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Stephanie Flanders | 13:15 UK time, Monday, 15 February 2010

How many economists does it take to write a letter? Yesterday, the answer was 20. But students of British economic history will remember that in the spring of 1981, the answer was 364.

Geoffrey HoweBack then, the economy was emerging from a double-dip recession, but the recovery was far from secure. When Geoffrey Howe decided to raise taxes by £4bn to restore Britain's credibility in the financial markets, the entire economics profession was up in arms.

In a letter to The Times, 364 of them - including the future governor of the Bank of England, Mervyn King, and the Labour peer, Maurice Peston - said that Howe's policy had "no basis in economic theory or supporting evidence", and that Britain's "social and political stability" was at risk if the government did not change course.

Nearly 30 years on, we now have 20 economists writing to the Sunday Times taking exactly the opposite view: deriding the government for not tightening fiscal policy fast enough. The list is shorter, but high-quality: this time, it's a former Deputy Governor of the Bank of England, Howard Davies, and the Labour peer is Lord Desai.

The Conservatives were cock-a-hoop yesterday, heralding the letter as an "important political moment". Perhaps they've forgotten how that 1981 letter worked out.

Watch my report on the 1981 BudgetAs I described in a film for Newsnight in honour of the 25th anniversary of the 1981 Budget, history was not kind to the 364. In fact, the economy started growing strongly, almost as soon as Howe's Budget was delivered. In retrospect, the tax rise looked well-timed.

Will today's letter-writers fare better? The answer is almost certainly yes, because, this time, the economists have been careful to hedge their bets.

The main thrust of their argument is that the UK needs to cut its structural budget deficit more quickly than the chancellor has suggested. On this they are in agreement with the IMF, the OECD and all the ratings agencies. Presumably, the chancellor disagrees. But the majority of economists would probably say that borrowing needs to come down more quickly, including many inside HM Treasury.

In calling for the elimination of the structural current budget deficit over the course of the parliament, the economists appear to be endorsing Conservative policy. But note that this is not the same as eliminating the structural deficit entirely. And note, also, that the difference between this and Labour policy is not as great as you might think. According to the IFS, it would mean about £15bn in additional spending restraint or higher taxes - a little more than 1% of GDP. (See my post on the Green Budget.)

They - the economists and the Conservatives - are equally cagey about 2010-11. Yes, "other things equal", they would want efforts to cut borrowing to begin this year. But the timing should be "sensitive" to the state of the global recovery. And, of course, the government is already starting to tighten this year, by removing the fiscal stimulus and putting VAT back up.

It's nice to see that letter-writing by economists is back in vogue. But I'm not sure it will change the political weather in 2010, any more than it did in 1981.

Comments

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  • Comment number 1.

    Tomorrow the latest monthly inflation figure is out. I think a figure close to 4% RPI will change the political weather more than a letter from economists.

    The nation must live within its means to avoid disaster. Inflating away debt simply means attempting to rob your crediters. Following this the poor are always the next in line to be punished.

  • Comment number 2.

    Well I am surprised that Economists are able to WRITE.

    HURRAH FOR ECONOMISTS AND THEIR ACHIEVEMENT!

    The only problem with modern Economics is that all their theories and models (which attempt to negate the truth) are based on perfect environments as it's 'too hard' for Economists to understand imperfect models - which is exactly why they never see the irrational panics we see so often. Even the exponents of free markets cannot explain how 'all things balance out over the course of a cycle' - do you mean like they are now? - balanced? - looks more like tipping over to me....

    I have a suggestion to 'cut the borrowing' - how about we strong arm all Economists into doing something useful rather than sitting and pontificating about perfect worlds and getting paid vast sums by the Government to do so.

    I've noticed that all the collective scum are now rounding and pointing at the public sector to "take it's pain" - but I seem to recall that this calamity was born in the "natural behaviour" of ther banking system to chase diminishing profit - have we all forgotten that already?? Is Britain colectively now that stupid???

    Oh the private sector is truly an arrogant beast if they think the public sector workers are going to take their pain while they get on with 'making profits' again.

    We'll see how much profit the banks can make when there is no working infastructure in this country. Lets see how they 'magic up' some bonuses then.

  • Comment number 3.

    #1 Jeremy Silverstone,

    "The nation must live within its means to avoid disaster."

    This country has not "lived within its means" for over a century and more. It has laways lived on the prospect of future 'means'.

    Now creditors are not normally silly people and have calculated the risk of lending and expressed it in the interest rate. Part of that risk is that, over the term, the nominal return could be erroded by inflation, therefore a portion of the interest rate must be dedicated to off-setting this risk. It is not a question of simply "robbing your creditors".

  • Comment number 4.

    It would be useful if these economists (which I imagine are at least to some extent supported by taxpayers money) could present a full balance sheet of the UK fiscal position instead of just lecturing us and the government.

    As far as I am aware much of the deficit is for cash to fill the depleted coffers due to governments necessarily investing in banks and paying depositors for failed banks. Much of this is an asset on an unmentioned balance sheet (correct me if I am wrong by showing a balance sheet). In addition, Stephanies point that average maturity of debt is ~15 years means that this year UK govt goes to gilt market for less than German govt. This is interesting and also ignored in the delinquent press.

    Please could these economists do an academic job by educating us with the full picture in a balance sheet (in understandable concise form) rather than just stating opinions.

    Thanks

    mereEngineer

  • Comment number 5.

    Economics!

    Is there any other profession where you get to be wrong most of the time and still be considered an expert?

  • Comment number 6.

    If you are assigning credability to economists can you explain why they failed to forsee the almost complete collapse in the financial world ?

  • Comment number 7.

    4. At 2:08pm on 15 Feb 2010, mereengineer

    I completely agree - these Economists are all about the solutions, but as yet they have no hard and real evidence of the 'problems'.

    They are also falling into a contradiction, for they promote fiscal tightening as the solution for the public sector - and yet they must know that consumption is the biggest driver in the Economy (and if not ours, then the world's).

    Now to re-instate previous consumption levels - what do they propose? Borrowing more perhaps? I mean apparently the problem is the lack of lending in the market caused by the credit liquidity crisis.

    So the public purse needs to tighten whilst the consumer needs to borrow more in order to sustain recovery.

    That way the Government will avoid being enslaved by the bond holders and the consumer can clap themselves in irons as a sacrifice to the 'Credit lords'.

    It is not what your country can borrow for you, but what you can borrow for your country.

  • Comment number 8.

    Post 5.

    How about bankers and politicians?

  • Comment number 9.

    5. At 2:25pm on 15 Feb 2010, newblogger wrote:
    Economics!

    'Is there any other profession where you get to be wrong most of the time and still be considered an expert?'


    I don't know, but it certainly made me laugh.


  • Comment number 10.

    all those that say economics is all about irrelevant models that are based on perfect environments don't know what they're talking about.

    i am an economist and base judgement and analysis on pragmatic opinion and relevant statistical metrix rather than stuffy models.

  • Comment number 11.

    Less spending and more revenue..to balance budget....My these folks are smart. The stimulus, not the one for the banks but the other one, was an afterthought to maintain the governments and their employees with a little left over to produce jobs. History will wonder why the banks were never held accountable......atleast under Chiang Kai Shek they were all related....The false economy of the global economy continues to influence the governments from taking actions that are best for their own nations. The conservatives bemoan the loss of industry but provide incentives for companies to produce in other lands and the liberals fail to understand the difference between spending money and getting things done. The fact that there are economists, brings into question the progress of governmental decision-making from soothsayers.

  • Comment number 12.

    Stephanie, you suggest the Conservatives may have forgotten how the 1981 letter turned out.

    Surely the whole point is that they HAVEN'T forgotten how it turned out.

    Unlike Labour and Lib Dems the Conservatives recognise that the argument that cutting the deficit early leads to depression is nonsense, just as it was back in 1981.

  • Comment number 13.

    Deficit/borrowing is a matter of concern and living within our means should be a longterm objective. However, on the shorter term dramatic cuts in spending/tax rise may effectively mean further job losses and reduced disposal income which would inevitably have a negative impact on spending and hence recovery that, in terms of recent growth figures of 0.1% despite quantitative easing and artificially low interest reates, raises further fears of a double dip recession. Am for one unable to convince myself that measures such as quantative easing/artificially low interest rates are useful on the long term. This is all borrowing in one form or another. I think we need to encourage saving and investment and interest rates need to be realistic to avoid skewed growth data/control inflammation which in the housing market is now running at over 10%. What I fail to understand is in the absence of sound economic fundamentals and concerns about double dip recession how state owned banks are agreeing to lend people to buying clearly over-valued houses or otherwise why are they directly or indirectly encouraging such an inflation in house prices?

