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July 13, 2016



"and could not argue that staying in the EU would lead to a better EU. This meant that the wishful thinking bias was mostly on the Brexit side, rather than the Remain side."

The best way to lead Europe is to limit open borders until they implement sane policies...

If we can "reform the EU" how come we couldn't do that early 2016 before the EU ref?

Peter K.

As an American, I'd say the situation is analogous in the US even though we had Obama in office. The Republicans controlled Congress and forced through unprecedented austerity on the economy while Obama met them half way in the name of deficit reduction.

I think this has helped lead to the rise of Trump.

Austerity has ended, but there has been no fiscal push as the recovery remains weak and the Fed tries to raise rates and tighten monetary policy, but keeps pushing back the liftoff date.

Dave Timoney

I'm not sure that austerity significantly "increased hostility to immigrants". If we take the Ipsos-MORI 'Issues Index' as a guide, then concern over immigration starts to ramp up in the late-90s and reaches a plateau in 2007. It then drops down, as concerns over the economy came to the fore, before returning to the higher level this year. In other words, the degree of concern (and by implication hostility) was established well before austerity kicked in.

What seems to have been more significant is the linking of immigration to the issue of public service demand, and pointedly the casting of "bogus asylum seekers" in the 90s and early 00s as emblematic claimants. Cameron's failure was therefore a continuation of policies and attitudes established during the last years of Major and the early years of Blair. Austerity probably exacerbated this, but the failure was already hardwired in the wider political culture.

Where Cameron (as a representative of his class) is particularly culpable is in failing to see that two decades of 'Benefits Street' etc would not only demonise the underclass but would pollute social trust and solidarity more widely, creating an atmosphere in which xenophobia was normalised. Austerity held out the prospect that "the guilty would pay", but in the event the innocent suffered (as usual). As such it was probably the final straw for a lot of people, so in that sense it was material to the referendum result.

Ralph Musgrave

Chris claims there was significant scope for “expansionary policies in the euro zone – policies which would have both helped to reduce migration to the UK and which would have diminished the image of the EU as a failing institution.”

I doubt it. Since the 2007/8 crisis, inflation in the EZ has been pretty much on target, i.e. just below 2%. Thus there has not been much room for good old Keynsian stimulus. The REAL PROBLEM has been the INHERENT problems of common currencies (which Wynne Godley and Milton Friedman warned about before the Euro was born). That’s the fact that if the performance (particularly the balance of payments) of different countries (or geographical areas) in a common currency area varies significantly (think Greece and Germany), then deflation / austerity has to be imposed on the poor performer to make it regain its competitiveness.


Hate crime is declining actually, as was readily predictable. From the article linked:

" He said the number of reports had fallen in recent days and was returning to what police were used to."


"- Austerity policies ran contrary to the established wisdom of most economic experts. "

Always austerity austerity austerity with you rather than focusing on the gigantic 20 year credit bubble that is the cause of all economic woes, including the current totally non-existent austerity, which would more accurately be described as "slightly less massive deficit spending than Chris would like", and the productivity problem that so puzzles you. (Of course the internet is the other major cause of low productivity).

"Most economic experts" aided and abetted this disaster because they essentially ignore debt dynamics in their thinking, if we may so dignify their activity, and because it was politically expedient to do so.

Why on earth would any rational person listen to "most economic experts" when they don't even understand the basics of credit creation? Why? It would be like going to a physician who was sketchy about the circulation theory of the blood.

What a moronic piece you link to estimating the costs of austerity:

"In my Vox piece, I did a simple exercise to show how important fiscal austerity has been in the US, UK and Eurozone. If government consumption and investment had grown by 2% from 2010 onwards, and assuming a multiplier of 1.5, GDP could be around 4% higher in all three ‘countries’. [1]"

Thank you captain obvious! If you spend more money, then GDP goes up. Of course no consideration of the long term. No consideration of ongoing malinvestment and zombification, no consideration of the impediment of debt, no consideration that the real world multiplier is going down and heading to negative in some regions of the world. No, so long as we all pay each other for mowing each others lawns then GDP is up and we're all "richer".

Absolutely incredibly simplistic. It really is as sophisticated as "spend more to make the spending numbers go up", overlaid with an entirely basis-free set of assumptions about "potential growth" and permanent gains or losses in growth.

