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March 12, 2016



Isn't the main reason Osborne's incompetence works in his favour that, under the dominant "household budget" metaphor, every failure self-evidently reinforces the necessity of his approach? Without shifting the metaphor, it's politically impossible to win the argument.

It's a less cynical version of the GOP approach to governing the US: make the state as dysfunctional as possible so people will support its dismantling. (Which I wouldn't accuse the Tories of doing; they'll need to do some more work on the media landscape before they can get away with that over here.)

Matt Moore

Credibility exists when your personal preferences align with your stated intent.

Thus, since Osborne would prefer a balanced budget and a smaller state, his commitment to achieving them is credible (his competence in doing so is an entirely different question)

McDonnell would prefer to expand the size of the state, and the voters know it. Even if he promises not to, that promise is contingent either on his personal integrity or the weak incentives of another election in five years time.

You will notice inhave deliberately conflated the size of the deficit with the size of the state. I think most voters do the same thing (not unreasonably, since there aren't many other small state Keynesians around)


«the question: why, then, should Labour be struggling so hard to establish “credibility” with the electorate about its approach to the public finances? [ ... ]
Instead, I fear that there are less good reasons why Labour is struggling. One reason is that voters have bought the story that Labour “over-borrowed” in the 00s.»

This to me seems the usual "mediamacro" argument in terms of "austerity" and "anti-austerity" framing of which people SimonWL is also exceedingly fond of.

The reason why Labour is considered less good with managing the economy is instead tremendously simple: a Labour government let southern property prices slip in 2007-2009, for whatever reasons, southern voters don't care.

Every time in the past many decades a sitting government party lets southern property prices slip it has to spend 10-15 years in opposition so that southern voters forget that slip in property prices.

The conservatives lost their reputation for managing the economy in the 1991-1996 southern property price fall, and T Blair won the 1997 elections speaking of "aspiration". So did G Osborne in 2010.

Luis Enrique

I heard a Labour wonk of some sort arguing that because this amounts to same policy Miliband ran on, and lost, that it makes no sense to run on it again. I don't think voters were passing judgement on the wisdom of borrowing for investment.

Matt is right that the problem is not the policy but believing whether they'd really follow it. Osborne can be trusted to cut deficit even if it means wreaking untold damage. "credible on the economy" mixes up notions of competence with being able to credibly commit to policy even if a bad one.

Blissex I like to think the point is approaching where letting house prices keep rising is popularly seen as a bad not a good


Luis Enrique has missed the point of what Blissex has said. Namely Voting has nothing to do with ideas but depends on feelings of wealth. Lots of swing voters incorrectly equate land ownership with having net wealth. Actual voting behaviour is divorced from Academic arguments and indeed facts. Not only on the economy defined narrowly but in other areas. The Tory election victory and subsequent policies and the votes for Trump at the moment are people projecting their prejudices and un educated self interest. All mainstream economists support free trade and oppose autarchic ideas but trump is exploiting the opposite idea driven by atavist nationalism.

More generally there is the theory that most voting behaviour is always based on irrational heuristics; Governments in office during severe recessions or crisis almost always fall from power regardless of their culpability in the economic events. Which means arguments about economic theory are purely an exercise in passing the time, namely a hobby, they never decide elections. They may even have no effect on economic policy either. Harold Wilson must have known he would have to devalue the pound but decided to try and avoid it when he came to office fearing unpopularity. But he had to devalue any way and suffer the unpopularity he tried to avoid. FDR was lucky the collapse happened under the GOP. Luck is all. What would have happened to him if the crash had started while he was in office? NO second term .


Is the paradox of thrift actually relevant to a real economy?

Aren't savings placed in banks, either to pay off debt, or invest?

Don't banks make loans based on these savings, if there are opportunities to make money, thereby decreasing interest rates, increasing borrowing and therefore precious aggregate demand, and avoiding a state of "net saving"?

If this market repricing of interest rates (for both borrowers and savers) does not maintain valuable economic activity, then isn't there a fundamental problem with the structure of the economy?

Why would we think increasing government borrowing might fix this?

Surely you have to diagnose the problem ,not just push in the opposite direction to one of the symptoms?

I just don't understand the thinking. My fault I'm sure.


Endrew. Keynes answered that some time ago.

Investment under Capitalism is based on expectations of future demand and profits while saving takes place using money and depends on aggregate incomes today.There is no automatic mechanism to keep total investment equal to saving. They may be, but do not have to be in balance.

When Saving and investment are unbalanced there is a fall or rise in total demand compared to potential output. And a boom or bust. there arte plenty of books about it.

Luis Enrique

Keith, I made an observation prompted by what he wrote, don't read too much into it. But on your (good) point, the "feelings of wealth" thing might be changing too, as rents move with house prices and more voters are renters, plus house buyers trying to move into higher price areas feel worse off. I certainly feel worse off because of house price rises. The proportion of voters feeling better off because of house price rises may be falling - I hope.


