Posts Tagged ‘Fiscal’

13 Nov

Apologies for light blogging – events, dear boy . . .

Posted by freethinkingeconomist in Economics, Politics. Tagged: , , , , , , , , .

We had an amazing event on “Dealing with Debt” yesterday: speakers from Canada, Ireland, Sweden, Australia and even the UK giving their various views.  I could not possibly summarise it all here and now: maybe at some future juncture, maybe not at all.  See below for the speakers: as well as them, there was a strong informed crowd, including people from across the spectrum, journalists and civil servants.

A couple of spotty observations:

  • In terms of winning the political debate, you have to treat everyone equally.  Every department, every region has to feel it is getting some pain.  David Herle, who for my money was the best speaker from a very strong crowd, made the point that they had to scrap subsidies for farmers across their vast country to win support.   In which case why are people promising to ring-fence the NHS? It will make it harder going after other areas
  • Most of the countries discussed were smaller, economically, than the UK, and had less to gain from fiscal support.  In particular, the Irish examples tell us almost nothing about the wisdom of fiscal consolidation here.  Their stimulus leaks abroad, and merely hits their borrowing rates.  For the UK, it is not so sure
  • Related to the first point, if one group seem to be favoured (bankers anyone?) then the chances of widespread consensus are very damaged.
  • When I (twice) challenged on the subject of the economic implications of fiscal cuts (see Slash and Grow? – which Chris Cook very generously and probably inaccurately credited with bringing a volte face in Conservative economic policy), the right-of-centres so challenged (Andrew Tyrie, dry and excellent, Nick Bosanquet, similar though looking continuously mischievous) always answered that we are going to have trouble selling our debt.  This seems to me a very speculative argument: why the UK in particular?  But Andrew Tyrie made a very telling point about how easy QE had made debt-sales this year.   I look forward to learning more about what he thinks on that subject – Sally Keeble MP too.
  • David Walker had an interesting and slightly dismaying point to make about centralism/localism and fiscal consolidation: you probably need central control to force through tough fiscal policies.  I notice that he has been consistent on this point (2002 article):  “Local communities, especially those where Labour used to draw its support, tend to lack resources. Some are reactionary and others are incompetent . . . Communities may be energetic and progressive; they may also be sluggish and mean . . . If you value inequality, localism is a fine doctrine to hold.”

I hate to give support to such a pessimistic vision, but yesterday the FT reported this on the success of a particular localist policy:

A £100m programme to screen young people for infection by chlamydia has not been good value for money, the National Audit Office said yesterday. In a blow to advocates of greater localism, the public spending watchdog found that the latitude given to individual primary care trusts involved in the programme, launched in 2002, had led to duplication and inefficiency.

—————————————————-

These were the speakers.

  • Gemma Tetlow, Senior Research Economist, IFS
  • Sally Keeble MP, member of Treasury Select Committee (tbc)
  • Andrew Tyrie MP, former special advisor to Chancellors Lawson and Major, member of Treasury Select Committee
  • Lord Newby of Rothwell, Liberal Democrat Treasury spokesman
  • David Herle, political advisor to finance minister and prime minister Paul Martin, on the politics of the Canadian cuts of the 1990s.
  • Warwick Lightfoot, economist, former special advisor to Norman Lamont (tbc)
  • Julian McCrae, Research Fellow, Institute for Government, and former member of the Prime Minister’s Strategy Unit (tbc)
  • Professor Colm McCarthy, economist and commentator, on how Ireland is dealing with the collapse in its tax base.
  • Christopher Cook, economics leader writer, Financial Times
  • Chris Sanger, Head of Tax Policy, Ernst and Young
  • Pär Nuder, Swedish finance minister from 2004 to 2006, on how Sweden cut public spending by 17 per cent of GDP since 1993.
  • Dr Chris Aulich, academic and commentator on Australia’s public sector, on John Howard’s privatisations and public services reforms which reduced the size of the state to 33 per cent of GDP.
  • Professor Nick Bosanquet, Professor of Health Policy, Department of Bioengineering, Imperial College and Consultant Director, Reform
  • David Walker, communications director, Audit Commission, formerly the Guardian

Today, we have Sharon Bowles MEP, fearsomely bright and now influential in chairing the EU’s Economi and Monetary Affairs committee.  Her background in patent law gives her a relentlessly forensic and legally-aware mind, ideal for the work of that committee.  I’m chairing the event at Bloomberg, asking how the EU will fit in with the G20 agenda.  So that’s why the blogging is light.  Anyway, who’s reading?  mostly people from the Sceptical Doctor blog, anyway, I suspect.