  • Comment number 14.

    In reference to the recommendations aimed at addressing UK budgetary structural imbalances made this cabal of elderly scribes: one thing we can be sure of, is that economists, like their peers in the City, will never be punished for their theoretical errors and damaging policy outcomes . And, indeed, they stand to be well insulated and protected from the vagaries of market upheaval and fiscal tightening for which their mis-beggoten ideas are frequently responsible (remember the Medium Term Financial Strategy of the 1980s or the Efficient Market Hypothesis, of the more recent past?).

    The fact is that the majority of the aforementioned Sunday Times signatories hold secure well superannuated academic posts (for life). By way of contrast others in their universities are less well cosseted against the chill winds of unemployment. From cleaners to administrators, along with of course, some junior academics - up coming job prospects look a tad more than grim as a result of impending public sector cuts.

    So, while we know that economists are not accountable for their frquently erroneous normative assumptions, we the citizenry,can, nevertheless, still exercise our right to judge them. In so doing, harshly condemning them for their persistent and arrant hypocrisy!



  • Comment number 15.

    If I recall rightly back in 1981 the remark was that if you laid down all the economists in the world in a row from head to toe then you would still never reach a conclusion. There was much merriment at the time and perhaps this will be repeated.

    However, what is to be done about the structural deficit facing not just the public sector alone but the entire economy? We need to get away from the false dichotomy of public verses private sector. My preference is to use the terms Big Government and Big Business who are not separate but cooperate happily together to ensure that the little people are shut out of the process, the decisions and the prospect of a decent income.

    The issue facing this country is that insufficient value is being created to provide the needful by which we can manage our society in the way we choose. The model still being pursued by the current government is that by pumping up an asset bubble the government will derive sufficient income from the financial services industry to survive for another ill-defined period. Sadly, this is not a solution to our predicament.

    Neither is a slash and burn policy directed at the public sector. It is understood that the government's financial position is unsustainable and that this needs to be adjusted. So a policy must be adopted that divides necessary public spending from the unnecessary. I would approach this issue using the definition as to what-is-needed as opposed to what-is-nice to have. Obviously you cut into the nice-to-have category.

    Yet cutting public spending cannot be conducted in a vaccuum. At the same time priorities within the economy must be redirected into developing more value-adding activity from which wages can be drawn by the otherwise unemployed and taxes can be derived to sustain the remaining parts of the public sector.

    In other words cuts are not enough: we need an economic strategy that mobilises the creative skills of the entire population. This is what we have to do; I appreciate it will take time but this is the only route out of this shambles.

    My perception is that there are people in both government and opposition who also see the matter in this light. However, all of us are struggling to be heard under the cacophony of political opportunism, backbiting, grand-standing and institutionalised negativity.

    Add into this the prevailing dishonesty of the government which has already implemented cuts by stealth and the vagueness of the opposition as to whether cuts are going to be selective, stringent or strategic and we have a great deal of uncertainty. This is what I think these economists are driving at: a cut in public spending is necessary so let's be honest about it, let's address the issue because if we don't the problem will become critically dangerous for the entire economy as the financial speculators we subsidise step in to ruin us even more than we are already.

    The uncertainty needs to be ended. The government should come clean about the prevailing cuts it has already initiated and set out a plan as to how further cuts can be made without jeopardising value-adding jobs in the public sector. In my view if left to himself the Chancellor will perform this task satifactorily. His problem is that to a certain degree he is a prisoner of opinions other than his own.

    The problem is a political one and can only be resolved by a change at the top. Given that the Parliamentary Labour Party are incapable of achieving that necessary change then the matter must be left to the electorate. This will probably mean a Tory government, but before everyone starts screaming about cuts, Osbourne, Thatcher and what happened in 1985 I woud draw your collective attention to the fact that the Shire Tories run most of the local government in England. They do not like cuts to their little empires so they will be keen to protect public services as well.

    I have articulated over the past year the way Labour could survive through a Government of National Unity. They have failed to grasp that opportunity and so we have to consider other options. A goverment of national unity could be the consequence of a hung parliament so we should remain positive and hopeful.

    The truth is that someone, anyone has to get a grip; put a workable strategy in place to add value into our economy and let us go and get it working. It is the only solution!

  • Comment number 16.

    Stephanie,

    What makes Darling an economics expert?

    (Just looked at wiki on him.)

    Takes me back to my post @ 5.

    Are economic predictions so easy anyone can have a go?

    Or are they impossible, thus anyone is allowed a go?

    As an engineer, I wish I had so much margin for error.

  • Comment number 17.

    5. # Economics!

    Is there any other profession where you get to be wrong most of the time and still be considered an expert?

    Yes, weather forcasting.

  • Comment number 18.

    10. At 2:46pm on 15 Feb 2010, james1981 wrote:

    "all those that say economics is all about irrelevant models that are based on perfect environments don't know what they're talking about.

    i am an economist and base judgement and analysis on pragmatic opinion and relevant statistical metrix rather than stuffy models."

    Ah the old "you don't know what you're talking about" line from an Economist (oh the irony)

    ...and what do you do fill your statistical matrix with? Perhaps instances of past occurences? You are relying on past performance being an indicator of future performance (and everyone knows that's a no, no)

    We can all "foretell the past" - it's the future which is the problem.

    So in your 'pragmatic opinion' - how long before social defiance overtakes fiscal punishment?

    As an Economist can you explain why CDS's are based on the belief that the 'historical rate of default for investment grade companies 0.2% - and that this is an oversight by bankers not understanding insurance.

    I presume you have written to the Government and informed them of this disaster of mathematics which we're all sitting on?

    CDS's are a classic example of making the 'behaviour fit the model'. Sure, if the whole thing goes belly up simultaneously all the CDS's will cancel each other out - in a perfect world - but this world is anything but perfect.
    Insurance sold without actuary input and without having any requirement for capital (or the underlying) and the ability to speculate on the downfall of credit (i.e. betting that Greece WILL fail is a sure way of ensuring it DOES FAIL - because markets will follow the rising CDS price and it snowballs into higher and higher debt costs for Greece)......

    ....does that all fit into the matrix? - when has such an occurence happened in the past to which you can refer?

  • Comment number 19.


    'Is there any other profession where you get to be wrong most of the time and still be considered an expert?'

    Weather forecaster?

  • Comment number 20.

    No 4 Mere Engineer wrote

    "As far as I am aware much of the deficit is for cash to fill the depleted coffers due to governments necessarily investing in banks and paying depositors for failed banks".

    Oh that this was the case.

    Monies that have been paid to bail out the bank do not contribute towards the defecit.

    Monies used to bail out the banks are reflected in our balance sheet as both an asset on the one hand (ie an investment in the banks) and a liability on the other (reflecting the money we borrowed to invest in the banks)

    The defecit on the other hand is the difference each year between what the government receives in taxes currently 450bn and what it spends currently 630bn hence a deficit of 180bn.

    The government has to borrow 180bn each year in order to pay its bills. 180bn this year 180bn next year and so on until the government do something in order to bring taxes and payments closer together.

    Can you see the problem. 1 percentage point on income tax will raise 5bn.

    Only a small percentage of our population has any comprehension of the trobles ahead.

    The government got into this position because during the boom tax revenues were grossly inlflated. Mr Brown took the opportunity to increase government spending by even more than the taxes.

    Now that the the bubble has burst we still have the government spending but we no longer have the inflated tax revenue.

  • Comment number 21.

    Economists?

    Many of these people were directly responsible for failing to manage the economy in the last decade and they are the ones whose, frankly duff, education and understanding gave us huge and sustainable asset bubbles. The implosion of these bubble destroyed major British banks and created the unmanageable debt mountain. To be every taken seriously again these people must first admit their manifest failings and beg our forgiveness. They are the same idiots that said when along with the idea of affordability as a way of assessing loan to wage levels - this was and remains insane - they are the ones that have destroyed the economy.

    However - the debt must be reduced - first, I suggest by ceasing to pay any of these people for anything ever again. (And the vast majority of so called economists - we will not forget or forgive your stupidity. We invested heavily in your training and you knew what you should have done but did not do it now you must pay the price.)