This level of analysis is simply pathetic. By this logic the government should borrow and spend an infinite amount. It obviously shouldn't, therefore the logic is wrong. Come back with an argument that isn't trivial, and trivially unsound. Come back with a model that actually models credit and investment and retirement expectations and consumer psychology. Who knows- we might start listening to "most economic experts".


Chris can you post your thoughts about what happens when Japan monetizes most of its 250% GDP dept at no interest and the BoJ quietly loses it down the back of the sofa?

What happens then? Currency collapse or economic boom and continued low interest rate gov bonds?

What should Japan do?


@ Endrew - One argument for looser fiscal policy is that it might actually reduce the risk of malinvestments. This is because the alternative to fiscal policy is low interest rates & QE, which might do more to promote bubbles.
There are vast numbers of things I know nothing about, Japan being one of them. MY fuzzy understanding is that the country has a massive demand for money, with the result that efforts to increase the supply of money have consistently failed to raise inflation as much as hoped.


Endrew reminds me of the Tory spokesperson who said of Corbyn that he will just spend his way to disaster. Let us forget this is an ideological attack and does not actually engage with what Corbyn is arguing. This attack and Endrews comment assumes that Corbyn wants to create money in order to build castles in the sky.

However there is another option, slice up the existing pie differently! Given the huge levels of inequality one way of funding vital public services is to take money off the wealthy and redirect the economy to the interests of the many and not the few. By taking the money of the wealthy you do not have to spend any extra money at all!

Not only do you increase social cohesion and improve vital public services you also tackle the deficit problem.

Yes Endrew has stumbled upon the only available option, a sustained and direct attack on the wealth of the wealthy. I.e. a real austerity, an austerity that says the rich are a luxury we simply cannot afford.


Thank you Chris - since apparently no one else knows anything about that particular scenario either, we might as well speculate. The long and ignoble history of sovereign default and debt monetization suggests that recovery can be rapid.


I suspect the problem would however be the need for ongoing printing. At some point, and in a discontinuous fashion, confidence would be lost.


If by "massive demand for money" you mean flat broke, then I think that is more than a fuzzy understanding.

It's what happens when you don't let an epic credit bubble clear with defaults.


And we both know that (even) looser fiscal policy would never be used as an alternative to monetary laxity. Unless you are proposing mass foreclosures and bankruptcies side by side with shiny new roads and airports.

Most government spending goes straight into consumers hands. We might think these particular consumers are more likely to spend it on essentials or pay down debt but who knows? If we are simply talking about infrastructure spending, then why it is more likely to be a better investment decision than one taken by the private sector? Because there is an election cycle investment horizon rather than a quarterly one? The public official doesn't even have to demonstrate a profit will be made. Has China's infrastructure spending included malinvestment? I would say yes, to a degree never before seen.

Central planning has fixed the price of money, thereby destroying the market's ability to invest based on genuine price signals. Are we now suggesting we mitigate that disaster by centrally planning individual investment decisions?

I thought you were sceptical of the ability and information access of "bosses". Here you are arguing for billions of borrowed money to be handed over to them!


"Most government spending goes straight into consumers hands."

Where do you get this bullshit from?

"Has China's infrastructure spending included malinvestment?"

2 words, Trump Tower.


The majority of government spending is entitlement programs and wages. Straight into consumers hands.


Is Trump tower occupied and earning rents? Is a Chinese ghost city?


«"Austerity policies ran contrary to the established wisdom of most economic experts. "

Always austerity austerity austerity with you rather than focusing on the gigantic 20 year credit bubble»

Another guy who looks at things straight instead of through the mediamacro bubble loved by ChriD and SimonWL.

They occasionally talk about credit and asset prices, but that is "not done" in polite circles.

There is an obvious reason why Economists in general talk about "austerity": because the prospect of non-austerity is seen as a way to tell the workers and the poor "what you need is not better negotiating leverage, more power to the unions, but the end of austerity, that will lift your boat too".

It is the usual "jam tomorrow" talk: prosperity will "trickle down" as soon as austerity ends, just keep waiting, don't make a fuss, except against austerity of course.

«that is the cause of all economic woes,»

Well, it is the cause of great enrichment for people for whom leverage works, like 30 years of land property owners getting 100% real [simple] returns on their cash investment, and huge salaries and bonuses for management and traders in finance; plus immigrants from low income countries, who have also benefited from debt-fueled spending.

These people think that the past 30 years have been fantastic, not woeful.