27 Oct

Civitas event

Posted by freethinkingeconomist in Economics, Politics. Tagged: , , , , .

Well, I really enjoyed talking to and with a Civitas audience.  You may be surprised that a wishywashy liberal hangs out with a think tank with such a differing view on the world.  It’s a long story.  Civil discussion and occasional disagreement are part of both our philosophies.  And I was first drawn to them by an excellent project they run that transcends political viewpoints: their supplementary schools which clearly do thoroughly good work.

But I am glad my views on immigration were not called for.  Earlier, I found myself asking David Green why borders around the UK need such vigilant policing when we are perfectly happy to let people from Yorkshire work in Kent . . .

Above all, Civitas events are usually excellent, displaying an exchange of views between participants of widely varying backgrounds.  My previous attendances had heard Irwin Stelzer and Martin Wolf.  Today, the punters had to put up with me. After I blithered on about A balancing act for a quarter of an hour, the discussion ranged over:

  • when the fiscal tightening needs to start; Phillip Blond and I had surprising agreement on this.  The long term effects of a second big Dip are horrible to contemplate regardless of your party affiliation.
  • the minimum wage.  The best contribution came from a self-deprecating economist called Paul Lewis who seemed to have read every Low Pay Commission report since 1885, and could tell people about which industries best resemble perfect competition and which are monopsonies: for those who are interested, social care is one that is worst affected by the minimum wage, most others not really so. Dan Lewis asked whether the black market economy distorted all this.
  • Professor David Myddelton was there, (privately) discussing the recent shock announcement of their new director.  I thought he nodded encouragingly during my disquisition which earned him my lifelong goodwill . . .
  • Ruth Lea – who holds the “tight fiscal loose monetary” view.  I longed to ask her about how much more loose monetary policy could be.  I wonder what she would think of Richard Koo’s verdict that it is the greatest non-event of the Japanese recession.  Yup, tens of trillions of yen of money can mean nothing if people don’t want to use the money for, you know, economic things like buying stuff . . .
  • Several of us agreed that households could buy more than is popularly imagined.

What is really interesting is that if we had a ‘war by op-Eds’ you would not imagine that half the people in this room could get on with the other half.  I mean, take Phillip Blond – arguably the star of the show – his views are that

The current political consensus”, he writes, is “left-liberal in culture and right-liberal in econo­mics. And this is precisely the wrong place to be.”

Which is the opposite of my views.  Ruth Lea and David Myddelton probably have views as far from mine on Keynesianism as it is possible to be and still be sane – at least in print.  But behind closed doors, people dare to find common agreement where in public they would strive to show their differences.  Not wishing to get sentimental, but it is the desire to get somewhere nearer the truth that comes to the fore.

19 Oct

ahem . . . thinktank publication of the YEAR . . .

Posted by freethinkingeconomist in Economics, Politics. Tagged: , , , , , , , .

Well.

That’s very nice.  Prospect magazine have given my humble pamphlet, ‘A balancing act‘, the award of Publication of the Year at their Think tank of the year awards. Congratulations to the Centre for Social Justice and the IFS for their richly deserved joint award of the main prize.

I won’t give a blow-by-blow account of the gestation of this piece because a. it was 6 months ago and b. it would be boring.   But it should not go unmentioned that:

  • my colleagues at CentreForum, Alasdair and Julian, gave me a fantastic long leash, showing considerable confidence that had not been earned by my previous work;
  • several writers, in particular Martin Wolf, Sam Brittan and Will Hutton  (see side links) did me a huge favour by giving very generous reviews;
  • also Aditya Chakraborrty of the Guardian made a big difference with his advocacy of one or two of its views;
  • the piece might have been remembered for entirely the wrong reason had my lovely and eagle-eyed wife had not noticed the references to pubic spending* targets in a late draft

And, finally, a word of explanation.  The paper was popular, I think, for its Keynesian views: supporting the way the government has stood against the chaotic deleveraging that might have turned a nasty recession in the vicious wipe-out of a great chunk of this country’s productive future.  I obviously stand by this – half the posts here are about it.  (yes, very repetitive).