    The sums are daunting, but we must I believe be fair in distributing the burden which will be imposed on us all. First the banker and those who profited from the insane economics - 95% tax, seems just, on pay and wealth. Then the overpaid (over £250,000 a year) 75% tax and 50% of wealth. Then the rest of us 35% income tax. (I don't much like putting up VAT but I suppose it will have to go up to 20%.) Further we also need to work towards a fairer society and we should seriously consider a National Maximum Wage. The huge size of the sums means that steady as you go with a little tinkering is not going to work - we do I am afraid need a revolutionary change. We will also need to put interest rates up to 5 percent asap to re-establish rational economics.

  • Comment number 22.

    How is Britain going to live within its means ?

    We manufacture an ever decreasing amount, we are no longer self sufficient in fuel, we can't feed ourselves, and our biggest form of income, financial services is in a huge mess. Nearly all our companies and even infrastructure are foreign owned as we have already sold off the family silver. Our currency has been devalued again.

    When was the last time we lived within our means for any sustained period ? Is the harsh truth not that we have to accept a considerably lower standard of living. Other than borrowing against the artificially inflated value of our houses, I honestly do not see what has sustained us for the last 10 years.

    The alternative is that we invent and manufacture things, become more competative and sell our services, or strike gold or oil and become a net exporter, but I don't think it's going to happen any time soon or ever in the case of the latter two. We have more chance of winning Euro millions every month.

  • Comment number 23.

    Don't these economists know there's an election coming up!? If they want belt-tightening then they will just have to wait until after the election for it! :)

  • Comment number 24.

    17. At 3:24pm on 15 Feb 2010, Jeremy Silverstone wrote:
    5. # Economics!

    Is there any other profession where you get to be wrong most of the time and still be considered an expert?

    'Yes, weather forcasting'

    How about Global Warming



  • Comment number 25.

    I studied Economics for 7 years at university (degree and Masters), this culminated in my final paper entitled "Why bigger isn't always better in banking". This was in 2007.

    The one certainty that I was able to take from my time studying Economics was that it is one of the most detached subjects from reality that I have ever studied. Everything is theoretical. In theory Economic theory can be used to manage the economy in the most efficient and beneficial way. In reality it never does as pointed out by 'writingsonthewall'.

    Take an economic solution problem, as 20 different economists for their varying opinions, change the recommendation to meet the latest political moves, finally, run it through the real world with all the unknowns that go with it and you have something that is SO far detached from the real world that it is unrecognisable.

  • Comment number 26.

    John_from_hendon #21 wrote

    'Economists?

    Many of these people were directly responsible for failing to manage the economy in the last decade'

    Er, no. I think you'll find it was Gordon Brown and New Labour who were responsible for mis-managing the economy over the last 10 years.

  • Comment number 27.

    @15 Stanilic
    Well said that man - the next election should be one of pragmatism, transparency and us all facing the consequences. I am not expecting Cameron & co to be any better than the current lot. With Osborne's retreat a couple of weeks ago I surmised that we face at least another 12 months before anyone "gets a grip" and some of us can start to plan our lives. How can growth generating economic investment take place (never mind these volatile global economic conditions) if our government are not absolutely clear about policy to remove the deficit. If we are realistic it's going to be a bit "carrot and stick", mainly "stick" I expect. Will anyone raise me the cancelling of Crossrail?

  • Comment number 28.

    I agree with WOTW, it happens so rarely - must be because of Valentines day yesterday.

    However, he is right about economics, the perfect market does not exist - all economics is at best an approximation to reality and at worst told fantasy.

    These means that economists cannot really say whether cutting expenditure now is good or bad.

    Simply fact is that as a country we have lived beyond our means to pay for some time now. The public sector has expanded and eaten into the resources of the private sector which is the only sector which can actually create wealth. I do not believe we can realistically increase taxes - as a country we already take too much in tax. There may be scope for increasing VAT to 20% on a wider range of goods but income tax (plus NI which is the same thing) and corporation tax are already much too high. That only leaves serious public sector spending cuts as the way forward. You can have a perfectly reasonable debate about timing of cuts but no matter what over the next 5 years or so the public sector needs an axe taken to it.

    The problem with politicians is that their definition of cuts is not the same as mine. If we spend £100 bn this year and £95 bn next year then that is a cut. But to a politician spending £100 bn this year and £103bn next year is still a cut if the intended spending was £106bn. This is nonsense. When I talk about cut I mean that if as a country the public sector spent £600bn last year in 5 years time the spending should only be £500 bn (adjusted for inflation only).

    Politicians next trick is to claim they have instigated £10bn of cuts over the next 5 years. What they actually mean is that the cut £2bn of spending projections in year 1 and then said as they have made that saving in each of the next 5 years that counts as £10bn of savings. Nonsense, they made £2bn of savings only.

    The reason I mention these tricks is that we have politicians waving "cut" numbers around pre-election. They are abusing the statistics. Lets have a grown up debate about making real cuts not "effeciency savings" (I love this term - does that mean for the last 5 years everyone in the public sector was ineffecient)

  • Comment number 29.

    Oh the joys of market efficiency.....

    First the market 'is stunned' by the standstill on Dubai world debt, Dubai CDS spreads widen to over 600bps.

    Then the neighbour (Abu Dhabi) 'assures' the markets with a $10 million stopper and indicates 'it might bail Dubai out'

    The Dubai CDS spread narrows again...

    Then the market finally spots Greece's fiscal worries - and the CDS spread widens for Greek debt.

    The EU meet and 'talk of a bailout' - without actually committing to anything - and the spreads narrow as a result.

    ....now the market has remembered the Dubai situation and noticed that there was no solid resolution to the standstill - and the spreads widen to where they were in November 2009.

    Isn't it efficient how the market is able to 'predict' the likelihood of default so accurately - even if it does look like jumping from one panic station to the next - and back again (to the untrained eye of course)

    ...and the journalists lap it up, believing in the absolute mastery of the market never once questioning the logic of it all.

    http://blogs.wsj.com/deals/2010/02/12/while-greek-cds-spreads-tighten-dubais-jump/

    If Dubai doesn't default by April then it will be back to Greece as they have a large issuance to get out around then.

    These markets must be run by absolute geniuses - or complete imbeciles.

    You cannot judge talent and ability by the pay packet I'm afraid.

  • Comment number 30.

    It has been said that there are two kinds of economists. Those who don't know and those who don't know that they don't know

  • Comment number 31.

    These blogs are interesting because even though most of us are not professional economists, it's a subject that is largely based on common sense, so we all feel able to chip in with our two pennies worth.

    The only problem with debt is your future ability to pay it off. I don't think any of us would be concerned about our high UK deficit if we knew a load of newly discovered oil/gas energy sources were coming online that would magic money from the ground in the future. Unfortunately those days have passed, and the opposite is true... yet another easy revenue stream is running out, and rapidly.

    Even with my limited level of economics knowledge I know that our economy needs to grow at a significant level just to maintain the status quo, that's part of the problem of having to pay back interest. But so many foundations for that growth just don't exist, and its exasperating being able to see the future ramifications so clearly, yet not able to do anything about it.

    Where are the major actions from both sides of the political debate that show how we will regenerate the West Midlands, the North East... well, everywhere apart from the South East? If we knew all the borrowing going on was going to up with this type of regeneration over the next couple of years we would have hope. But we seem to be deeply in debt just going backwards.


  • Comment number 32.

    i am an economist and base judgement and analysis on pragmatic opinion and relevant statistical metrix rather than stuffy models.Post 10

    Good for you mate, but I haven't got a clue what you are talking about. Pragmatic opinion sounds rather like a contradiction in terms to me. Stuffy models sounds like something to do with fashion or maybe taxidermy, and I'm not sure there is such a thing as a statistical metrix. Still we can all rest easy tonight reassured about you and your peer's competence.

  • Comment number 33.

    Pain, pain and more pain. That's the next 3 to 10 years. We'd better get used to it. I keep reading about inflation, but I and everyone I know are trading at prices they were using 7 to 12 years ago. All my friends are having hell buying and selling property. On top of that I read that certain banks think they can pay themselves bonuses AND whilst paying zero interest on their discount money, pay me no interest on my savings, keep my mortgage rates at only a bit below where they were 3 years ago, and try and lend to me at 6,7 or 8% and tell me I'm getting a deal ?!!

    And now I here tax is going up, and interest rates are going up soon....

    Anyone want to go on the streets about this ? I'll join you!



  • Comment number 34.



    20 women from Islington write letter offering views on economy and budget.

  • Comment number 35.

    17. At 3:24pm on 15 Feb 2010, Jeremy Silverstone wrote:
    5. # Economics!

    Is there any other profession where you get to be wrong most of the time and still be considered an expert?

