been empirically demonstrated beyond statistical doubt many times.

Equally clearly, the majority cannot in principle beat the market, regardless of system used.

Thirdly, the efficient market hypothesis is not false because people are stupid or irrational (though often they are). A market of optimal efficient optimally rational competing humans or computers could never, in principle, be efficient. For obvious reasons.

This is another subject that annoys me about economists - how can you bear to be a part of a profession that does not find these questions trivial and uninteresting?

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