But I don’t want people to think that I am some sort of 1970s Keynesian headbanger.  In the majority of circumstances I am very nervous about the idea of the government being the reason we are growing, year by year.  It goes against my conception of liberalism, which sees individual choice and daring at the heart of our economic story.  When people propose grand schemes of investment in things like Green Roads I am normally sceptical.  I was very influenced by John Kay’s The Truth about Markets, and even Hayek’s notion of a catallaxy.  I like to bore people with the view that if investment in 1993 had been all in the government’s hands, it would have been sunk into HOTOL or superconductors.

Instead, we got the Internet. (Yes, yes, I know: ARPANET and all that.  But with the government all the way it would have looked like Minitel). I like it when a thousand flowers bloom.

So yeah, it’s Keynesian, but Keynes was a genius for distinguishing the conditions of the moment, not applying the same dogma to all positions.  As people point out, he would have changed his mind, and ended up not being Keyensian if he had lived to 90.  Too bright for that.

The other thing that people liked was an emphasis on property tax.  Thanks to ALTER I am now convinced that this is still a good idea, but a fullblown land-tax is better.  I like the Mansion Tax idea, and wish it well.  I hope it is a first step to fairer taxation.

And on that pious note, good night.

*I have yet to develop my views on this

19 Oct

Seriously, the CBI is trying to drive us into another Depression

Posted by freethinkingeconomist in Economics, Politics. Tagged: , , , , , , .

This is the CBI’s recommendation for the British public finances:

The CBI is calling on the Chancellor to ensure his Pre-Budget Report delivers a credible plan for balancing the public finances by 2015-16, two years earlier than planned, in order to boost investor confidence and get the UK on the path to recovery. But it is warning that the government will need to take an extra £120bn out of current spending plans to balance the books.

Don’t you love that bit “in order to boost investor confidence and get the UK on the path to recovery”?  Work through the logic:

You run a medium sized business, and currently borrow at about 5-6% long term, a pretty fair rate.  Interbank rates are less than 1%, and credit availability is improving.  If you are a large company, you involved in the rush to more corporate bond issuance, perhaps benefiting from the policy of quantitative easing.

Does this mean you then invest more?  No – why should you? After all, in America (according to the Economist):

“companies are also seeking fewer loans, as they think twice before hiring or investing in equipment. Demand for “commercial and industrial” loans has fallen in every quarter since mid-2006, according to the loan-officer survey. A similar synchronised decline in supply and demand is visible in consumer credit . . . the decline would have been steeper but for the cash-for-clunkers car-sales programme.”

So IT DOESN’T MATTER HOW CHEAP THE FINANCING IS.  If you don’t expect there to be demand for your products, you don’t invest, you don’t hire, you don’t build, innovate, experiment, gamble, venture.   This is a DEMAND recession.  More credit for the credit constrained would be nice. Particulary for the poor who normally lack the ability to smooth consumption, and therefore cut back the msot.  But it is not the only problem.

And what have the CBI proposed? Cutting demand.   However it is done – largely through public sector salaries, one might guess – £120 bn less spending by government is £120bn less income for someone else.

What about their argument about confidence? After all, no-one feels confident if HMG is about to go bust, surely?  But people should look at the example of Japan. Their deficits stayed high for, well, ever, without borrowing rates shooting up too far.  OK, they are different in quite a few ways (see previous post), including their high household savings rates. But, still, it is crazy to act as if the biggest confidence problem in the current economic crisis is the government’s leverage levels.  If this is so, just go out into the market and buy puts on Gilts, you’ll make a low-risk killing (or buy index-linked gilts to hedge). The Government is one of the few entities we have that can be confident about it’s ability to repay. Servicing costs will be comparable with those Maggie T had to pay.   As I write in a soon-to-be-published piece:

Public debts have risen largely to allow private indebtedness to fall without catastrophic consequences for the economy. With a few noble exceptions, the prior rise in private indebtedness passed unnoticed by the same Conservative opposition (for which read the CBI) that is now almost hysterically worried about a similar increase in public debt.