    'Yes, weather forcasting'

    How about Global Warming

    Exactly. Based on a theory using a model full of assumptions and dodgy data. Planet 4.6 billion years old with 200 years worth of recorded weather. Same principle as economists that brought us models telling us how risk had been removed using CDOs and other economists awarded nobel prizes for LTCM. So much hubris - so much certainty -

    Now we have long term weather predictions for the next 100 years when its hard to say for sure if it will snow tomorrow or not. In 5 years time many of the doom and gloom end of the world global warming conformists will no doubt be claiming they knew all along it was not for real.


  • Comment number 36.

    John_from_hendon @21

    Re: economists, bankers and need for change I totally agree.

    The problem with income tax as it is currently structured is that it acts as a disincentive to useful, productive, wealth creating work (no, I don't mean the activities of financial speculators) and the burden often falls excessively on the hardest working.

    If we need a revolutionary change in taxation then why not shift the burden away from the fruits of socially useful work and onto land ownership, resource use and financial speculation?

    Why we are at it, how about legalising and taxing prostitution and drug use? This should generate a reasonable contribution to tax revenue with the added benefit of reduced public spending on pointless policing and enforcement


  • Comment number 37.

    #2 WoW
    Well said, and I for one would like to see them taking the brunt of this...for once making a loss. That money should come out of their pockets....and don't get me started on the 10,000 £1m bonunses!

    One problem is still that a lot of the profits they make are from investments in international organisations. Our infrastructure means not much to these guys, only our consumers!
    They take for granted the bins getting emptied and the lights staying on.

    #10 j1981
    Dear lord, is this the type who is gambling my pension....he doesn't even understand his own game! He's just going by what his mates tell him. But more worrying is the other point.....

    You surely use these statistics to assume things about the world, maybe not applying stuffy models, instead it sounds like ones you just invent yourself or only exist in your heead or just guesswork?!......in my game we call ssumption the mother of all muck ups!

    We also use a thing called PID control for all our control loops. It's based on real maths! Whether it be temperature, flow or pressure we use it to control the input to reach a desired output. I think I may try to figure out how this could be applied to the problem of working out how much money to inject into our economy or setting of taxes. At the mo it seems out government/BoE just guess which as an engineer both makes me laugh and SCARES me!

  • Comment number 38.

    #21 JFH,

    "The sums are daunting, but we must I believe be fair in distributing the burden which will be imposed on us all. First the banker and those who profited from the insane economics - 95% tax, seems just, on pay and wealth. Then the overpaid (over £250,000 a year) 75% tax and 50% of wealth. Then the rest of us 35% income tax. (I don't much like putting up VAT but I suppose it will have to go up to 20%.)"

    Now I was going with you for a while there! Then we came to "the rest of us 35% income tax" So, with the average income of £25,000 per year and a present tax rate of 20% at that level how can you suggest that your proposal was fair? It may make mathematical sense but is very very far from being equitable. On the basis of a mean of say £26,500 then a rate of 20% up to £100,000 followed by 40% £100,000 to £175,000 and 50% on £175,000 - £250,000. If you do follow your proposal through then a VAT increase to 20% on top of a 15% Income Tax increase would be slightly more than inequitable.

    try again John!

  • Comment number 39.

    I agree with most of Stephanie`s comments and would add the more important
    aspect of Perception by our trading partners,investors and foreign bankers.Britain was the first of the Developed countries to crash into re-
    cession with the collapse of Northern Rock and the huge build up of our Budget Deficits since 2006 by the Government. The collapse in the International value of the Pound followed when interest rates swiftly fell!
    There has to be a view of Britain abroad that it is responsible enough to tighten the belt slowly and start to rein in the debt whilst interest rates are still low,as well as more control on the Banks to curtail risky ventures. We already see a potential problem with fellow EU
    countries when the Euro starts it`s drop & interest rates rise there as well ??
    Cameron is right to show willingness to reduce the deficit and get
    more foreign confidence in our economic planning.

  • Comment number 40.

    #26. jobsagoodin wrote:

    "Many of these people were directly responsible for failing to manage the economy in the last decade'

    Er, no. I think you'll find it was Gordon Brown and New Labour who were responsible for mis-managing the economy over the last 10 years."

    I disagree on many grounds. The politicians provide a temporary government - the civil service (including the regulators) are in-power for decades. These are the trained experts - and we have every right to expect that they are indeed trained experts and further there is ample evidence that they are indeed trained experts. Thus these men knew that they were not doing the right thing. (And I have written evidence that they knew this.)

    They knew from their education that ignoring asset inflation was wrong and would inevitably lead to hugely damaging inflationary bubbles in assets, and because of the structure of the banking system this had to lead directly to a major catastrophic crash - and what is more even if they did not know this themselves due to their poor economic education at Harvard and Balliol many economists warned them in writing that this was inevitable over the last decade or more. (I possess two such exchanges of letters with both the late Eddie George and Mervyn King.)

    What is the point of a permanent government when they are so incompetent and lack the personal integrity to resign when they have overseen such a cataclysmic collapse the like of which has not been seen for one hundred and thirty years. So I disagree with you.

  • Comment number 41.

    One really great thing about the crisis (and there aren't many I know) - is the fact that all these clever people were totally dumbfounded and hadn't got a clue what was going on. They really had us all sold on the idea that they were soooo clever, panics like this could never happen again.

    Humans think they are Lords of Creation. They are not. Their behavior is at best erratic, illogical and full of contradictions. It was actually quite entertaining to see the terror stricken faces of those who only a few months before were so obnoxiously arrogant. "Oh my god" their little screwed up faces said - "we might lose everything we haven't worked for! All those people we trod on and destroyed in the past - they will be equals again!! OOOHHH GOOOOOD !!!"

    In just one tiny little way, it was a shame what they feared didn't come to pass. Am I alone in this ?

  • Comment number 42.

    #38. foredeckdave wrote:

    "try again John!"

    ""the rest of us 35% income tax" So, with the average income of £25,000 per year and a present tax rate of 20%"

    1. You are forgetting National Insurance of 10% = 30% ish now.

    2. The sums are so huge that it is going to hurt us all - what was it? GBP 30,000 extra from everyone - that is going to take decades to collect and it is going to hurt.

    We are all going to suffer and it will be real suffering. Our assets will reduce in value (possibly substantially especially our pension funds and house) Our savings will be drastically cut in value and resulting income. The grimness hardly bears thinking about, but the maths is unavoidable - isn't it. Austerity seems hardly a severe enough word to describe just how bad the numbers are, and what it will mean.

  • Comment number 43.

    Doubtless we'll get the usual wailing and gnashing of teeth when the latest inflation figures come out, with the hysterical doom-mongers demanding a crippling rise in base rate . But if they took the trouble to actually read last week's inflation report, they would understand that base rate rises will have no effect on price spikes caused by VAT hikes or factors beyond the MPC's control like oil prices. Government spending cuts after the election, whoever wins, will bring down inflation soon enough in any case. Caledonian Comment

  • Comment number 44.

    39 Peter

    The United States was the first developed country hit by this recession. The fact that their sub-prime sector was in melt-down in 2007 triggered the collapse of the wholesale credit markets which caused Northern Rock to implode as this was their primary source of funds.

    I do agree that the planned spending deficits that this government budgetted for have only made a bad situation a whole lot worse.

  • Comment number 45.

    "21. At 3:42pm on 15 Feb 2010, John_from_Hendon wrote:
    Economists?

    The sums are daunting, but we must I believe be fair in distributing the burden which will be imposed on us all."

    Just remember that the top 1% of earners curently pay around 25% of all tax. If they leave and imposing a 95% tax on them they will go. The 25% tax they are paying will have to be paid by the rest of us. IE with NO other tax rises our tax will have to go up 25%!

    Do you really want to pay 25% more TAX just to feel good about imposing a 95% tax band on the people who can leave the country?

    DO NOT SCARE THE TOP EARNERS AWAY OR WE WILL ALL SUFFER. And the same goes for FTSE listed companies, to not scare themk away!

  • Comment number 46.

    Hi Stephanie

    I think it would be well worth replaying and reminding ourselves of the full range of criticisms of the 264 economists in 1981. Perhaps your earlier report could be placed on the website/BBC iplayer? I think that the accuracy of their predictions may have had some important elements of foresight, accuracy and truth, which are worth considering.

    For example the predictions about social unrest. These were manifest through the "People's March for Jobs" and riots in Brixton and Liverpool to name, but two.

