At present I am in transit in Dubai waiting to fly home to Sydney after a week or more away in Central Asia. I am definitely being careful to avoid any public swearing, which means I am not reading any economics or business reports in public spaces. With the worry that I might swear out aloud and get stuck here, I judiciously completed all my reading in the privacy (assumed) of my hotel room at the airport. Lucky. Imagine what would have happened if I had been reading this article – David Cameron’s tonic to snap us out of recession – out on the concourse?
The facts behind the article is that the UK recorded its sixth successive quarter of negative GDP growth (the longest sequence in its available data history) and was a slap in the face to the business economists who were all saying last week that the recession in Britain was over. The poor result has allegedly given the conservatives a political filip although last week’s BBC program where the seriously lunatic BNP leader appeared seems to have given the latter the political boost for last week. I was going to write about the appearance of the BNP on the national television program but decided against it. My position is clear: the lunatic fringe do us a justice to appear on national media and face that level of scrutiny. I also do not believe in any form of censorship. As an aside, in terms of whether I like the BNPs political position or not is irrelevant to whether they should be heard. I would ban the conservatives too if repugnance was the criteria.
Anyway, the mainstream conservative reaction to last week’s national accounts disaster in the UK has been swift and predictable. A quick assessment is that they do not understand a single thing about the monetary system and are not qualified to lead that nation – not that I think Labour undertands anything much.
The article written by the Tory leader and Prime Ministerial aspirant David Cameron starts off reasonably:
Friday’s growth figures were deeply disappointing. A 0.4% fall in our national income may not sound much, but it adds up to £6 billion over a year. And its effects will be painfully felt in more bankruptcies, redundancies and repossessions. Gordon Brown, the man who said he had abolished boom and bust, has given us the deepest and longest recession since records began.
The economic interpretations are sound whereas the political statement in the last sentence is just that. An extended recession is incredibly costly and has a long tail – anaemic recoveries, lost productive capacity, and entrenched and debilitating long-term unemployment. The plight of 16-24 year olds in Britain is particularly accentuated – this will have negative implications for the next generation.
Cameron then claims that while “France, Germany and Japan started growing six months ago — and are getting stronger and stronger” the UK is being “badly left behind”. He atttributes this to:
… the economic mistakes of the past. For example, the government’s Vat cut added billions of pounds to what was one of the biggest budget deficits in the developed world, making the debt crisis even worse.
This is where he begins to reveal he has no idea of the role that a government plays in a modern monetary system. The British government budget deficits have risen in part because of the automatic stabilisers and in part due to discretionary policy decisions taken by the Government. The scale of the downturn in Britain has been so significant – in part, because of its larger exposure to the financial mayhem that generated the crisis – that the rise in deficit was inevitable and necessary. The discretionary additions to the deficit, while perhaps not to my taste (for example, I prefer direct public job sector to VAT cuts) demonstrated leadership rather than vandalism.
The fact that the British Government like most voluntarily choose to issue public debt – pound-for-pound – to match its net spending (deficit) is stupid and unneccessary but has no bearing on the failure of the economy to recover. The debt issuance is just draining the reserve adds generated by the deficits. So what? It is also adding an income stream to the holders of the debt and therefore providing a risk-free source of return to financial markets which have been reeling from poor (and corrupt) investments in an array of high risk (which they couldn’t price in anyway) derivative assets.
I would not issue debt at all but the fact that the Government is stupid and has chosen to do so is certainly not contributing to a “debt crisis” – see this blog for my views on debt issuance
The debt crisis that Britain faces remains in the private sector and results from years of neo-liberal inspired policies which failed to regulate the financial markets in any coherent and effective manner – all in the pursuit of the mantra that self-regulation was best. That is the legacy that British Labour should be judged. Like “Labour” parties around the World (definitely in Australia) – and I include the current US democratic party in this “team” – the British Labour party embraced neo-liberalism with panache – thinking it gave them economic credibility.
However, they were just seeking “validation” from the wrong assessors. The idea that the business community and its host of business economist mouthpieces – who are paraded out daily in the media telling us that deregulation, budget surpluses and all the rest of the poisonous suite – is in our best interests and constitutes the epitomy of fiscal excellence is the problem. Why we ever fell prey to that lobby is a question that needs to be researched further and a coherent answer provided.
So I would be attacking that failure in policy rather than the UK government’s current stimulus response if I was commenting on why the UK is in such bad shape. But then, of-course, the Tory’s would have been worse. Under Thatcher they set up the pre-conditions for the current demise of the economy.
Cameron then says:
The other reason Britain’s economy is still stuck in recession and falling behind those of other countries is that Labour has no serious plan for our economic future. The countries that are recovering strongly are all doing three things: getting their banks to supply credit to businesses; giving investors confidence; and implementing a proper plan for growth. In all these areas, the government is failing to act. It is astonishing to think that, 12 months after the bank rescue, lending to businesses is still falling. It is shocking that the government has still not come forward with a credible plan to get the deficit under control. If we fail to get a grip on public spending, investor confidence will fall, interest rates will rise and there will be fewer jobs. It is almost unbelievable that at a time when we face not just a debt crisis but a jobs crisis too, with unemployment heading for 3m, the government is planning to bring in an extra tax on jobs by raising National Insurance contributions.
