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How could the deficit reduction plan 'work'?

Paul Mason | 13:14 UK time, Friday, 29 October 2010

Like a pint of bitter, the Spending Review 2010 has taken a little time to settle down and become clear. Its claims to fairness were attacked by the IFS within 24 hours - and the debate on housing benefit rages.

But I've been taking a closer look at the big macroeconomic questions, which have caused both the FT and the Economist to call it "an experiment":
-Will it flatten the economic recovery?
-Does the labour market story hold water - of 490,000 job losses replaced by 2m private sector jobs over the same timescale?
-How does its impact interact with monetary stimulus, global currency war and still frozen credit conditions?

And I want to ask a possibly heretical question for those who are against the austerity package: what would you have to do to make it work? JM Keynes famously said don't wish for the failure of the anti-crisis measures, even if you consider them imperfect. So...First: what is the likely impact on GDP?

-Public spending will fall from 48% of GDP to 41% in 2014-15 (according to SR2010)
-So the private sector has to rebalance the economy, filling a 7% gap.
-The OBR in June published estimates of how it would do this, namely that there would be a switch - achieved by 2013 - from public spending to export led, investment led growth.

Here's a pie chart of GDP growth in 2008.

And here's one as projected by the OBR for 2014. Overall growth is the same, but its components massively different.

Starting next year, spending cuts create a 0.7% of GDP headwind against growth, so they disappear as a contributor to the pie chart. Business investment - which averaged 0.3% between 1999-2008, has to contribute 1.1% in 2012, 2013 and 2014. Net trade - which has been on average negative since 1999 - has to be contributing 0.5% by 2014 and indeed 0.9% in the next two years. (Source: OBR Supplementary Material to June 2010 Budget, Table 1.2)

So the conceptual shape of the rebalanced economy, at this level is clear: private investment flows in, stimulated by changes to corporation tax; Britain switches from a trade deficit to a strongly export led economy by the end of FY2011.

It is worth remembering why these projections were done by the OBR: if growth does not remain strong in FY 2011 and beyond, the tax take falls, the deficit rises. Unemployment places further pressure on the welfare bill, which in CSR 2010 was made to take £18bn of strain out of an £81bn cuts package.

The theory of "expansionary fiscal austerity" supports the OBR's projections - but it is only a theory. Its poster children are Canada and Sweden after the 1991 recession. Its theorists - most notably the October 2009 Policy Exchange report "Controlling Spending and Government Debts", look at three scenarios for the impact of a high budget deficit.

-In a "normative" economy, where information flows transparently and everybody acts rationally, a deficit does not produce a stimulus to the economy because consumers rationally react to the future tax hike implied by saving. This is the so-called Ricardian equivalence model. Its critics believe it has no relevance to a modern economy.

-Next, in times of crisis, because rationality goes out the window, a "right sized" deficit/stimulus can work - and therefore reversing it can cause a second recession. This is the common ground between Keynesians and neo-liberals.

- Finally there is a situation of a "too big" deficit: "When deficits are too large and/or spending levels too high, instead of providing a boost to demand large deficits actually impair growth, and so fiscal consolidations, far from driving additional contraction or limiting recovery, actually promote faster growth and more rapid recovery." (Policy Exchange, op cit, p26)

This is the essential theory behind the Coalition's strategy. The PX document states a preference for 80:20 cuts/tax rises and says:
"Providing spending cuts predominate over tax rises tightening is more likely to promote recovery than impede it." (p103) adding the caveat that this is especially true if fiscal tightening can be accompanied by monetary easing.

The IMF, in its World Economic Outlook this month, has issued a pretty thorough refutation of this theory. The IMF's position is not based just on a historical survey but on the most developed model of the world economy in existence - the GIMF.

Running its model, and the historical data the IMF finds:
"The idea that fiscal austerity triggers faster growth in the short term finds little support in the data." (WEO, IMF October 2010)

It does support the idea that deficit reduction has a benign long-term effect, but issues a caveat, of which more later.

The IMF sets out its model for what usually happens. They do not draw a distinction between "exceptionally large" deficits and right sized ones: for them the main distinction is whether a country is at risk of default - in which case cutting the deficit supercedes worries about austerity.

They calculate as follows:
-A 1% fiscal tightening brings 1% cut in demand plus a 0.3% rise in unemployment. But GDP only falls by 0.5% - due to the mitigating factor of a 1-for-1 percentage fall in value of currency, facilitating a rapid switch to exports.
-Without a boost from currency depreciation, higher exports and lower interest rates, the impact on GDP is worse.
-In particular if you are already at zero interest rates and cannot lower them any more "the output cost of fiscal consolidation doubles to about 1% after two years". (p109)
-It gets worse, because the IMF economists then model a global fiscal tightening scenario (using Canada as the guinea pig) where one country cuts the deficit but so do several others. This shows for every 1% of tightening, Canada - a small, open, globalised economy - suffers a 2% fall in GDP a year later.
-The IMF accepts that cuts-based tightening stimulates growth faster than tax-based tightening - because the absence of increases in VAT and other indirect taxes leads to the central bank being able to slash interest rates. So it implicitly supports the Coalition line on the mix of cuts to tax rises.

Applying all this to the UK, what it shows is that there is a large theoretical variability to the outcome of a 7% fiscal tightening. What are the variables:
Is the interest rate 0%? Yes it is.
Does everybody else cut? In many places yes.
Does the currency depreciate to boost exports? Yes it has done by 18% - but now needs to fall at least another 7% in the next 4 years.
Does everybody else attempt depreciation? You bet - we're in the middle of an undeclared currency war.

Without a massive monetary policy boost, the IMF's model would indicate the UK faces at least 1% reduction of GDP for every percentage point of tightening. Of course it's only a model, and an abstract one at that.