    The other key warning was about unemployment, which exploded rapidly towards 3m after the 1981 budget and stayed persistently above that level, until 1988; remaining consistently above historical averages for well above a decade. There was a short respite, in the the form of a reduction in a sharp V between 1989 and 1993, with some assistance from changes in the calculation of unemployment statistics, but it was not until 2004 that unemployment reduced to pre-1979 levels.

    It is very important that you have pointed out the balanced nature of the remarks made in the Economists' letter to the Sunday Times. Conservative politicians, as well as Sunday Times journalist and member of the Shadow MPC David Smith leapt upon it and implied that the letter's sole purpose was criticism of the government. It was not. It pointed out that whichever party was elected later this year, tough decisions would be needed on tax and spending. It was much more nuanced and balanced, as you state above.

    The letter called for more clarity from the politicians on all sides for their plans on the economy. It was very pleasing that a subject that has been discussed and raised on this blog previously in the recent past was aired here first, before the letter had been written. I am also very glad that these significant economists are in agreement with us on the need for politicians to spell out their economic medicine to the public.

    Will the politicians respond? Alistair Darling has suggested he will with the budget. What about the Conservative Party's plans? They are currently much more important, with the party currently enjoying a poll lead and yet they are more opaque.

  • Comment number 47.

    #42 i suffered today john a 12 mile round trip to the job centre on foot felt as though things cant get worse than this but they have changed where i go to sign on which is a 16 mile round trip hope i have enough for the bus fare next time. never imagined it coming to this but beware divorce and long term unemployment can cripple anyone.

  • Comment number 48.

    The nil- nil score:

    GROWTH NIL : NIL JOBS

  • Comment number 49.

    re no.45
    DO NOT SCARE THE TOP EARNERS AWAY OR WE WILL ALL SUFFER

    Will we really? Depends what you mean by "top earners". Most of the "top earners" don't pay tax here anyway do they ? And wasn't it the "top earners" that got us all into this mess in the first place ?

    Personally I want then scared, I want them so scared they can't sleep at night, just like me when my business hits the skids.

    But no, wait, they can sleep - the soothing noise of the taxpayers bail-out-bucket-and-spade works like a charm.

    Sorry - I'm getting ZERO interest on my savings, paying 20 or 30% on my credit card, being told I have to borrow at 8,10, 15 % when the banks can pick the discount window at 0.5%, and being told my local services are being cut back to the bone because they are broke as well.

    At the same time I'm reading that UK banks are getting ready to pay themselves bonuses AGAIN.....and you don't want these people scared off ?

    I do.

  • Comment number 50.

    26. At 4:06pm on 15 Feb 2010, jobsagoodin wrote:

    "Er, no. I think you'll find it was Gordon Brown and New Labour who were responsible for mis-managing the economy over the last 10 years."

    ...yep - you keep telling yourself that so that come May it will change and you can seek security in the knowledge that "this time it will be different".

  • Comment number 51.

    41. At 5:33pm on 15 Feb 2010, Mark

    Qualiy post - bu don't fear...

    "In just one tiny little way, it was a shame what they feared didn't come to pass. Am I alone in this ?"

    They haven't forseen the NEXT crisis which will test their assumption that 'the people will put up with it' - which of course they won't.

  • Comment number 52.

    45. At 5:46pm on 15 Feb 2010, icewombat

    ...or the short version "We need the rich to remain and tell us what to do, otherwise we will sit and pick our noses like neanderthals"


    ....speak for yourself - slavery is not a requirement for the rest of us.

    Are you still assuming high wages = talent? Oh do behave - that was SO LAST YEAR

  • Comment number 53.

    #43 Caledonian Comment. You are almost there. Base rates are at an historically unique all time low of 0.5%. Any rise from this nadir will be "crippling" and anyone suggesting that this new paradigm can be maintained ad infinitum are "hysterical doom-mongers." Hmmm...

    Meanwhile things like oil price rises are helpfully dismissed as simply being beyond the control of the MPC.

    There is a wealth of evidence that supports the contention that cheap or free money is bound to lead to asset and commodity price bubbles. The blowing of such bubbles allows a few to get rich and a majority to get poor. Cheap money is directly related to the oil price excursion of the past few years from its historical trading range. There is no mystery to this.

    Still why bother with facts and intelligent analysis when hype and invective require so much less intellectual effort.

  • Comment number 54.

    #41 Mark. Unfortunately you are wrong. Those at the top knew with 100% certainty that their actions were bound to lead to the present situation. They also know that their continued actions are certain to lead to a further catastrophic deterioration to the infrastructure and fabric of society.

    They are busy salting away as much as possible whilst all the time running a series of black ops propaganda stories pretending that all of this is as much of a surprise to them as anyone else.

    Take one example of UK power generation: Anyone that looks at the numbers knows with certainty that the UK is going to run out of on demand access to affordable electric power in about 7 years time. They know this, but their bet is that either you don´t know or you don´t care. Meanwhile the capital that could be deployed to head off such a crisis is consistently diverted to enrich a select few.

  • Comment number 55.

    I have to disagree that running a deficit is a bad thing. Government debt has been with us for 300 years and people have always fretted irrationally about "paying it back". Well, it doesn't get paid back. It gets rolled over by issuing more debt. (Just as no-one worries about redeeming all those banknotes in circulation. Worn-out ones get replaced by shiny new ones.)

    The real question is, do we have too much debt? If the UK was horribly out of line with other countries, then it would be a problem. But that's not true.
    It is going up (12% per year) a bit faster than the Eurozone average (8% per year). But it started from a much lower base, so the overall effect is that most countries are looking at roughly the same levels of debt in a couple of years time. Some downward adjustment to the deficit is due in the medium term as the economy recovers. But please let's all stop panicking.

  • Comment number 56.

    In the article you state that "According to the IFS, it would mean about £15bn in additional spending restraint or higher taxes - a little more than 1% of GDP.".

    So according to IFS £15 billion ?

    Sorry to carp on about the banks again, but is a windfall tax not out of the question when the sum of just Barclays and RBS bonus schemes amount to approximately £3.5billion. If the other banks were included in this, then hasn't a large proportion of the reduction been achieved ?

    If one drew a line in the sand and suggested a 50/50 split, that would mean 7.5billion less that would need to be cut from the budget ?

  • Comment number 57.

    At the end of this, what (I suggest) we really want is a fair and above all, simple tax system.

    How about 12K personal allowance, and one rate of tax at about 20-30%. Then abolish all personal tricks to reduce or avoid tax. Every payment to you, in cash or kind is simply taxable. I don't want to punish high earners, I just want them to pay the same tax as the rest of us, no avoidance. None. The tax take from the richest would actually go up. At the same time, you get rid of lots of accountants, tax inspectors, beaurocrats and dodgy avoidance schemes.

    Then you concentrate on the larger listed companies, who currently negotiate with the taxman about how much tax they pay. Apparrently, their structures are so complex, they simply can't just pay corp tax at the ticket rate. Several large companies pay about 5% corporation tax on their profits, legally, every year. News International springs to mind.

    A simple, fair, tax structure is easy to calculate, and makes it difficult for the well paid to squeal "unfair". Any form of avoidance is a jail sentence and fines.

  • Comment number 58.

    Let's not mess about for much longer. Put VAT up to 20%, reverse the proposed 50% tax rate and the NI increase with no offsets for any tax retrogression. Gordon Brown has blown it over the last 12 years with his tax social engineering. Let's reward enterprise rather than featherbedding benefit scroungers and overpayed public servants with their unfunded pensions. It's time to follow in Howe's footsteps. And if there's rioting in the streets then get the troops back from Afghanistan to sort out any rioters..

  • Comment number 59.

    #51 writingsonthewall. Of course they have foreseen the next stage of the crisis - they are busy creating it. Look at the stuff coming out about Goldman and their role in assisting the Greeks to manipulate their finances, and now look at them shorting Greek sovereign debt. They know what they are doing and they know the consequences of their actions.

    As things deteriorate watch out for increasing efforts to blame the foreign man, and listen out for the increasing drum beat of the march to war. More diversion whilst they hoover up the last crumbs.

    If they are really lucky you will have been vaporized sometime before your anger can be given any practical manifestation. If this doesn´t work out they still have no problems as they have no intention of living on your street.

    They know what they are doing all right, it is just that what they are doing is so nefarious that few can bring themselves to believe it.

  • Comment number 60.

    #55 goodthinkinggeorge. Instead of the "low carbon economy" we could just go for the "magical economy" - Sounds good to me.

  • Comment number 61.