What is the CBI’s positive verdict on how growth will be achieved? In their helpful letter to Alistair Darling, they say:

Beyond the recession, the drivers of economic growth will almost certainly be different to the recent past, with consumer and government spending expected to be more constrained. So business investment, exports and import-substitution will need to make a much greater contribution to economic growth. With activity in the financial and housing sectors unlikely to return to previous levels, there will need to be structural change in the economy to fill the gap.

So the same advice as G Osborne is willing to give, extrapolating with irresponsible enthusiasm the lessons of the early 1980s onto the deflationary situation of today.  But as I argued on Friday, this ignores our historic inability to eke more than a percentage point at a time from such sources of growth.  Even then, we have only managed it in much sunnier times, with a growing world economy and rates falling from high levels, rather than scraping along the bottom and sustained by a programme of QE that looks unlikely to work as advertised.

Plus every nation and his dog is trying to grow through exports, even those like Germany that could do with less.

I advertise this blog as impartial between the parties, and I mean it.  I don’t hold back from criticising Lib Dem policies when I feel the need to.  But the Conservatives and their close associates in the business community have got this one badly wrong.  This economic slump needs more than just unblocked finance to fix it: it needs demand, from a world suffering a terrible synchronised recession.  Putting out a paper calling for the government to pull 2% of annual demand out of the economy and then labelling it “confidence boosting” is nuts.

If people like this get into power, we’re all in a lot of trouble.

[What seems even crazier is that the CBI think this should be done while:

  • Making equity raising tax deductible for SMEs
  • demanding 'all genuine business expenses, including the costs of raising equity, should be tax deductible'
  • delaying the reduction in pensions tax relief on those over £150k
  • questioning the rise in Air passenger Duty

This is all meant to be achievable because 'If public sector productivity had been as high as the private sector in the recent past, then the same volume of output could have been produced with 14% lower input volumes.'.  If you find a piece of analysis more simple-minded than that, let me know. ]

18 Oct

Conservative conference: John Redwood on public spending Cuts

Posted by freethinkingeconomist in Economics, Politics. Tagged: , , , , .

For those of you new to this blog: hello, and I hope you appreciate something different here.  The first difference may be that, although I am a committed Liberal Democrat, employee at CentreForum, 100+ poster at their blog Freethink, etc – I am not a tribal politician.  The issues are debated on their merits: I like some Conservative policies, some Labour, though clearly neither  enough.

And a good thing too.   Who needs blinkered opinion? Not that such a thing exists in the blogosphere, I’m sure.

To prove it, this post is about John Redwood MP, one of the brightest and most uncompromising Tories.  I spoke alongside him, and Simon Griffiths and Steve Freer at the Conservative Conference a couple of weeks ago.  It was my second-only time before a Conservative audience (the first is blogged here).  While the first had the modest aim of solving poverty despite a fiscal crunch, the second merely intended to achieve Public Services: 10% cheaper, 10% better?

No problems.  Next week, no doubt Global Warming will be fixed while the participants consume a well-deserved dish of french pastries.

I furiously jotted down notes the night before.

(I got no help from other think tanks.  Demos has helpfully told us all that the secret to being more efficient is being more effective.  It feels like pre-Crunch daydreaming.  Reform call for slashing 10% off doctor’s salaries.  Sure, look forward to that strike.  But at least it as an attempt: amazingly, there is very little out there on the issue that will dominate politics till 2020 at least.  Vince’s paper is still the best.)

My natural position is scepticism: if someone thinks it is obvious how to do public services on no cash (hi Mark), they are probably simplifying just a little.  But the punters deserved some substance for schlepping through the rain to hear an unknown like me, so, in no particular order:

  • I questioned the premise.  Not because it was impossible, but in my experience good ideas come from below. You don’t put a bunch of self-important Directors (= politicians) on the job: you listen to the staff, appropriately incentivized.
  • I point out that this has never happenned before. As my chart from A Balancing Act suggests, not even Mrs Thatcher actually cut public spending.  It is really difficult.  There are contractural reasons why spending cuts need to be afforded.  Redundancy payments for starters.
  • There are some win-wins.  Prisons – why pay to educate people in crime – at £50k per year per head?? Why so many short jail terms? More prevention, less treatment in health too. Welfare is a popular one here: less welfare good . ..  is it?
  • Localism Everyone’s favourite liberal idea.  More on that later.

