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August 03, 2016


Luis Enrique

and this post, in which Richard manipulates accounting identities, eliminates consumption from the expression and then concludes govt investment therefore cannot affect consumption, should disbar him from opining on economics forever:


[there is a narrow point where i think Richard says the rule commits to running a current surplus (i.e taxes > current non-investment spending) where James says, sure that might happen but if it does can respond by raising expenditure, I think Richard might be technically correct that if you accept some periods of undershooting withing rolling 5-year you are committing to some periods of over-shooting. Think that might be just about the only point of disagreement where Richard is right]


Murphy seems to think it involves balancing the budget over a five year cycle, which sounds like Gordon Brown's golden rule but nothing like McDonnell's.

No good can ever come from reasoning from accounting identities.


The rule is a disaster that simply cannot work. This Keynes idea appears to come from a time before the Beveridge style welfare state was implemented and certainly before that evolved into a spending side auto-stabiliser system, but that 'fact change' doesn't appear to have dulled enthusiasm for the concept.

So I thought I'd dig into the numbers to show what it is all about and point out the issues:

The numbers come from the Public Sector Finance report from the UK's Office of National Statistics.

For the financial year 2014/15 the current budget deficit stood at £48,876mn. So that is the amount you have to generate from somewhere to get it to zero.

However before we do that it is useful to understand how you get that figure. What actually is the current budget deficit?

It is defined as:
Net Current Expenditure + Interest Paid + Depreciation - Current Receipts
so using the figures from 2014/15 (In £ mns) you get:
634,317 + 47,222 + 37,306 - 669,969

To get the current budget deficit to zero you have to conduct extra investment spending - which then gets taxed away at the tax take percentage (which is 1 - the saving percentage) creating the extra tax receipts to cover the current budget deficit. Effectively you move the deficit from the current budget to the capital budget.

There are a couple of things to note from this calculation.

The first is that the depreciation figure is a transfer from the capital budget and adds to the current deficit. The more investment you do, the bigger the depreciation figure gets which then means you have to do ever more investment spending every year to cover the growing current deficit.

The second is the interest paid figure which similarly adds to the current deficit. The more investment spending you do at interest the bigger this figure gets. The higher interest rate you pay the bigger this figure gets. And the bigger the figure gets, the more investment spending you have to do in subsequent years to clear the current deficit.

You can already see that there are two unfortunate positive feedback loops inherent within the calculations.

Net investment spending (Gross spending less depreciation) for 2014/15 was £30,328mn. If you express receipts as a percentage of total expenditure you find the tax take is 89.4%. So for every £100 spent, £89.40 came back as tax and £10.60 was held as financial savings.

The tax take percentage varies as the tax side auto stabilisers allow people to save. In the post crash era where people are generally saving it has been as low as 82%.

So to clear the current budget deficit at a conservative tax take of 80% you'd need to make £61,095mn of extra investment spending (i.e. the capital net spend needs to be three times what it currently is!) That will vary up and down depending upon the actions of the automatic stabilisers. In 2009/2010 you would have needed £107,684mn of investment spending.

There is of course lots of talk within Corbynomics of closing tax gaps, changing rates and the like. All of that is largely distributional. If you take tax off one person, they can't then spend it with somebody else and you potentially deprive somebody of an income. Only where you defer or offset saving behaviour, somehow, is there an impact on the total tax take percentage. Really you're relying on the old balanced budget multiplier to work its magic - which likely isn't that effective in an open net importing economy like the UK.

There is, of course, no need to balance any budget, and doing so violates 'Lerner's Law'. The wisdom in Lerner's statement is already apparent given the brouhaha over People's QE. All that is down to the complexity of trying to present a simple overdraft or guarantee in flowery language. The mainstream have misinterpreted it and are now engaged in a campaign of misinformation. The lack of simplicity makes that difficult to counter.

Begin to see the problem?

Besides the complexity issues, balancing the current budget has clear issues.

* You are limited to fixed capital formation and capital transfers. So you *can build universities and hospitals but you can't staff them!*

* Eventually you run out of stuff to build. This leads to the old Labour problem of building roads to nowhere just to keep 'investment' going.

* You neglect items because of the current budget restriction. The only effective investment a government can make is in its people. But that is all current spend and is therefore difficult to do.

* You have to raise taxes to make the books balance. Nobody likes tax rises. Raising taxes is far more unpopular than explaining that budget balances are not really significant. It seems strange to take a political hit on taxation when you don't need to.

* Fixed capital investment targets a small section of the country's supply chain. Only a small section of the population is engaged in building things. The UK is 80% service based and people are trained for services. So you are quickly going to run into supply side capacity constraints, and potentially start to limit other capital development in the private economy.