Thanks Keith.

I see a couple of issues with that.

1. The interest rate pricing I outlined would be precisely such a mechanism (along with the massive "automatic stabilisers" of social support spending).

2. Capital investment is not actually determined by estimates of aggregate demand. It is determined by the aggregate estimates of specific demand for each product. Big difference. I think it is the wilful oversimplification of an economy to Keynesian aggregates that I find so disturbing.

The parable of the buried bottles of money is most disturbing. It's such an obvious example of stimulating waste. It would have almost no chance of long term benefit relative to simply providing a social safety net to the unemployed. And yet it seems to be only half jokingly advanced as an illustration of the benefits of stimulus.


The self-belief of Cameron and Osbourne is disturbing, and convincing for the public.

This is often a feature of the right wing, need I mention a certain Donald J. Trump, who for example will make the Mexicans pay for a two thousand mile wall on the boarder, The Rio Grande is apparently not enough.

Of course John MacDonald who wished to support Osbourne's Fiscal Charter, has been true to himself. He is Tory-Lite because like all politicians he believes in the household model of finance.

A fiscal credibility rule, how stupid is that? If you are credible you don't need it, and if your not it will not confer credibility, and no-one sticks to them, they just obfuscate the policy, destroying credibility.

The 'world at one' highlighted how Brown and Osbourne have broken their own fiscal rules, the latest in a long line of failures.

Monetary policy is a busted flush, why only on the zero bound?

John MacDonald has even (foolishly) constrained himself on the level of public investment, his policies are politically disastrous, economically modest at best.
The best Labour can hope for is a Conservative failure on economics.

Why ask if one rule is better, if it is just more of the same - shades of grey?

Needless to say I depart from John MacDonald, and SWL significantly on both the economics and politics. This is the politics of the Ostrich.

I do have a radical political and economic solution, as you may have gathered.

Spenser Livermore is right. A re-run of 2015, for Labour an uninspiring leader, chancellor of the exchequer and so-so economic policy. But then parliament is void of political and economic talent.
However the Tories are not too bad at Public Relations, and that is what matters.

The same 'world at one' has a poll on Gen Y, the only way the future is worse is if we keep the same political idiots in charge.
Poor economic growth.

Thatcherism was worse than the situation now, higher unemployment, higher interest rates etc.


You make good points here. My view is that Corbyn's Labour is essentially a socialist model - and we don't have socialism any more. We may need socialism badly, but the 'swamp' that socialism thrived in has been thoroughly drained and so it is now very hard if not impossible for a socialist ethic to gain traction. Indeed the last Labour government to have any serious traction was Blair's (please forgive me) and he continued the drainage works.

Worse, the Tories are struggling with the economy and will continue to struggle - as any government of any flavour would. The current in-out palaver is a vain hope for sunny uplands from people who have their own careers at heart.

The reason for a struggle is that most of the West is over-priced and under-ability. The UK suffers because we have not invested in our social fabric, it has been sold off for exploitation or left to rot. For it is not merely better maths and spelling we need, we must go much deeper into a richer culture of the creative arts, the law, architecture and so on to create the services and goods the world will buy. Beating up on the teachers is no good, the underlying social fabric must improve. Or of course we might conclude that humans have reached their limits - time to invest in machines.


While I agree with ther general aspect of "Luis Enrique"'s comment the details matter a great deal:

«the point is approaching where letting house prices keep rising»

Governments of the past 30-35 years haven't *let* southern house prices rise, they have used whichever policies they could to *push* them up relentlessly even at a huge cost to the real economy.

And it is *southern* house prices because property owners outside the south don't matter to returning a parliamentary majority, and so they have stagnated or fallen in real terms for decades.

«is popularly seen as a bad not a good»

A lot of people already see rising southern house prices and pushing down wages and benefits as a bad and not a good. But these people, mostly voters outside the south, don't matter as to returning parliamentary majorities.

The question is when southern property owners voters will turn against earning a 100% "interest" every year on their cash invested in property as they have done for the past 25 years. The answer is obviously "never".

Or more precisely when that stops by itself, that is when the southern property markets collapse as catastrophically and for as long a time as those in the north-east and similar regions. Then southern voters might return to seeing better wages, safer jobs, a good safety net, as better than 100% (simple) returns on cash invested.


«Voting has nothing to do with ideas but depends on feelings of wealth.
Lots of swing voters incorrectly equate land ownership with having net wealth.»

But one of my standard refrains is that they are not that wrong, because it is not mere «feelings of wealth» it is *cashable wealth*, thanks to the magic of remortgages, and the amounts involved are amazingly large, they are not small.

According to the Halifax/Lloyd house prices index (sheet "All(ANN)" in their historical spreadsheet), South East average property price was £50,302 in 1985, £77,248 in 1995, £217,963 in 2005, and £294,371 in 2015 (£49,149, £49,419, £134,555 and £138,269 in the North).