    #53 - Where exactly is all this "cheap or free money" you're talking about ? It certainly isn't coming to businesses or individuals in the form of bank lending. Indeed the banks are "repairing their balance sheets" (a.k.a. profiteering) with no regard to base rates when it comes to lending. Their rates and arrangement fees as disgraceful. But they are of course assiduous in linking their savings rates to base rate. Surprise, surprise. Caledonian Comment

  • Comment number 62.

    "The Conservatives were cock-a-hoop yesterday" :-)

    Some would say they are cock-a-hoop every day.

    What kind of democratic government keeps its accounts as a state secret? What is it hiding from its population that they should know about? What else is the government hiding that would anger its citizens? Why is Britain any different today than it was under the rule of kings and nobility who kept the peons in the dark and made the informed decisions for them? It is as elitist as it ever was, only the names and their titles have changed.

    IMO besides the long term structural debt which will have to be addressed at some point is the immediate debt as mereengineer pointed out. To resolve that there is only one way out, devaluation of the pound. But this should not happen until the US Treasury devalues the US dollar first by printing an ocean of money to pay off its own debts and those of its citizens. Only then will it be safe for others to follow. For its own reasons, the US government is resisting this with all its might for as long as it can. In the meantime, Euroland will go broke if it isn't already. Just be grateful the UK still has the pound sterling (or should it more accurately be called the pound pewter) and some freedom to act independently in its own self interest. Had King Tony had his way, that would no longer be the case.

  • Comment number 63.

    #61 Caledonian Comment. Banks borrow money from central banks effectively for nothing. They use this money for all kinds of exciting things - like ramping oil or copper prices or shorting Greek debt. Imagine the returns if they get it right. They can only get it wrong if there are further bailouts so they get it right again.

    Why should banks allow you or some business access to cheap money? You are not credit worthy. If you were you wouldn´t want to borrow from them.

    Despite assertions to the contrary banks know what they are doing. They know that you are not cedit worthy before you know yourself. This is, or should be, instructive as to likely future prospects.

  • Comment number 64.

    arma;

    "Despite assertions to the contrary banks know what they are doing."

    They must have learned mighty fast. It seems like just yesterday they were giving money away to anyone and everyone with his hand out and suddenly discovered they wouldn't be getting a lot of it back. Either the government bailed them out or they went broke. Now how do you suppose from then to now they got so smart so fast?

  • Comment number 65.

    #59

    The four phases of economic crises :)

    "As things deteriorate watch out for increasing efforts to blame the foreign man, and listen out for the increasing drum beat of the march to war. More diversion whilst they hoover up the last crumbs."

    First accept meekly.

    Second, get angry at the people who created it, with the usual tennis of who is actually to blame.

    Third, the ruling classes attempt to make the stunned populace pay for it.

    Four...as you suggest. I honestly think that the rise of extremism (from either the right or the left) will be the next phase of all this. Either the country will enter an ill-conceived war or there will be a complete collapse of social cohesion as everyone fights to keep their head above water.

    BTW, I've read these blogs for some time and have optimistically hoped that there was some alternative to your pessimistic analysis, but I'm no longer sure. The trade deficit last month was ridiculously high for a country that should be tightening it's belts and leading a drive to exports. I'm no longer listening to government with regards to it's fairy-tale projections, nor the idea that an election will resolve it.

  • Comment number 66.

    #45. icewombat wrote:

    "DO NOT SCARE THE TOP EARNERS AWAY OR WE WILL ALL SUFFER."

    I would be content to agree with this if it wasn't so self-serving. These 'top earners' already make every possible use of tax avoidance and there is no actual evidence that anyone except they themselves will suffer. I think we should try it and see (along with the provision that once they leave they cannot return!) Unless they pay their fair share of the cost destruction that they mainly benefited from I don't see that they are worth much to the rest of us.

  • Comment number 67.

    Stephanie:

    Yes, loved the number of men it takes to write letters analogy...

    (Dennis Junior)

  • Comment number 68.

    armagediontimes /wotw, et al, I buy it, I really do, have been on this blog for 18 mths or so and in fairness you've made more sense than anyone over this. I tend to shy away from the US sites purporting "financial Armageddon" type theroies as the yanks have too long a history of the state is after you head for the hills with an AK47 types. But in the case of the UK and the imminent future as somebody running a business and trying to hold it together I have too admit to being very worried. Things are no better and getting worse IMHO. I spoke to my accountant the other day who has a cash rich client with a 100k overdraft he never uses his bank rang him and offered to double it, why, because that was deemed as another 100k lent on their books...its all smoke and mirrors my friends. The banks are lending less than ever and yet we as a nation are obsessed with high st spending figures which are all based on credit card spending and those companies are currently hiking their rates some by 100% so how long will that last.
    I ran my business through the 80's and the 90-92 recession and went into this one thinking i had some experience of it all and would be ok, I was wrong , this is much worse.
    So what I want to know from you is this, will the bubble be reflated and we will all crack on merrily for a while or is this the big one?

  • Comment number 69.

    A recurring theme on this blog,and so many others, is the public yearning for honesty from a government, any government ! We know that hard times are ahead and delaying the day will only make it harder to stomach. Why can't we find even a handful of honest politicians in Westminster ?

  • Comment number 70.

    #64 MarcusAurelius11. There is an old saying: "The proof of the pudding is in the eating" The banks didn´t go bust did they? They were bailed out, and in some ways made stronger by getting overt recognition and acceptance of the "too big to fail" thesis. Maybe they knew that this would be the outcome.

    They don´t invest all that money in Government Relations out of alturism.

  • Comment number 71.

    Like other post-ers, I'm still amazed that we take much notice of 'economists', since their discipline seems to be slightly flakier than homeopathy. That is, it's not predictive, not verifiable and not repeatable. So why in the name of all that's holy it has a Nobel Prize escapes me. Same goes for the "Rating Agencies" - they were a great help when all this was brewing.

  • Comment number 72.

    #62

    "But this should not happen until the US Treasury devalues the US dollar first by printing an ocean of money to pay off its own debts and those of its citizens."

    At which point the entire World economy would go insular in an instant. The US would not be able to import either finished produce, nor commodities. I think you're forgetting the "White Man's Burden" of being the Reserve Currency.

    The US is as hamstrung as the Euro. Any attempts to devalue will create huge conflict with the countries who hold their debt.

    I'd argue the UK might be better off in that it can devalue massively and to be honest, no-one will really notice. We handed the responsibility of World Reserve Currency onto the US. We can get away with it, despite the impoverishment it would cause.

    "Why is Britain any different today than it was under the rule of kings and nobility who kept the peons in the dark and made the informed decisions for them? It is as elitist as it ever was, only the names and their titles have changed."

    By the way, Peons is a Spanish word. I wonder if their endeavours at fighting hyper-inflation during the King/Queen phase to which you refer may happen. "There's Gold in them thar hills"

  • Comment number 73.

    #68 DudeHangingon. The smart money has to be on this being the big one. It will most likely take a while yet until it becomes obvious for all to see.

    Look at the time that elapsed from the first cracks appearing in the Enron edifice until the winding up of the last "Enron clone" company. This is an altogether bigger deal.

    You have the whole business/government/media combine dedicated to spreading misinformaton - this will not change. The ongoing atomization of society is designed to get people sitting at home on their own thinking maybe its just me, maybe everyone else is doing OK.

    This kind of stuff is very powerful and makes it hard for people to reach informed conclusions.

    There is growing disillusion with politics - look at voting participation levels. Why should people vote all mainstream politicians have the same policies, but different smiles. This is because the political classes have been captured by oligarchs. At some level people understand this, even if they can´t enunciate it or even if they just don´t want it to be true.

    Look at periods where there are long term stock market declines. Sometimes they go up - but the trend is down, and normally the downlegs are sudden lurching movements. When Hemmingway was asked how he went bankrupt he replied "slowly at first and then very suddenly" This is how it will be.

    I would love to be wrong - I have a nice peaceful life with easy access to food, warmth, shelter, rainment and safety. I have enough money for my wants and from a personal perspective I couldn´t care less who may have more than me. I have no desire for this to change.

    But: Wherever I look I see systemic bankruptcy propped up (for the time being) by rigged and manipulated markets. All counter arguments are either the product of ignorance or delusional thinking - Not because I want them to be ignorant or delusional but because rational analysis reveals them as such.

    No-one can know about every aspect of complex economies and so sometimes there are valid micro arguments to the contrary - but they are micro, they do not really change the overall picture.