* The action of the auto-stabilisers pulls the current budget out of balance as a matter of design. If the economy contracts social security payments go up and tax take declines. You then have to do more investment spending to counter that. Yes there is more slack at that point, but is it the right sort of slack. Is the supply fungible enough?

* The more investment, the more depreciation and interest paid. That leads to a positive feedback spiral between the current budget deficit and the level of required investment (and is another reason why Gilt Issues are harmful.)


"Labour must establish economic “credibility”."

Or just explain how things already work and that the only constraint is real resources. That government spends on a 'credit card' except that it gets everything back as 'cashback' when it spends. So the only time you run a 'deficit' on the card is when people stop spending - iow people saving. That way you can end poverty by buying the labour of the unemployed and underemployed for instance.

I still think it is easier to tell people the truth. Good riddance to neo-classical economists who believe in a natural rate of interest you can't work out, and a natural rate of unemployment you can't see, and who think that you just need to emit more government bonds paying more interest to rich people to get the labour market to clear.

Blanch flower, Wren Lewis et al are part of the problem, not the solution. Messing around with interest rates to push debt is really dumb, especially when there are arguments *either way* that increasing and decreasing rates could induce or harm growth. it relies on distributional effects.

And it is not just all "political" because people are treating these people like experts. A quote from when I was explaining things on Comment is Free:

"typical of the Corbynista stance

showing its total ignorance when it starts abusing people who really DO know their stuff"

For example:


"NIESR called on the monetary policy committee to act decisively by cutting interest rates and resuming its bond-buying programme, known as quantitative easing. "

Which will do precisely nothing.


I have started thinking that the endless "mediamacro" discussions on fiscal rules that ChrisD and SimonWL and many others so love is not just arguing the toss, but end up being misdirection.

The big problem with the UK and other countries that practice what C Crouch calls "private keynesianism" is actually the reliance on "wealth effect" trickle down fueled by high imports, rents, offshoring, zero hour contracts, shrinking labour rights, and fueled principally by amazing levels of leverage.

So "austerity" maybe has the role of distracting away from the consequences of "privatized keynesianism", by telling workers that their falling living standards are due to "austerity", not bigger rents and imports and offshoring and investment going into improductive speculation domestically or job creation abroad.

Perhaps the end of "austerity" is the new Godot, and we are told to just wait for it, and pay no attention to the city spivs behind the curtain.


"Perhaps the end of "austerity" is the new Godot, and we are told to just wait for it, and pay no attention to the city spivs behind the curtain."

Or as it is put "safe (risk-free) asset shortage." Essentially “We can make loans cheaper and clear the market if government subsidises shadow banking with more corporate welfare”.

I’m going to suggest that as the approach we should take with unemployment. We can’t reach market clearing for unemployment because we are up against the ‘zero lower bound’. So if we issue ‘unemployment bonds’ to the unemployed that pays a coupon to the unemployed then they’ll be able to spend that coupon and that will get them employed again :)


"Only where you defer or offset saving behaviour, somehow, is there an impact on the total tax take percentage. "

If you change distribution then you change saving behaviour.

It should also be noted that the current deficit figure was partly the result of distributing money from the masses to the banks and wealthy. Also the distributional changes over the last 40 years have all favoured the wealthy. I.e. every tax change has been an extra burden on the masses and a relief to the business owners.

A complete reversal of the last 40 years, from a distributional point of view seems a reasonable strategy to me.


"which would increase government borrowing."

Terrible framing. I would put it is not really "borrowing" as such as they are "in credit" with the government.

Can we admit the deficit is not under the Chancellor's control, for instance? Take the osborne farce 2016 "budget." You make spending cuts of £4bn, then people receive less income by £4bn and there is less spending in the economy and therefore less tax and saving to the tune of ... £4bn.


"When you’re faced with a rabid dog, you should throw it a bone."

Lol. Sometimes the rabid dog has to put down, to continue this metaphor.


«That way you can end poverty by buying the labour of the unemployed and underemployed for instance.»

I continue to repeat that lower unemployment and better wages are no longer election winners. Who wants to vote to «end poverty»? Certainly not swing voters in marginal seats, who tend to be affluent rentiers, to whom low wage workers are a cost, and the unemployed or poor are a minority. Who among the politically engaged "right thinking" rentier middle classes really cares about the brutalization of zero hour workers?

«I still think it is easier to tell people the truth»

That's the key issue. My impression here is that it is not easier in the short term, in the short term it is much easier to get elected by repeating the conventional wisdom. F Rooselvelt was campaigning on a balanced budget and strict fiscal policy just after the Great Depression, and won the election on that mandate, for example. Then he did a 180deg flip.

