Friday, July 09, 2010

Another fine mess

There are some things that are predictable. There was little hope that I would look at the the new coalition's emergency budget with anything other than horror. Though I do have a range of critics to call on to support my view. Over in the New York Times Paul Krugman plugs away with increasing exasperation at the new economics of austerity. David Blanchflower launches continual attacks on what he calls, "This unnecessary and dangerous budget". Liberal Keynesians both. I suppose you would expect it from them too.

Now, in measured tones, doubts come from a more orthodox source:
Most advanced economies do not need to tighten before 2011, because tightening sooner could undermine the fledgling recovery, but they should not add further stimulus.
This from the IMF. Yes, Osborne and Alexander's critics now seem to include the IMF.

And as stories begin to crop up like this:
A school which burnt to the ground seven months ago, forcing its pupils to attend lessons in portakabins, was one of hundreds that heard this week that the government had called a halt to its rebuilding plans.
And this:
Millions of pounds intended to be saved by scrapping school building projects could be spent on legal fees as the government faces a spate of litigation from contractors and local authorities.
Not to mention this and this:
The government's new tax and spending watchdog needs urgent reform to establish its independence from George Osborne's Treasury, according to a report today by one of Britain's leading thinktanks.
There is a sense that perhaps all is not as well as might be with our new political partnership. I am beginning to wonder if this is how they got in.


Will said...

that Mooate malarkey is well mental.

Think of the bairns.

he has been nickking carrots from allotments. the allotment holders will not be happy. there will be hell to pay.

I hear (according to BBC News 24) that moaTe has been breeding homing Seagulls trained to hunt doon chips for him to gan with his carrotts.

Chips and carrots. A healthy well balanced meal.

DorsetDipper said...

well if the government borrowing lots of money and spending it is such a good idea, why not just give all the unemployed completely pointless jobs and pay them £50,000 a year?

And if that would work, how come we are in this mess now?

The Plump said...

DD. Even without questioning the prevailing economic model:

1. William Keegan here on the "mess" we are in:

... the latest budget red book puts UK debt at 61.9% of gross domestic product in 2010/11 (against 177% in 1932) and debt interest at 6.3% of total public expenditure in 2010/11 (against 40% in 1932).

And the invaluable annual report of the Bank for International Settlements (the "central bankers' bank", based in Basle) contains some impressive charts and tables that suggest our new prime minister and chancellor, along with their Lib Dem collaborators, should be prosecuted under the Trade Descriptions Act for distorting the scale of our fiscal problems.

I give you chapter and verse: on page 68 (Part V) you will find that Britain is top of the league when it comes to the length of time before its debt has to be refinanced. The "average maturity" of the UK's debt is 14 years; by comparison, other leading industrial countries, including the US and Germany, have maturities of under 9 years. This is not to say there is anything wrong with the US or German position – few can gainsay the fiscal rectitude of the Germans; and the US, whatever its fiscal problems, remains the pre-eminent reserve currency. But it shows how hysterical the debate in Britain has become.

Public finances are not strong, but are where you would expect them to be after concerted action to avoid a depression and to recapitalise a collapsed banking system.

2. The crash was not caused by public spending (despite ingenious attempts to try and say it was), but by private sector speculative failures.

3. What the IMF (oh, and the CBI, OECD, and rucks of others) are concerned about is that the removal of huge sums from the economy now would push Britain back into recession, and possibly even precipitate a depression. If that happens, lower tax revenues and higher social spending would mean that the cuts would actually increase indebtedness. The IMF should know because this is precisely what structural adjustment programmes did to highly indebted nations in the 80's. There is hard empirical evidence to back this up.

4. So, mistaking the side-effects of the treatment for the disease, the government are going to end treatment before the disease is cured. The price will be paid by people losing their jobs and thousands of, otherwise perfectly viable, SMEs that will go bust; firms that could have spearheaded a revival of British industry. These are real people and companies in the real economy. The damage done to public services will be just as real. This is why this utterly reckless and completely unnecessary emergency budget makes me so bloody angry.