John Redwood went first. His major point was: in the private sector, no-one would blink at this target.  It happens all the time.  He gave examples from his experience; error rates of 150 per 100,000 being brought down to 10, say (in the car parts industry).  You might argue that manufacturing allows a certain perfectibility that services don’t – but in the benefits system, the error rate is thousands per 100,000.  It is surely not that much in insurance, say.

More anecdotes from his time at the Department of Wales – ridiculous duplicated jobs at the top, people buying their stationary centrally despite it costing more than popping down to WH Smiths (this is straight out of Yes Minister), his strong view (on the blog) that 450,000 civil service staff were too many in 1995, and 750,000 certainly too many now.  Consultants duplicating permanent staff jobs.   And  a really interesting though obvious point about capital spending: even though we all believe “capital good, current bad”, capital commits you to future current, so if a LA is rejoicing on getting some recession-dosh to build a new school, they need to look forward to their future current budget which may not afford to run it . . .

He also argued that public sector job cuts should occur through wastage, not forced redundancy: which is one area where the public sector might be pleased it was not subject to private sector discipline. In response to another’s question about hospitals, he said that giant hospitals are proof of diseconomies of scale, and that he would support more smaller outfits, closer to the patient.

JR got some serious kickback.  But not very much from me (I was next): I thought his points were theoretically sound, just that they evaded entirely the political fights.  The fact that Mrs T was not able to do this – and she was quite happy to have 60% of the population against her – makes one wonder how a future Conservative administration will pull it off.  I did point out that in Sweden, Canada and other countries that had managed this, long preparation and consensus had helped: and that the chance to achieve this had been seriously delayed by Gordon Brown’s obfuscation last June (see endless past posts).  I expected a mighty cheer for this, but got none.

The kickback mainly came from those who argued that JR was somehow making a moral point: private good, public bad, because private gets on with efficiency improvements naturally, public waits for a crisis.   I think this simplified his view, and he bridled at the accusation.  Private sector agents do not have as many mixed motives: you are, ultimately, about building a big profitable company.  You may build happiness and Loyalty in your client base, but for the ultimate reason that it pays to. (disclosure: when put in charge of sales at IG, I really pushed this idea.  It worked).

Do we want nurses and social workers to feel this way – to be endlessly experimenting, under pressure, into finding ways of doing things ever  more efficiently?  It takes no genius to see the problems with this approach. This may be why JR restricted himself to debates about administrators when talking about cuts.  No-one sees administrators in any other light than efficiency.  There is never any point to having one extra.

Like the Poverty event, I was again surprised by the un-Tory like attitude of the crowd.  There may be headbanging Eurosceptic hangers and floggers out there – of course – but they don’t tend to come to these sorts of event.

Most of the genuine Conservatives (i.e. not lobbyists or journalists) were local councillors, I reckon.  This may explain the unease at the whole topic; these people administer services, and know what it is like to be criticized for failing to do it well.  They find the top-down way that budgets are deciding inimical to long-term planning.  Everyone, on paper, agrees that it makes more sense to pursue subsidiarity to its logical conclusion.  But when I asked a particularly lucid councillor about whether she would prefer to have 3x the level of council tax and all the responsibility herself, I’m not sure I got a positive answer.

More localism is clearly necessary.  Our culture and system are as centralised as any other major state (the ippr ask which is cause and which effect). But I wonder whether this is an issue that moves cyclically: more power is devolved, bad practises and inefficiencies gradually proliferate, the government is called upon to Do Something, it all reverses . . .

Way too long for a blogpost, sorry.  I enjoyed JR.  I don’t agree with his economics views, but he is clearly brighter than 90% of MP’s and worth listening to.   Better than listening to a thick Tory, anyhow.

16 Oct

Warning to Osborne: this ain’t ever happened before . . .

Posted by freethinkingeconomist in Economics. Tagged: , , , , , , .

In recent posts I have drawn attention to the new fiscal-economic approach that the Conservatives seem to have settled on: that they/we can afford to cut the deficit on day one because, economic theory tells us that easier money and a cheaper exchange rate will fill the gap – with higher investment and a contribution from net exports. Here is his speech giving this view. The CEBR have backed this up – without giving us any of that ‘valuable intellectual property’ that might be their workings . . .