Sure, then there are also the woes of neoliberalism fueled by bigger debts, but those only affect "losers" (middle and low income workers without property in jobs exposed to low income immigration) for now.

The problem with ever increasing debt is that while it gets bigger the beneficiaries party, and who cares if the bitter end comes later, as many people have fantastically high discount rates to the future (in particular the property owning middle class middle aged and retired swing voters in southern England).

«including the current totally non-existent austerity, which would more accurately be described as "slightly less massive deficit spending than Chris would like", and the productivity problem that so puzzles you.»

As to the deficit spending, there is an amusing coincidence: government deficit has been around 5% of GDP, trade deficit not that different at around 7% of GDP.

This would seem to indicate that the sustainable level of UK GDP is around 5% lower than now, and perhaps 10% lower.

That 50-10% boost is being funded by asset sales (government and private debt, land property in London, ...).

Which means that currently there is no austerity, but a pretty expansionary fiscal stance. It may be the right policy now, but it is a big on the edge.

The PSBR, current account balance and GDP:





It seem that the other commenter "Endrew" is a bit of a formulaic old-style conservative, because:

«The public official doesn't even have to demonstrate a profit will be made.»

That would be crazy! The goal of government is not to make profits, but to raise and spend the common budget according to the wishes of the majority of voters. If the voters wanted to spend all public money on cathedrals to Saint Margaret Thatcher, that would likely generate no "profit" but be an entirely legitimate government activity.

Some delusional conservatives think that the state apparatus is or should be a business, when instead it is a group purchase scheme, and therefore what matters are how cheaply it raises funds, and shrewd is at buying the stuff its members have asked.

«Has China's infrastructure spending included malinvestment?»

For sure, like all private investment too, but I think not significantly; while obviously "quality" is a bit of a problem, China has had colossal need for more capital, from entire cities to road networks.

«I would say yes, to a degree never before seen.»

Nahhh. I could mention the frittering away of the oil fields of Arabia, or of the Scottish oil fields, both done by very conservative governments; here A Blair's opinion in 1987, well before he had any hope of prime ministership:

«The situation is neither stable nor healthy in the long term: [ ... ] The fact that we have failed to use oil to build a productive and modern industry for the future is something historians will deplore.
Nevertheless, oil has been utterly essential to Mrs Thatcher’s electoral success.»

That oil has funded "tory" (Conservative, New Labour) credit-bubble upward-redistributing policies for 25 years, between 1982 and 2007, and currently the UK is having a "Wily Coyote" moment :-)

«Central planning has fixed the price of money, thereby destroying the market's ability to invest based on genuine price signals.»

Here we have full-on delusional thinking, because the «price of money» as a concept simply does not exist any more than the "length of a kilometre" makes much sense.

There is a price of *liquidity*, and since liquidity is manufactured by the government and government-regulated banks, the prices of different types of liquidity (the interest rates) can never be set by "the markets".

The rates of profit are determined by technology (in a late sense), the rates of interest by the production of liquidity by its issuers, so both are exogenous, like in large part the distribution of income then, and "the markets" work with the rest, which is heavily dependent on them.


«the market's ability to invest based on genuine price signals»

Besides as JM Keynes and any practical businessperson can confirm investment does not depend on «genuine price signals», but on "animal spirits" overcoming fear of the future. Current prices don't really factor much in that, and future prices are usually very uncertain even if interest rates were fixed for the long term (which would make the uncertainty about future prices worse).

John Brian Shannon

I think PM Cameron played his cards to get exactly the result that he got.

UK leaving EU.
Downward pressure on immigration.
More UK sovereignty and control over policy.
A renewed dialogue with Scotland, and possibly Northern Ireland and Wales.
Stronger links between The Commonwealth of Nations.
Faster international trade agreements (EU agreements tend to take 6 years! Which almost negates any reason to sign on to them -- diminishing returns, after all that time, at the very least) with no compromises with EU nations.

Psychology is a very powerful force in politics.
David Cameron is a very deliberate human being.

I take the position that he very deliberately played his cards to get the result that he wanted.

When you get the result you want... that's a win!

Cheers, JBS


Austerity in the Uk has punctuated the last 37 years and is deeply embedded in thinking. The Uk invented privatisation, an austerity measure I believe. Note also that prior to 2008 there was a labour shortage in many areas of the uk particularly in many trades. Certainly this continuing process has led to considerable political fragmentation. The poor electoral system has played its part with the poor feeling they cannot influence anything.

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