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November 28, 2017


Tony Holmes

But couldn't it be argued that if the additional borrowing is for investment, it will raise potential GDP above the current full-employment level ?

Andrew Dodds

It seems similar to the statistical studies on deaths in Iraq, which produced results so horrifying that they were automatically discounted.

But if, as the BBC, you are prepared to let Nigel Lawson pontificate on global warming, then you have set your standards very low indeed and it is somewhat hypocritical to suddenly raise them now.


Its obvious, to me anyway, the question most want exploring is whether or not McDonnell (a Corbyn led Labour party) has ability enough, integrity enough, to work within all the democratic constraints our constitution has to offer. This is a question advocates of supposed right wing economic stability trade on; implying Labour doesn't via the avoidance of talk of anything serious in favour of questions which in reality have been asked and answered for real – there is the continuing failure of Osborn's economics. We are at stalemate clearly. Yet for the most part our public referees, our commentators and journalists, persist in ignoring this fact – Intentionally or otherwise, they are not allowing/enabling debates to be opened up beyond (successful in the past maybe) but now failing neo-liberalism. Not so much silly as desperate...


Also, if you want to know what the BoE thinks would happen with fiscal policy X, why not...ask it? The central bank is made out of people! It's even in the habit of issuing forward guidance about what it's going to do!

Ralph Musgrave

Wren-Lewis’s twitter point is suspect. He says government can borrow at around a zero real rate of interest, ergo a small return on public investment (3 or 4%) means such investment pays for itself. Problem with that argument is that governments can borrow at artificially low rates of interest because everyone knows that if their investments are a failure, they just confiscate money from taxpayers with which to pay creditors.

A realistic rate would be what a private infrastructure provider would have to pay to borrow. Given that the original Channel Tunnel investors lost their shirts, I suggest a private infrastructure provider would have to pay a hefty rate of interest.

Ralph Musgrave

“This, however, is what the debate should be about: how big is the multiplier?” Actually the multiplier is irrelevant.

The multiplier is the eventual increase in GDP that results from £X of deficit, divided by £X. E.g. the “eventual increase” can be £2X or £3X, which sounds good. However, assuming to take a simple case the deficit funded simply by printing and spending money, as advocated by Keynes, the real cost of creating that money is nothing (as Milton Friedman pointed out).

Ergo if the multiplier is a miserable 0.5, it really doesn’t matter. The solution is simply to print and spend more money, as doing so is costless.


Apart from any intrinsic benefits, a major boost to public spending on infrastructure might create space for the private sector to reduce its debt, which continues to weigh heavily on economic activity.

Private sector debt amounts to about 164% of GDP, down from a peak of 192% in 2010 but still at levels never seen before the early 2000s.

Household debt is at 88% of GDP (down from a peak of 97% in early 2010), while business debt is at 76% (down from 95%).

The government sector debt is much lower and represents a major part of the nation's wealth,held by pension funds, insurance companies, banks and private investors.

Similarly, government interest payments on the debt (which apparently worry the BBC) represent a major source of income for the nation's savers and a safety valve against inflation.


"* Update: Simon Wren-Lewis on Twitter corrects me here. At negative real interest rates, infrastructure spending pays for itself even if the multiplier is zero. "

Well, this is true. But it is *more* true that most all infrastructure pays for itself, as long as the disbursed benefits are properly estimated. And this is regardless of irrelevant financing weeny weenies.


@ John - I've always been wary of the glorification of infrastructure spending.Some can be pointless: I'm not sure if all the stories of bridges to nowhere in Japan are untrue. Also, the building of infrastructure has adverse spillovers in terms of congestion - eg the A14 to Cambridge.

mike berry

This is a killer point

"Let’s put this another way. How often have Tory chancellors been asked: “how much tax revenue are we losing because austerity is depressing economic activity? But this is the question that matters when thinking about the public finances."

The BBC- as Simon Wren-Lewis argued in his 'media macro' critique - tends to spend far longer discussing the supposedly bad things that will happen if debt gets too high but doesn't discuss nearly as much as the negative consequences of cutting public spending.

Here's a classic example from 2009 which employs the classic formulation of the 'markets as vengeful gods' who need sacrifices.