But in the long run there is no alternative to educating the public and letting them reach their own conclusions. Which may not be nice: the majority can quite reasonably come to selfish, even nasty conclusions.


There is no shortage of "safe" assets for coupon clippers. There is a shortage of cash flows for real projects, which is a demand problem.

And uncertainty implies high probability of low returns in addition to higher probability of higher returns, in equal portions. Since the second part of this is unthinkable by inspection, what you are talking about is not uncertainty. "Uncertainty" is a neoliberal shibboleth that rots the brain.


«uncertainty implies high probability of low returns in addition to higher probability of higher returns, in equal portions»

That is volatility, that is risk, not uncertainty.

Since JM Keneys, "uncertainty" in political economy discussions means the inability to assess probability, not a wide spread of probabilities.

That's not just terminological pedantry.

As to safe assets, obviously there is a shortage of safe assets, or else interest rates on many assets would not be negative.

If an asset pays positive rates that means it is not considered safe.

richard yot

The fiscal rule is bullshit, it's overly complicated so basically unintelligible to the layman, which means it fails in its main purpose which is as a propaganda tool.

If your average voter isn't going to understand it, then it's not going to make Labour more credible economically.

Why not just pursue a policy of full employment, and stop worrying about the deficit?


"As to safe assets, obviously there is a shortage of safe assets, or else interest rates on many assets would not be negative."

Well, think through this. Borrow a great deal and spend it sufficient to left the economy out of this low equilibrium. This increases your safe assets. But the lift off means a more normal g, and the rate on your increased safe assets would likely rise.

Also, from what I read in Keynes, his uncertainty reads like not having a firm idea of the duration of cash flows as opposed to their size. Fine. Except that this is always true.

In the final analysis, when it comes to business guys doing something, cash speaks, and the rest does not.


As to talk about austerity and the fiscal rule and Brexit and Owen Smith adopting in large part anti-austerity and other J Corbyn positions, from a post at MainlyMacro I think that I have figured out what the "real story" is.

The key clues S Wren-Lewis at MainlyMacro gave are:

* «Smith [ ... ] makes it clear that the UK will get a second opportunity to vote on Europe» (biggest clue).

* «With the Brexit vote what I would call the pro-European centre desperately wants an effective voice.» (second biggest clue).

* «In 2015 business and finance were 100% behind the Conservatives. With the Brexit vote, and the campaign’s leading lights running the coming negotiations, that has fundamentally changed.» (third biggest clue)

So the story I now imagine is:

* The business/establishment interests that wanted "Remain" still want "Remain" and want a second referendum or something equivalent.

* There cannot be a second referendum, and the something equivalent must be a party that campaigns for an wins an election with a manifesto saying "Remain", and that then is a binding commitment, while the referendum was merely advisory.

* Therefore the business/establishment interests that want switch to "Remain" need to sponsor a party that will put "Remain" in its manifesto.

* The liberals are irrelevant, the Conservatives are now compromised by the eurosceptic wing and will not put "Remain" in their manifesto, and anyhow the business/establishment interests are angry with them.

* So the "Remain" business/establishment interests need to sponsor Labour, because that's the only option, and after all Labour did get the vast majority of their voters to go for "Remain".

* While J Corbyn did achieve the miracle of getting the vast majority of Labour voters to choose "Remain", the problem is that J Corbyn the day after the referendum called for an immediate invocation of Article 50, and will never put "Remain" in Labour's next election manifesto, because it would be a complete betrayal's of Labour's historical base; and he is "not for turning".

* Therefore J Corbyn has to go, and be replaced with a PR agent of the business/establishment interests that want a "Remain" result. This PR agent must then talk the talk that made J Corbyn popular with the Labour base to maximize the chances that they will still vote Labour even if it has "Remain" in its manifesto, but the real goal is to pivot the Labour base and get the 40% of tories who voted "Remain" to vote New Labour in the next election.

* As soon as such a PR agent is in place as Labour leader, the press and the BBC will do a complete change of tone, becoming enthusiastic supporters of New Labour, and vast funding will become available for the future "Remain" campaign and New Labour candidates, and many PLP member "understand" that not only they will get a chance to get government jobs but after that corporate/establishment sinecures will become available to them as they have always been available to tory MPs.

So the plan seems to be to reposition Labour as "Conservatives for Europe", which was P Mandelson's position in 1999:

«Peter [Mandelson] thinks that we are a quasi-Conservative Party but that we should stick our necks out on Europe.»