The failure of the banks to lend at present is because there are not enough credit worthy customers willing to take a risk and invest. The response of the government via the Bank of England in this respect has been a farce. They thought that lending was reserve constrained – which is a reflection of their neo-liberal leanings and mindless devotion to textbook myths that have no application in the monetary system they oversee. So they embarked on a massive quantitative easing campaign and surprise surprise – not much happened. I explain why this comes as no surprise to a modern monetary theorist in this blog – Quantitative easing 101.
So in terms of monetary policy the British government failed to understand what the real problem was and is. Banks can always lend and do not require reserves to do so. That hasn’t been the problem. Adding reserves was never going to alter the fundamental lack of confidence in the outlook of the economy.
The cry for a credible plan to “get the deficit under control” is another neo-liberal ploy which is resonating all around the World. SBS radio (national Australian broadcaster) woke me up this morning in Dubai asking me for an interview for a program they are compiling on this issue. During the telephone interview, I told them that these cries represent a real danger to the recovery prospects for our economies. At present, with private saving rising (to repair balance sheets rendered precarious by the private debt binge), there is a need to support aggregate spending. When private spending begins to recover, the deficits will fall anyway via the rising tax revenue and declining welfare payments.
At that point, the governments will have to consider how much spending growth is required to match the real capacity of the economy and a vital signal will be the rate of labour underutilisation. While the conservatives are calling for cutbacks even while unemployment continues to rise, the prudent and responsible action will require governments to keep running deficits for the indefinite future (unless their countries experience large net export contributions).
The deficits are also putting downward pressure on interest rates contrary to what the Tory leader says. He is just mimicking the mainstream textbook nonsense about crowding out. In a modern monetary system, where savings are a function of income, the central bank sets the interest rate (and conditions the term structure), and inflation is not a foreseeable issue there is no application of that textbook reasoning.
Business confidence is about whether it can sell things into the product markets. It will begin investing when it thinks there are durable recovery prospects. The deficits are rquired to underwrite spending and stop if falling off a cliff.
Anyway, the Tory leader proposes a three-point plan which would be a disaster for the current British economy if implemented:
… we need change in the banking system. A lack of credit, coupled with big margins between the interest rates at which the banks can borrow and the rates at which they lend, is still sapping demand from our economy. Fixing this should be our priority. For nearly a year now we have been calling for a national loan guarantee scheme. This would underwrite lending from banks to businesses — guaranteeing billions of new loans and helping new enterprises to start and existing ones to survive.
The lack of credit is due to the lack of customers who are credit worthy. A national loan guarantee scheme might be useful but then you would also have to seriously alter the way banks have been operating. This blog indicates the scale of reform that is needed – . I doubt the conservatives would be smart enough to implement these reforms.
… we need change in public spending. Unlike Labour, we have acknowledged the scale of the debt crisis and been frank with the British people about the difficult choices we will have to make. That is why we have started to set out a plan for reducing public spending, including a one-year pay freeze for all but the 1m lowest-paid public sector workers, in order to help protect jobs.
As above. It would be a total disaster for the British economy to start reducing net public spending at this stage. A sustainable long-term growth path, given that Britain is not about to become a large net exporter will be for the private sector to wean themselves of the debt train which in turn will require national budget deficits indefinitely. Get used to it. Any attempts to push back to surpluses would be self-defeating and prolong the damage already evident in Britain.
A reasonable dialogue should, however, be focused on abandoning the voluntary policy to issue public debt to match public net spending. Then the “debt monkey” would disappear soon enough. Irrelevant as it is.
… we need change in our attitude to the economy. At our party conference, we announced our plan to get Britain working. It is the most radical departure in economic policy in this country for a generation — a plan to unleash investment and enterprise so we create more wealth and jobs … Getting Britain working is also about getting people ready for work. This is where some of our most radical reforms come in. We will bust open the state monopoly on education. That will increase competition, raise standards and make sure our children get the education they need to succeed. Our plans for technical schools in our 12 biggest cities and 100,000 new apprenticeships mean we will also develop the engineering and technological skills of the future. And we will radically reform the welfare system so the unemployed get the tailored support they need to get back into work.
Notice “getting people ready for work” not generating jobs is the policy mantra. Full employability rather than full employment. Churning unemployed people through relentless training programs divorced from a paid-work context has been the neo-liberal approach for years and intensified after the release of the 1994 OECD Jobs Study. It has been a failed strategy – and will continue to fail.
Further, a focus on welfare reform that he mentions is all geared to a construction that a person is unempoyed because they lack skills or have the wrong incentive structures (in part because of failed government policies). Mass unemployment arises from a lack of jobs. You can bully and train and starve the unemployed “until the cows come home” but if there are not enough jobs then this strategy will always fail. You might be interested in this blog – Training does not equal jobs! which considers these issues in more detail.
Anyway, I am glad I don’t live there given this lot is likely to win the next national election.
So with all that done, I can now safely poke my head out into public and head for my flight to Sydney via Bangkok – safe in the knowledge that I will avoid any spontaneous public swearing outbreaks in Dubai.
I will be back with a new blog on Tueday afternoon sometime. Probably late. Unless I run out of things to write about.