    Look at something straightforward, countable and therefore largely unarguable. Look at UK power supply. Anyone that does look understands very quickly that within about 7 years the UK will no longer be able to supply on demand access to electricity as it currently does. There is nothing that you can now do about that since you are talking about large engineering projects that have defined timelines from inception to completion. Does anyone care? Seemingly not, but there are material consequences for complex advanced economies that cannot supply on demand electric power. California provides a recent example of those conqequences.

  • Comment number 74.

    Its been so cold in the UK for so long, I no longer believe in global warming. I've emptied ALL my aerosol cans and the temp hasn't moved a bit!

  • Comment number 75.

    Economics is an interesting subject - but be aware of experts. There are always too many plausible explanations as to why things don't work out quite as expected when a particular theory fails to deliver.

    Economic forecasts are no better than the weather forecasts - useful for the next few hours, but pure speculation anything beyond that.

  • Comment number 76.

    A belated comment to Jeremy Silverstone #1, it worked for the banking industry that apparently are earning vast profits from tax payers credit, so how is it any different for governments? The vast majority of the general public do not have vast savings, or large houses, but they do rely on employment, with the government and its services the largest employers in the country (thanks to Conservative policies in the 1980-90s to destroy the productive base of UK and privatise the major utilities).

    To attack the present borrowing requirement instantly why not ask the banks for our money back now - even those such as Barclays who without taking support from the government have benefited from a stable financial market. If there are excessively wealthy individuals/institutions out there that can pay £65m for a Giacometti(?) that they could have bought in a nearby gallery for £25m, then there are idiots that would be willing to purchase at an inflated price even Northern Rock/RBS/Halifax, et. al. National debt wipedout in a trice, or cannot the government, in similar fashion to the banks they now largely own, account for the debt owed by said banks as profits on the national accounts?

    As the recent circus over the last 2/3 years demonstrates, and hedge funds persist in to this day, it is all a fiction created by manipulative speculators gambling on millions of workers futures with little regard to anything than personal gain. The mantra of expertise and worth; the threat of loss of rating/business gurus seems facile in comparison to the dessimation of the general public's living standards over the next decade or two. Let these highly self-opinionated experts join the estate agents and hairdressers on the vanguard in the colonisation of space (oops I think somebody has already suggested that in the "Hitchhickers Guide").

  • Comment number 77.

    Nick;

    ""But this should not happen until the US Treasury devalues the US dollar first by printing an ocean of money to pay off its own debts and those of its citizens."

    At which point the entire World economy would go insular in an instant. The US would not be able to import either finished produce, nor commodities. I think you're forgetting the "White Man's Burden" of being the Reserve Currency."

    Maybe. Or devalue also. If they don't devalue they won't be able to sell in the US. US corporations should be required to produce more of their goods in the US to create jobs here or pay high tarriffs along with other exporters to the US. The WTO is not working for the American worker who also happens to be a taxpayer and usually a voter.

    "The US is as hamstrung as the Euro. Any attempts to devalue will create huge conflict with the countries who hold their debt."

    Oh yes, China will be very angry. So sad, too bad. Lessons learned. What could they do about it though? If they want to get paid back at all, this is how it will have to be.

    "I'd argue the UK might be better off in that it can devalue massively and to be honest, no-one will really notice. We handed the responsibility of World Reserve Currency onto the US. We can get away with it, despite the impoverishment it would cause."

    They have to wait for the US. If they don't, it will be a disaster the way the EU will face when it is forced to devalue to pay off the PIIGS debts.

    Anyway this is very likely to happen because when all that American debt comes due, there are only two places for the US government to get the money to pay for it. Tax Americans which will kill off the recovery and send the economy into deep recession (pulling the rest of the world down with it) or print it. Since the depression, every time there's been a recession, printing money has been what the US government eventually did only not on this scale. It makes it faster and easier to pay down debt with new cheap dollars. The sooner these debts are behind us, the sooner it will be back to business as ususal.

  • Comment number 78.

    Dear Stephanie,

    An interesting comparison to 1981. As well as writing what other economists are saying and the two views of the major parties can you please quantify for us what you personally think should happen to public spending and taxation between now and 2012? Some opinion from you on top of relaying the news would be much appreciated. Thx

  • Comment number 79.

    "66. At 9:02pm on 15 Feb 2010, John_from_Hendon wrote:
    #45. icewombat wrote:

    "DO NOT SCARE THE TOP EARNERS AWAY OR WE WILL ALL SUFFER."

    I would be content to agree with this if it wasn't so self-serving. These 'top earners' already make every possible use of tax avoidance and there is no actual evidence that anyone except they themselves will suffer. I think we should try it and see (along with the provision that once they leave they cannot return!) Unless they pay their fair share of the cost destruction that they mainly benefited from I don't see that they are worth much to the rest of us."

    The fact is even with their tax avoidance... the top 1% of earners pay 25% of all income tax. If only 10% of them leave our taxes will have to go up 2.5% if half leave then its a 12.5% tax rise for us.

    They might not be worth their pay, they might cheat the system, they might look smug, they might have caused this mess in the first place BUT they pay 1/4 of all income tax.

    My view is this mess was caused by lack of regulation, tax breaks making buy to let investors cause a housing bubble, corprate take overs funded by putting the company into debt, and cheap money. The bankers just took advantage of the system. NB Not all the top 1% are bankers, some (quite a few) are civil servants.

    I know a lot of people who in the last 3 years have moved to europe, fly in on easy jet each week working 4 days in the UK and now pay NO uk income tax. Most are firends i meet whilst commuting to london 10 years ago or at my golf club. Over half the group "left" last year. I agree most of them work in the city, but 3 own their own companies, one is a judge, 2 work for quangos and 1 manages an NHS trust. Their TAX savings alone pay for their flights, their UK base (either a hotel or flat in london) and their quality of life far exceeds mine.

  • Comment number 80.

    Just to correct some maths... if the entire top 25% of income tax vanishes because the earners leave, the remaining 75% pick up that 25% - an increase of 33%, not 25%.

    Likewise, if half of them leave it's 87.5% picking up the missing 12.5% - an increase of 14.3%, not 12.5%.

  • Comment number 81.

    #79 icewombat

    "I know a lot of people who in the last 3 years have moved to europe, fly in on easy jet each week working 4 days in the UK and now pay NO uk income tax"

    Why should they pay UK income tax? They don't live here, but they are contributing to this country; taxing them would be an impertinence. They spend money while they are here and are taxed on that; perhaps they could recover the VAT as they are non-resident?

    We all have a choice. I chose to live in the UK, bring up my children, and run my international business here. I could have been based anywhere; living in the sunshine and paying no tax was quite possible and I would have been rich now.

    Staying here was worth it as this is my country and a good place to live, but now I advise my children and grandchildren to get out while they can. Criminals run the government and their disease is spreading everywhere. We have one last chance to boot them and their evil parties out of power; if we don't, we are finished.

  • Comment number 82.

    #79. icewombat wrote:

    "the top 1% of earners pay 25% of all income tax. If only 10% of them leave our taxes will have to go up 2.5% if half leave then its a 12.5% tax rise for us."

    I don't agree with the relevance of your use of figures to the question as income tax is not the only tax.

    As to you point of fly-iners: we are the stupid idiots who let them do it. We need to make if far more difficult by tightening up the non-dom tax requirements. A hotel room is OK provided it is not the same hotel week after week - a flat certainly breaks the regulations and would make them liable for full resident tax under the current law. The non-domicile requirements included not owning or renting or having use of a permanent or temporary residence in the UK. So your friends may be criminals.

    These non-dom requirements did also stipulate a maximum number of nights in the UK and from what you are saying your friends are highly likely to be breaking these regulations too.

    Anyway these non-dom requirements need tightening for example there being a presumption of full residence in the UK unless explicit entry and exit stamps are obtained on each and every entry and exit from the UK - putting the onus on the taxpayer to prove non-dom (as indeed is the unenforced law today.) Also habitual visits should also mean that full tax should be paid on world-wide income in the UK as a full UK resident has to pay. Similarly being in receipt of payments from UK based, or organisation with a UK base or carrying out work in the UK on behalf of anyone and receiving payment for such work do (should, and used to) mean that full UK resident tax should be paid.

  • Comment number 83.

    Is it possible that these economists are making predictions for a game which has very few rules and played by large group of individuals, who sometimes work together but often against each other.

    They were extremely quiet during the first seven years of the last decade, suggesting they didn't see anything coming, so why should we listen to them now?

    Most of the panic is about the devaluing of accumulated wealth, which is built up by a small section of the community from the work of the majority.

    Why not look again, Stephanie, at the thoughts of Robert Owen, who believed we should have money that lost it's value after a set period of time. Therefore requiring us all to continue working to pay for goods and services which will keep people in work.