SF: Our national debt, what we own as a nation, will be more than £790 billion by the end of this year or £13,000 for everyone in the UK. That is not as high as some, but it's rising fast. As things stand Standard and Poor's thinks it will reach 100% of national income in less than five years. You can't stay at that level and keep your triple A. But that's all in the future. Britain has not been downgraded yet because whoever is in power in the next few years could take radical steps to bring borrowing back down before the debt gets so high. The trouble is, investors cannot know what is going to happen until they know the results of the next general election….A downgrade would push up the cost of government borrowing, though investors do not only look at ratings when deciding how much Britain's debt is worth (BBC, News at Ten 21 May 2009).


"The Bank of England believes – maybe wrongly – that there’s little slack in the economy. It might well therefore respond to the incipient boost to GDP given by looser fiscal policy by raising interest rates"

So how much the investments assist the economy is based on an entirety political decision by unelected bankers who might decide to prioritize lower inflation over growth or higher wages. Cool. Seems totally reasonable. I mean, it's not like central bankers have an ideological predisposition to policies which might benefit capital over labor.

It's pretty tough for the left in the modern financialized economy. The central bank can actively diminish the effectiveness of the fiscal policy choices by raising rates and actively blunt the harm of right wing austerity by lowering rates.


99% of Tories are Fetishists.


"I've always been wary of the glorification of infrastructure spending.Some can be pointless"

Sure. Some is a word that works.

Think more broadly. Courts. NHS. Local schools. Trade schools. Public R&D funding. Old age pension.

And more broadly yet, think of so-called stimulus spending as infrastructure. When the multipliers significantly exceed one, private capital cannot compete even in good times and it makes up for lots of other infrastructure errors.

The broad perspective is driven by thinking in a financial analysis mode where all things you can identify that have yield are assets. In the case of infrastructure the yield is dispersed. The above list is representative.

You're talking with a guy who makes his daily bread analyzing private investment. Yet it's obvious to me that quite often public investment returns dominate private, so I could paraphrase your statement as, I'm always wary of the glorification of private investment.


Sometimes I am very perplexed by the craven obedience to right-wing framing by mediamacro people like our blogger or S Wren-Lewis, because the debt fetishism by the tories, whether labeled Conservative or New Labour, is about much bigger debt growing much faster as this chart from Steve Keen shows very clearly:


The "Debt" red line is to the total outstanding private debt (80% of it is mortgage debt IIRC), which has trebled as a percentage of GDP since 1980, breaking a long-standing constant trend, and the blue "Credit" line is the amount of new credit issued every year (80% of it new mortgage credit), which has largely doubled between 1980 and 1990, and tripled between 1995-2010, and has been surging again after 2010.

The graph has to be seen to get the full impact of the mad obsession that tories have had for 35 years with bigger, ever bigger, private debt.

Framing discourse, like our blogger and S Wren-Lewis do, on just public debt is highly misleading mediamacro.

Because as C Crouch has well pointed out, tories have chosen "privatised keynesianism", in which effectively government-guaranteed private debt is used to deliver keynesian stimulus, the the economy of southern England's affluent upper-middle classes and upper classes; and all that nominally private debt will have to be paid for by the north and the lower middle and working classes too in various ways, even if they did not benefit from it, or even had their cost of living increased a lot by higher house prices and rents because of it.


«how much the investments assist the economy is based on an entirety political decision by unelected bankers who might decide to prioritize lower inflation over growth or higher wages»

That's completely different from reality: the target rate of inflation is given by the government to the BoE as a political decision. The BoE just have to find ways to achieve it.

The politically set target inflation rate has been the same since 1997, through 5 general elections, so if there was any democratic will to raise it, it has not manifested itself in sufficient numbers of votes; as far as "democracy" goes the 2% target inflation rate has been fully endorsed by voters for 20 years.

The game played by the tory governments since 1997 has been to use a fiscal squeeze to try to push the (wage) inflation rate below target to "force" the BoE to create massive asset price inflation hoping some of it "trickles down" via the "wealth effect" into (wage) inflation countering the fiscal squeeze.
Of all means the BoE could have used to counter the fiscal squeeze they have consistently chosen those most likely to cause asset price bubbles and incentivize financial fraud over anything else, and for that they can be criticized, but they cannot be for choosing the inflation target.

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