So I spent a day or so just looking into how likely this might be.  Has the UK ever done it?

Weeellll, not exactly.  This graph shows how much net exports and capital investment have added to growth in the past.

UKCapexNX

You can see that there were some bumper years for Capex, like 1973 or 1988, the Great Overheating: but often net exports pulled the other way.  Even the legendary export-led recovery from 1992 did not amount to much – the exchange rate recovered from 1996.

The blue bars dominate.  That’s household consumption.  If that is weak – perhaps as it might be if a government goes hell-for-leather after a fiscal consolidation – then growth is very hard to find.

The following two graphs suggest that Japan, the exporter-par-excellence, also had a similar experience.  Despite exporting to growth for the last 5 years before the Crash, they never got much from business investment:

JapanCapexx

Again, growth in capital investment and growth in net exports (exports minus imports) tended to go in opposite directions.

The same goes for Germany, the other great Growth through Austerity example that Conservatives are no doubt poring over.  Look at these figures:

Germany Household consumption Government consumption Capital Investment Exports Imports GDP Growth
1996 1.56% 2.08% -3.57% 6.05% 3.53% 0.99%
1997 0.81% 0.50% 1.28% 11.71% 8.22% 1.80%
1998 1.37% 1.80% 5.32% 7.96% 9.45% 2.03%
1999 2.91% 1.15% 3.26% 5.94% 8.55% 2.01%
2000 2.33% 1.37% 2.26% 13.53% 10.17% 3.21%
2001 1.96% 0.53% -7.84% 6.44% 1.23% 1.24%
2002 -0.84% 1.47% -9.14% 4.29% -1.44% 0.00%
2003 0.10% 0.38% 2.44% 2.46% 5.36% -0.22%
2004 0.08% -0.71% -0.31% 10.25% 7.28% 1.21%
2005 0.24% 0.41% -0.99% 7.67% 6.53% 0.77%
2006 1.10% 0.62% 7.50% 12.69% 11.85% 2.96%
2007 -0.40% 2.19% 5.01% 7.47% 5.03% 2.46%
Averages 0.93% 0.98% 0.43% 8.04% 6.31% 1.54%

Encouraging? Even though exports grew way faster than imports, capex just didn’t grow.  Because household and government investment were anaemic, so too was overall GDP growth.  Fiscal hawks may envy Germany: the consumers had it rough.

Given similar scepticism about QE (mysteriously missing from the CEBR), I am becoming a bigger fan of Duncan’s idea of a National Investment Corporation.  Investment is a good way of leading growth: but how do you make it happen in Depression circumstances?  This is one way – similar to Vince Cable’s earlier idea at conference.

What I am certain of is that prioritising the debt at all costs can be a very damaging mistake.

13 Oct

The CEBR’s view on the economy

Posted by freethinkingeconomist in Economics, Theoretical musings. Tagged: , , , , .

In yesterday’s piece on the timing of fiscal tightening, Chris Giles pointed out that the classic Macro 101 reasons for a fiscal tightening NOT MATTERING might not apply now.  The countervailing monetary easing and lower exchange rate that are meant to somehow replace demand lost from fiscal tightening are both highly suspect in conditions where (a) a liquidity trap is quite possible (b) the main credit channel (the banks) is unable to convert liquidity into aggregate demand and (c) many other countries are hoping to rely on the export channel to ressurrect their overleveraged economies.  For example, the US . . ..

This is not noticed by the CEBR, or not acknowledged. They blithely write:

The policies depend for their success on keeping monetary policyvery loose –a combination of quantitative easing and base rates at 0.5% until mid 2011 at least and a fall in the 10 year bond yield to 2.5% in two years.This leads to a continued weak exchange rate –the pound falls to $1.40 and could temporarily reach parity with the euro unless the markets become aware at anearly stage of the euro’s structural weaknesses.

Have they heard of Japan? Do they really think that having the Pound just 7% weaker against the Euro, and 10% weaker against the dollar will be enough to find 100 billion of lost demand? Do they not realise why rebalancing between surplus and deficit countries is such a fraught issue for the G20? Do they not think that the surplus nations may resist this?

No, all these difficulties disappear within the simplicity of CEBR’s equations.