The Plump said...
This comment has been removed by the author.
DorsetDipper said...

We aren’t going to agree, so I just thought I’d give as clear an explanation as I can why I think its right to cut spending, and it’s a mixture of economics and politics.

Firstly, lets start at a budget in the early 2000’s. Labour has just been re-elected, and Gordon Brown announces that thanks to his brilliance the economy is now growing at a trend rate of 3%. This means he has much more tax revenue to spend, so he’s going to spend it over the life time of this parliament. I stroll over to our economist and say I think it sounds to me like he has committed the government to an unsustainable consumer boom, and ask how much of the additional growth does the economist think is due to consumer borrowing? He answers “about 150%”. Very smart man, that economist.

So I don’t agree that the credit crunch was due to “speculation”. It was due to a massive bout of lending.

In some ways the government is not to blame, as the cause of the lending was the massive trade imbalance with China, which was due to the exchange rate being too low. This is the only major exchange rate set by governments and not markets, all the other rates are set by the market, ie “speculators”, so in some ways the cause of the credit crunch was not speculation but the absence of speculation.

Nevertheless, the government oversaw a huge increase in bank lending and allowed this because it enabled Gordon Brown to pretend he was some kind of economic genius. This is the heart of the tragedy of Gordon Brown. His vision of socialism is not one where workers have thrown off their chains and enjoy increased liberty and control over their lives, instead it is one where the state controls every aspect of workers’ lives. A group of brilliant people (ie him and his mates) issue edicts on how things should be done which are translated into targets, and then managed by appointing lots of inspectors, like the one who appears regularly at the end of my road to check the traffic warden is doing her job. Every social interaction is intermediated through agents of the state. No-one is to be trusted to act independently, because they might be Bad People. This legacy, that Labour is all about centrally controlled statism, is one that may well destroy the Labour Party as a meaningful political force.

Back to the crisis. So governments should borrow and print money to sustain expenditure. Well that will pull Germany and China out of a crisis, but its not obvious to me how paying people to buy foreign-made goods does anything for our economy. Furthermore, to quote an FT journalist, “the point about Keynsianism is that you should save during a boom, and then borrow in a recession. You can’t suddenly get onto a recession and decide to become a Keyensian.”

Finally, as I think you’ve said previously, these cuts are political. What the coalition are doing is getting rid of as much of the Brown statist infrastructure as they can – hence the 40% cuts request. Then they will be free to increase spending how they want in a way that coincides with their vision not Brown’s. There will be increased unemployment, but this is what the country voted for – there was a rejection of Labour’s army of pointless bureaucrats, so the country would like to see them lose their jobs. At this point, either the private sector will pick up the surplus (there is some evidence from Wales that the private sector has been unable to compete with the government for workers), or if it doesn’t then the coalition will increase spending but in its own way and not by employing Brown’s bureaucrats. But my prediction is that any second dip will be mild.

Will said...

henRy PortEr for PM!!!%^%^$$#%#%

BorsettShiTteR for deoputy!@$#@#$%#$%$^$%^&%

You are wasting your time arguing with the stupid cunT peteR

Anton Deque said...

Peter. Thank you for your comments to DD. The additional information is superb and supports what I have been able to discover from Klugman in particular. The 'Do nothing' approach to the banking fiasco recommended by some berserk Scot on Newsnight a month ago would have produced a Depression so violent it must have had extreme social consequences: People who see their own children suffering will support anything, not excluding fascists. Brown and especially Darling deserve praise for that. The breezy tone ("stroll") of DD on the other hand exposes a serious lack of credibility.

"In some ways the {Labour?] government is not to blame." In the only important way.

We about to see the re-enactment of an old, old, story – "It's the rich what gets the pleasure and the poor what gets the blame".