Then New Labour in their "Conservatives for Europe" marketing strategy get to win the next election with both anti-austerity (to get the votes of their historical base) *and* "Remain" (to get the votes of the europhile tories) in their manifesto.

Probably the business/establishment interests think that a bit of anti-austerity is acceptable as the price to pay to get a "Remain" victory.


BTW my hypothesis above explains why the New Labour PLP have been attacking J Corbyn for losing the "Remain" vote with his lack of commitment even if he miraculously carried for "Remain" the vast majority of Labour voters like N Sturgeon did for SNP voters, and the "Remain" vote was list because the vast majority of tory voters went for "Leave".

It is a "dog whistle": they don't really talk about his successful commitment to "Remain" in the *past* referendum, but about his obvious lack of commitment to campaign again for "Remain" in a future election.


I would disagree that Jeremy Corbyn asking for David Cameron to invoke article 50 was a mistake.

On 22nd of february 2016 (hansard column 24)David Cameron said in the house of commons:

"If the British people vote to leave, there is only one way to bring that about, namely to trigger Article 50 of the treaties and begin the process of exit, and the British people would rightly expect that to start straight away."

Of course, he didn't mean it, but he did say it.

Jeremy Corbyn was sticking it to the then prime minister, which is perfectly legitimate politics.

However the PLP helpfully stepped in, allowing the first amongst equals to scarper from the consequences of his own strategy.

Great job, PLP!


«disagree that Jeremy Corbyn asking for David Cameron to invoke article 50 was a mistake. [ ... ] Jeremy Corbyn was sticking it to the then prime minister, which is perfectly legitimate politics.»

Indeed, but incompatible with running a New Labour election campaign focused on "Remain".

My imagined story also explains why neoliberal eurosceptics B Johnson (in a neutered position), D Davis and L Fox were put to front the conservative government on the Europe question: so that the next election be a clear choice between "Conservative against Europe and for austerity" and "New Conservatives for Europe and against austerity".

Except that May and Hammond seem to have understood that plan and are also talking the talk of anti-austerity, so that the contest be between "Conservatives against Europe and against austerity" and "New Conservatives for Europe and against austerity".

If my story is correct then J Corbyn has zero chances of surviving because what the business/establishment wants, a "New Conservatives" mandelsonian party fronted by one of theirs, they will get.

At least then both parties will campaign anti-austerity to attract more votes to their EU/anti-EU position.


'Indeed, but incompatible with running a New Labour election campaign focused on "Remain".'

But not incompatible with the actual outcome of the referendum.

I do find your story dismally plausible.

I hope you are wrong, and given the sheer uselessness of the mandelset so far, I will nourish that faint hope.

Austerity has definitely dropped off the permissible talking points list though I think it remains a desirable objective.

I suppose we just don't need austerity as urgently as we did a month ago. It must be a real drag for the journalists to keep up.


Just noticed that SimonWL at MainlyMacro has added:

«this is good: http://www.politics.co.uk/blogs/2016/07/14/everything-you-need-to-know-about-theresa-may-s-brexit»

and that article says:

«May could follow a much-loved and long-followed rule of politics. She could find the longest grass available and kick this appalling problem right into it.»
«She could skip all this two-year stuff and agree an interim arrangement where the UK stays in the single market while it negotiates its ultimate Brexit deal, with a deadline of 2020 to coincide with the general election.»
«Won’t the Brexit guys hate that? Yep, but no option is actually good, they're just different levels of bad. They'll hate it less than if she said she'd stay in the single market permanently.»
«This article is based on conversations with [ ... the best and brightest of the establishment :-) ... ]»


I don't think it takes the best and the brightest to work that one out.

All the excuses about the sheer complexity of the process, how hard it will be to get a 'good deal for britain',etc are a dead giveaway.

Putting Liam Fox in charge of anything tells you no one is taking this seriously.


It's pretty clear that Richard Murphy is being deliberately obtuse in failing to see what political attacks McDonnell was trying to head off with this rule, and also the fact that the rule itself is a semantic trick, sufficient to placate the idiot media, but in no way tying a Labour government to anything look like austerity.

This is about Murphy's monstrous ego. Corbyn failed to hail him as a genius and hand over Labour's entire economic policy to him, and he's throw his toys out of the pram. Just look at his blog lately he talks of Corbyn 'using my ideas' as if he's the only person to ever advocate that infrastructure spending be funded by the central bank. He's gone into serious crackpot territory.


I don't know about monstrous ego, but there is a whiff of wounded amour propre.
He should be equally angry with smiffy, as he's nicked those ideas off Jeremy,as any radical socialist winner would.
He just can't admit that he fell for the plotter's nonsense, let alone that there was a plot at all.

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