That over 30 years including two periods of large house price falls gives average "interest" (capital gain profit) of £8,135 per year per average South East property, tax-free, effort free, purely redistributive without producing any value; a yearly "interest" on a deposit that given an initial price of £50,000 was probably *less* then £8,135, for a yearly "interest rate" of at least 100% on cash invested over each year; that is simple interest, not compound; to get a £244,069 total return from an £8,135 cash investment over 30 years would take a 12% *risk-free* compound interest rate, the stuff of legends (4-6 times GDP growth for 30 years!).

Note also that an "average" southern property with a price of £50,000 in 1985 was typically a terraced 2-up-2-down purchased by working class southern voters with "average earnings" before tax of around £12-16,000 per year, that is the yearly 100% "interest rate" resulted in "interest" that nearly doubled their after-tax income, and probably was twice as large as their earned disposable income.

Much bigger proportional effects for the southern voters in the even more "aspirational" middle and upper middle classes who could afford the larger deposit to speculate on 3-bedroom semi-detached or 4-bedroom detached properties and for whom a 100% yearly "interest" on that deposit meant "free" holidays in the Caribbean and "free" private school fees, a lifestyle like "upstairs" gentlefolk.

And all this without considering the benefit from not paying rent, or the income from renting out.

My usual quote on remortgaging:

«Under Thatcher, this exploded to over £250bn across her premiership – a staggering 104% of GDP growth. ... But Blair did his homework and let loose – as did Thatcher – a wave of cheap credit, financial deregulation, house price inflation and an equity withdrawal-led consumption boom. Withdrawals under Blair’s leadership totalled around £365bn, that’s a full 103% of GDP growth over the same period,»

It is not a mere feeling, it is huge spending power redistributed southwards and upwards.

What is staggering is the enormity of the story, and how the "intelligentsia" largely rather prefers to discuss topics which by comparison are more like which end of the egg to break :-).

Southern voters are in effect, democratically, selling their votes to the highest bidder, and not for a mess of pottage, but for really significant amounts of money.


My other usual quote on the overwhelming political importance as to winning elections of pushing up fast southern property prices:

«Privatised Keynesianism sounds a bit joyless, but the political classes found something to give it extra zap. Call it housing-market heroin: the special high the Brits get when property prices are really taking off and Sarah Beeny is on the telly explaining how we can all cash in. Thatcher was the first PM to really push housing-market heroin with her right-to-buy programme and her Lawson boom but, with their love of aspiration and Home Ownership Task Force, Blair and Brown knew its potency, too.»

As to «we can all cash in» that's obviously ridiculous: because it is actually only southern voters who are meant and can cash it in.

Because as I wrote that «housing-market heroin» trade gives a «a 12% *risk-free* compound interest rate, the stuff of legends (4-6 times GDP growth for 30 years!).»

Because How is is *possible* that a mass activity gives compound returns that are 4-6 times the GDP growth rate for 30 years running?

That only works if it is redistributive (and also must be asset stripping, but that's another story).

That is if it redistributes from voters who own no or smaller southern properties to voters who own more or bigger southern properties, that is redistributes southward and upward.

This redistribution takes some pretty obvious forms, both fueled by low interest rates and high leverage policies:

* Since there are plenty of housing-related jobs in the South because of rising property prices, and the government in not helping the North rebuild, and is actually cutting the benefits that keep poor Northerners afloat, many Northern voters have little option but to "get on yer bike" and move to the South.
* Since property prices are rising in the South, those moving Northern voters pay much higher rents and house prices than otherwise.
* Since the government keeps interest rates low by keeping wage inflation low in various ways, including mass immigration from very poor EU countries, so the Northern voters who end up working in the South earn quite a bit less than they would otherwise.

Rinse and repeat for 30 years :-).


«redistributes southward and upward. This redistribution takes some pretty obvious forms, both fueled by low interest rates and high leverage policies:»

That is currently. In 1980-2007 it was largely fueled by profits from Scottish oil production, as T Blair clearly and authoritatively wrote already in 1987.

Most of the economic history of the UK in the past 50 years in one graph:


Deviation From The Mean

“Investment under Capitalism is based on expectations of future demand and profits”

Ah, the old 2 variable explanation those economists are so fond of!

Investment is also dependent on there being something to invest in! So the innovation cycle is important, as is diminishing gains from technological progress and a million and one other things. But when there isn’t something to invest in, branding goes all crazy and we are told investment is high, innovation is great, when it really isn’t!

If we look at the household budget analogy we run into a problem, the failure to factor in what you are spending the money on. So in politics the economy is narrowed to include money, employment, prices but for some reason education, the state of the NHS etc are not included under the category of economics. So the Tories can be seen to be economically competent even though the things we consume are going down the toilet.

And here is something else going on, to be seen to be cruel, nasty and punishing is to be seen to be competent, this must be a reflection of the culture of the workplace, among a million and one other things!

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