I also can’t work out what the CEBR think about our credit-issues with the markets.  On the one hand:

in normal circumstances, the deficit could be reduced gradually but because of the UK’s bad image internationally and with the financial markets, the need is probably more pressing at present

While on the other

[Conservative] policies depend for their success on keeping monetary policyvery loose –a combination of quantitative easing and base rates at 0.5% until mid 2011 at least and a fall in the 10 year bond yield to 2.5% in two years.

In one world, we have to scramble to reduce the deficit quick or the financial markets will spank us.  In the other, they are lending us money at 2.5% for 10 years.  The Tories are persistently confused on this one, and love the drama of a potential default. Wow, things move quickly.

UPDATE: Jeremy Warner on the Telegraph blogs has added up the implications of Conservative plans to stop both QE and fiscal easing – deflation. Just what an overleveraged economy doesn’t need – unless you are cash-rich, of course – like, say, someone inheriting a great fortune soon.  In which case you’re sorted.  Thanks George and David . . .

8 Oct

How dare he, part II

Posted by freethinkingeconomist in Politics. Tagged: , , , .

More from Cameron’s speech.’

Don’t they see? It is more government that got us into this mess. Why is our economy broken? Not just because Labour wrongly thought they’d abolished boom and bust. But because government got too big, spent too much and doubled the national debt.

Why has the national debt doubled?  Because of a collapse in NGDP.  The difference between now and 1981 is not economic incompetence, but the absence of inflation to wipe things away.  And why has NGDP collapsed?  Because inflation was beaten, and then the world economy collapsed because of a financial market asset-boom collapse that went disorderly.  It has affected everyone.   Brown might have been more prudent in the good times.  Call that 5-10% of GDP.  The rest is something called the Credit Crunch.

what is progressive about spending more on debt interest than on helping the poorest children in our country?

Because without that debt, unemployment might be hitting 4 million, not skimming under 3. Why can’t politicians give it to us straight?

Otherwise, a Curate’s Egg

Good parts of the speech:

Devolution; the minimum wage; civil partnerships, these are good things that we will we keep.

laws so bureaucratic and complicated even their own attorney general can’t obey them.

for now the 50p tax rate will have to stay and child trust funds for those on middle and higher incomes will have to go.

Our pension system was designed in a time when many people didn’t live till 70 …. It is out of date and it has to change.

Let’s be clear where growth will come from. Not big government, with its Regional Development Agencies and National Investment Corporations but entrepreneurs. New businesses, new industries, new technologies.  (Well, TFP growth will come from that.  But don’t forget L, Labour and K, capital . . .)

That’s why Sure Start will stay, and we’ll improve it. We will keep flexible working, and extend it.

This lever-pulling from above – it has got to stop. With Andrew Lansley’s reform plans, we’re going to give the NHS back to people. We’ll say to the doctors: those targets you hate, they’re gone.

I see a country where the poorest children go to the best schools not the worst, where birth is never a barrier. (but put money into the Pupil Premium then)

More bollox nonsense

It was you Gordon Brown who designed the system of financial regulation that helped cause the financial crisis. You want to keep it the same. We say it needs to change. That’s why we will give back to the Bank of England its power to regulate the City powers that should never have been taken away.

Really? IF the Bank had had the FSA’s role, then none of this would have happened? The Tories really do believe in the Bank of England Governors Eyebrows story.  Which is really quite scary if you think a repeat of this mess is not impossible.

Parties have been talking about raising the pension in line with earnings for years. But it never happens. Well let’s be the party that finally makes it happen.

But you broke that link!

8 Oct

How dare he

Posted by freethinkingeconomist in Politics. Tagged: , , , , , .

After forcing my office to put David Cameron’s speech on the radio, I found myself so irritated by the bit about poverty that I had to storm out to the gym, there to half-wreck the only proper exercise machine out there.

Remember, I’m not some sort of crazed Marxist, romantic denier of economic truths or tribal Labour supporter: here I try to play the ball, not the man.  Like Cameron (I presume), I’m an economic liberal, optimistic about the ability of ordinary humans to improve their lot, given the right framework and a fair start.