  • Comment number 84.

    We interrupt this programme with breaking news of inflation at 3.5%

    see - http://news.bbc.co.uk/1/hi/business/8517156.stm

    One suspects that inflation has more to go since the VAT re-increase is only just coming through. This is not good news as some of us have been forecasting for some time.

    More news of a warning nature re credit crunch 2:

    see http://www.telegraph.co.uk/finance/economics/houseprices/7245801/UK-house-prices-to-slump-as-credit-crunch-returns.html

    And of course the hidden menace has finally got some attention:

    http://www.telegraph.co.uk/finance/personalfinance/borrowing/creditcards/7245125/Credit-card-holders-face-crippling-interest-rates.html

    Untold damage of this rather unscrupulous banking act (forget the bonuses)....

    I suggest Stephanie rather than some pointless misdirection on an Economist letter (and an incorrect application of context) plus a reference to Robert Peston's father - could we deal with the effects of these and others like them which is where it matters.......

  • Comment number 85.

    #73 armagediontimes
    Thanks for your considered response, I found your comment about the "atomisation" of society interesting, I have had the "is it just me" thought many times (well daily in fact), if this is the case, and i believe it probably is, then I wonder what will be the catalyst to change and society to realise the charade.

  • Comment number 86.

    #82 John_from_Hendon,

    Here's a scenario. What about a person who is in the UK only because he is married to a British? This person has never claimed benefits or used the NHS. He pays for all his dental visits. Are you telling me that this person, who has properties in a number of countries, need to pay tax in ALL those countries on 'worldwide income'?

  • Comment number 87.

    #63 - I didn't think it was possible for someone to make our politicians seem credible but you've achieved that with the nonsense you're talking.

  • Comment number 88.

    "Most of the panic is about the devaluing of accumulated wealth"

    Ultimately, this is unavoidable. There are more dollars in existence (orders of magnitude) than the sum value of all assets on the globe. There is also far more debt in the world than there is wealth with which to repay it. The only way this can rebalance is the mass devaluation of essentially all currencies. Much wealth will be lost.

    The tug-of-war among the elite is to decide whose wealth devalues first and furthest, and how to transfer as much as possible from the poor to themselves whilst it happens.

  • Comment number 89.

    When he was Chancellor in the mid 1920s, Churchill considered that returning to the Gold Standard would be an unwise course. He felt it quite strongly (Roy Jenkins , Churchill, 2001). But all the leading Economoists, both within the Treasury and without, argued strongly in favour.

    Churchill felt that to disregard the advice of those 'much better placed to understand such matters than himself', relented and agreed to the Return.

    This , as we all know, led to the greates economic depression since the end of the Napoleonic wars.

    The moral I take from this and this article, is that when an economist points on one direction, then look the opposite way.

  • Comment number 90.

    Is there any other profession where you get to be wrong most of the time and still be considered an expert?
    Yes. Economics editors.

  • Comment number 91.

    There are three types of economists: those that are good with numbers and those that aren't!

    5. newblogger wrote:

    Economics!
    Is there any other profession where you get to be wrong most of the time and still be considered an expert?
    **
    There are loads. In addition to those already suggested, what about-

    estate agents
    the Met police
    credit rating agencies


    55. goodthinkinggeorge. I think your comments are spot on.

  • Comment number 92.

    Now that the latest inflation figures are out of the bag at 3.5%(if you believe that, then beleive in fairies) we can expect more waffle from the Governor but he will quietly get on with destroying savers nest eggs and incomes but continue his blind obsession with supporting his pals in the city (Barclays just creamed off £11.6 Billion mainly from QE) and will restart printing later in the year when he has an excuse that deflation may emerge, what rot this man talks. Is this his revenge for Geoffrey Howe not listening to him in the 80's. King will be the financial death of all who are retired on small pnsions.

  • Comment number 93.

    Post 84 I agree and have posted something similar on Bobby P's blog.

    It's amazing isn't it that CPI has hit Mervyn's believed peak for 2010 in one bound. I can see it going above 4% soon and definitely will be above 4% come election day maybe closer to 5%.

    How much longer can the bank sit on their hands and ignore their key task re inflation and not put up interest rates?

    Or does it really believe a "little bit of inflation" will do us some good? We have all been there before and it wasn't pretty.

    So much for an independent Bank of England!

  • Comment number 94.

    So inflation is confirmed at 3.5%. Did anybody believe that it would have ben otherwise? The big question is will that rate start to return to 2% later in 2010 as predicted by the BOE and confirmed by the BBC? I somehow think that prediction is just ever so slightly a gross over-expectation.

    TAX/NON-DOMS

    I stand to be corrected upon this but, do not the US IRS start with the basis that ALL US citizens are liable for US tax irrespective of their domicile unless they can prove that they are paying tax to another 'approved' tax regime?

    If that is true then could we not adopt such a stance?

    BILL

    You may be patriotic but you destroy your argument when you mix politics or economics with religion. You may totally disagree with the present government buy you have NO basis upon which to brand them evil.

  • Comment number 95.

    Further to comment 92,I completely agree - see this blog

    http://britisheconomydiary.blogspot.com

    There is a very relevant video at the end of today's post on the above blog and older posts have some entertainingly satirical caricatures of today's politicians in this economic soap opera.

  • Comment number 96.

    86. At 10:20am on 16 Feb 2010, I am not a WUM wrote:

    #82 John_from_Hendon,

    Here's a scenario. What about a person who is in the UK only because he is married to a British? This person has never claimed benefits or used the NHS. He pays for all his dental visits. Are you telling me that this person, who has properties in a number of countries, need to pay tax in ALL those countries on 'worldwide income'?

    =================

    You could say this person is lucky. You could also ask whether this person every uses the roads we have prepared for their visit, or the street lighting we have installed for their use, or maybe the police force we employ to offer them safety while walking the streets.

    If of course, they were to need the NHS, in an emergency, we have agreed that people can use it at the point of need, regardless of ability to pay or nationality, or even residency. Those things can be sorted out later. It came from a growing belief in collectivism, which unfortunately was abandoned during the eighties.

    Of course, what you describe, a world where we can all earn our living anywhere in the world but live where we like, is a very desirable image. It would however, require an international agreement on tax distributions around the world, to share the world's resources. A sort of international socialism I guess.

    Seema like a good idea.

  • Comment number 97.

    94 FDD

    "You may totally disagree with the present government buy you have NO basis upon which to brand them evil."

    Nothing to do with religion.

    The illegal invasion of Iraq
    The unjustified invasion of Afghanistan
    The fraudulent claiming of MP's expenses
    The treasonable surrender of sovereignty to the EU
    Etc.

    All evil acts done against the wishes of the people, with the compliance of the opposition.

    Get rid of the lot of them.

  • Comment number 98.

    FDD #94

    I hope you and Mervyn are right. The RPI is even higher at 3.7% which is way over expectation. I suspect that this is why QE has stopped because they're worried over the inflationary effects.

    UK inflation is way out of kilter to everybody else especially with base rates so low.

    How are the public sector unions going to react to this as a means of pay negotiations? Do you think they'll go along with Mervyn's assessment?

    If the pound goes lower it will also increase due to our heavy reliance on imports for example.

    Reading through Mervyn's explanation leaves a little to be desired. Much VAT rise was delayed in January so exactly how much did this spike the increase?
    MK says that a return to 2% rate 'more likely than not' which is not quite as assertive as one would like. Sterling depreciation from 2007/8 is also mentioned but we're expecting it to stop?

    This type of inflation is not good for the NHS for example because of the purchase side costs which puts further pressure on balancing the books (a fact that many forget when urging inflation is ok) and it is certainly not what SMEs need.

    Actually, MK's explanation doesn't explain much at all funnily enough. It strikes as more charade than formal insight...........

  • Comment number 99.

    I just wonder how you actually manage any sort of organisation whn you are unable to differentiate between EVIL and ILLEGAL. No wonder this country is in the mess it is with such ill-educated commentators!

  • Comment number 100.

    #87 Caledonian Comment. Allow me to paraphrase - "smear the last refuge of the scoundrel"

    Delusion will not save you, why not explain how I´m wrong? Why not ask yourself why banks can borrow money for nothing, but wont on-lend to you for anything other than patently usurious rates. You are the one the complaining, not me.

    I just told you the answer, not my fault you don´t like the it. You are in the process of being crushed by forces you don´t even seem to realise exist. Neither smear, bluster nor delusion will halt this process.

 

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