But this is really annoying:

But also this year, in these difficult times, we’ve won the argument on the economy and debt

No you haven’t! You’ve been as wrong as you can be! Often macroeconomic policy involves making difficult nuanced decisions.  Last year was not one of those times.  And the Tories blew it.  It’s not just left-leaning types who believe that a disorderly attempt at closing the deficit would be dangerous: read The Economist, or the Financial Times

David Cameron, Tory leader, is on thin ice when he calls for action to reduce the deficit to start now, much sooner than Labour plans. He claims intellectual backing for the policy, but the overwhelming view of economists and international policymakers is that the stimulus is still needed because the recovery is fragile and monetary policy remains impaired.

Saying “we’ve been proven right” is downright dishonest: it relies on the fact that the vast majority of the public cannot be bothered to read the more nuanced accounts of the problem, be they from Dillow’s excellent analysis or the FT or even the Independent:

What happens if governments – in the middle of rising unemployment – panic about debt and stop stimulating the economy? We don’t need to speculate. During the 1930s, Franklin Roosevelt launched a huge stimulus funded by debt, and the economy began to recover. Then, in 1935 and 1936, he was besieged by people offering the Cameron argument: the recovery will be stronger if we cut the debt now. The result was that the depression came back with a nasty slap

To properly explain the Augustine dilemma we facerequires Judgment.  Which is what Osborne showed he did not have.

But the really irritating bit was about poverty:

Who made the poorest poorer? Who left youth unemployment higher? Who made inequality greater? No, not the wicked Tories. You, Labour: you’re the ones that did this to our society. So don’t you dare lecture us about poverty.

Excuse me? NOT the wicked Tories?   Look at the figures from the IFS:

IFSpoverty09

Inequality rocketed under the Conservatives (see figure 3.7 from that IFS document).   Then Labour tried to hold it at bay.   They introduced several expensive mechanisms to do this – notably tax credits.   Underlying inequality was still really racing ahead, thanks to the asset boom.  Inequality is a Conservative-born problem.  The structural changes they needed to bring to the UK brought deep problems – problems they failed to fix because their mental model for how the economy and society works was faulty.  Instead of spending surpluses on softening the impact of change, they frittered it on their core group.

7 Oct

Tory maths: not so much better than Labour maths after all?

Posted by freethinkingeconomist in Economics, News Summary, Politics. Tagged: , , , , , .

Maybe I went out with my views too early. Tory figures not adding up as much as I thought. I was willing to give high-ish marks to Osborne for austerity honesty – but a closer look at the figures and the accompanying spin call for a re-mark . . . How exactly can increasing the pension age from 65 to 66 do this (from the gullible Telegraph):

The shadow Chancellor believes he can save £13 billion a year by bringing forward the rise, with an extra £130 billion in total being raised by the move.

Steve Webb MP on his blog does the best job of tearing this to bits. The maths is really simple.  10 years’ worth of people retiring (400,000 per year) will forsake £5000 per year of basic state pension.  That is a total saving of £20bn.  Whatever heroic assumptions are meant to turn that into £130bn, I really don’t want to know: it would make me want to sell my gilts and run to the hills.

Bizarrely, one of the best articles about the way QE might be withdrawn is in the Asian Times.

Knowing the Bernanke Fed, it will doubtless do precisely the reverse of what this column recommends, beginning to withdraw liquidity vigorously at an early date, while keeping interest rates at their present abominably low levels for far too long. In that case, the Fed will deserve the hyperinflationary depression it will almost certainly get

This is related to the FSA’s liquidity rules that rather conveniently for the Government demand that banks hold  . . . lots of government IOU’s.  The Adam Smith blog (Butler) doesn’t like it.  Their view that the banks “have to spend £6bn to do this” is nonsense.  They get lower interest payments, yes. But they have lower risk.  Modigliani Miller theorem – it just makes them safer  . . . more boring . . . but not necessarily ‘costing’ more.

I’m not sure what to make of Dillow’s article arguing that Government Spending has saved Capitalism.  Is this not using accounting identities to prove causal relationships? Not my forte, but if G-T had been lower, could not the equation have balanced in all sorts of ways – different X-M, different O, and so on?  It saved all sorts of things – but not necessarily all profits.  In some set ups the profits might have held steady, the exports higher, for example (i’m not saying it would have – just the logic . . .)

Liberal Vision no doubt correctly complain about a President Blair. They forget a very important point: how incredibly annoying this would be for a. Gordon Brown and b. David Cameron.  Imagine the Blair motorcade coming down Downing Street . . . come on, it would be brilliant

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