Both the IMF and Policy Exchange believe there are beneficial long-term outcomes from reducing the size of the deficit relative to GDP. This is because the long-term real interest rate falls, pulling in private sector investment. However the IMF is clear on the limitations of this, and the timescales:
-It believes the long-term interest rate effect takes place about 5 years into the cuts.
-It believes there is a stronger positive impact of deficit cutting in countries at risk of sovereign debt default. Hence the debate about the real or imagined nature of Britain's sovereign risk is important there (see Kaletsky, Wolf etc)

Here too it is important to understand the IMF's model is global, and depends on interaction between economies, not just the domestic impact of deficit reduction. In the global model, the developed world can make a one-off long-term cut in the size of budget deficits, and this can boost growth, but only if there is a one-time rebalancing of world trade so that the entire developed world improves its export performance while China, India, Asia, South America consume more.

But the complicating factor - the crucial factor - is quantitative easing (QE). Since we can't cut interest rates much further, the monetary stimulus relies on QE being effective. George Osborne has already signalled he will allow for more QE - but will it work? To work it has to get real interest rates down.

Whether it is because of QE or merely a signal of long-term stagnation, inflation-protected bond yields are currently at their lowest ever. Here is the indexed yield on a 10-yr gilt:

As you can see it is extremely low. One bond-market source told me:
"Credit risk is not being reflected in real yields today. Or rather, if there is credit risk in UK real yields, then the 'risk-free' real yield is a deeply negative number. Real yields can only fall in the UK due to market concerns that the long-term sustainable growth is falling, or because they see the stock of Gilts evaporate, and in this way what we see is no longer a 'market price'."

So while it is true, and welcome, that deficit reduction plans - even before implemented - are able to lower the cost of borrowing for government considerably, and hike its credit rating, you have to have some long-term view of what's going to happen in this combined world of QE, deficit reduction and currency depreciation.

And the starting point is, the risk-free rate is historically low: if my bond-market source is right, it is the credit system, not the perceived risk of a UK default, that is strangling the recovery.

In summary. To answer the question - how could the deficit reduction plan "work".
-It needs the maximum possible assistance from monetary policy. If it is the case that 12% of GDP spent on QE suddenly switches through from bank balance sheets into the money supply, then you will see QE supporting the austerity programme and the conditions for success will be in place. However then comes the moment where the monetary authorities have to decide what to do if this boosts core inflation.
-Real credit conditions would need to change. The risk-free rate is, as I say, already low: it is the margin between that and real business credit rates that is too high for recovery to take place. My hunch is that much of what "worked" in Labour's fiscal stimulus was micro-economics: the grants to businesses, the instructions to the banks to avoid foreclosure; the rapid return of A8 migrants to East Europe. Micro-strategy is important in the austerity phase as well.
-Then there is the labour market. Actually the labour market is crucial in these situations. Policy Exchange notes, inter alia, that it was the Invergordon Mutiny that finally pushed Britain off the gold standard and thus onto a softer path through the Depression after 1931. Likewise, the theory that if Britain pegged its currency to gold, wages would fall in line with global market forces, ran up against that ultimate example of wage stickyness, the 1926 General Strike.

Today wages are sticky for a number of reasons:
-The minimum wage: impossible politically to abolish, or to cut without sustained inflation.
-During the boom there was already downward pressure on wages at the lower end. The problem is at the salariat level. You cannot place mid-term downward pressure on wages without this showing up as a new stress in the property and personal credit market.
-The 490,000 estimate of public sector jobs lost was reduced from 750,000 on the understanding that public sector pension cuts would mitigate the public wage bill. We already know the scale of increased pension contribution in the public sector: it's about 1.5bn. But we also know the government's strategy is to encourage public sector workers to trade wages, pensions and hours for job security. We will have to wait for the OBR's assessment of the impact of SR2010 on 25 November. The OBR is now "under new management" and its new boss Robert Chote may want to revisit the methodology used in June.
-The longer term issues remain: do the new jobs created go to A8 migrants, does the Universal Credit succeed in getting millions of Brits back to work, and does it do so in time?

On currency: according to the IMF theory you would need a massive boost from sterling depreciation. Having fallen 18% you now need a 7% depreciation. But the USA is depreciating - despite its doctrine of strong dollar. So is Japan. QE should help depreciate but it is not yet a done deal at the Bank of England.

Of course, the real economy has a habit of defying all theories and models. But it is striking how overtly the IMF's view clashes with the underlying assumptions of the UK government - despite the fact that the IMF gave the June budget a nod of approval.

Another striking thing is that, while academics and journalists are locking horns at this theoretical level, the two front benches seem keen to skirt around the deep detail.

It leaves me asking the question - to make the austerity work the way it's intended to, will they have to adopt a vigorous modern form of protectionism, aggressively promoting trade, tanking the currency, printing money and manipulating the cross-border labour supply?


  • Comment number 1.

    Why do the authorities & economists have no models that give prominance to the rate of profit (the key measure for capitalism)?

    They merely see imbalances in their equilibrium models.
    So action required:
    1. Reduce China's trade surplus & the West's (inc. UK) trade deficit
    2. Reduce the fiscal deficits of the West (inc. UK) to ensure banks believe the government is solvent as continue to lend to it
    3. If this all results in insufficient effective demand, print more money

    Voila, equilibrium restored, capitalism carries on.

    They can't see that capitalism is inherently unstable because production runs ahead of effective demand.
    They've never taken a interest in Marxist crisis theory (not helped by the fact that Marxists argue amongst themselves).

    To understand the UK's predicament requires an understanding of what's been happening in the world economy for at least the last 40 years.

    Declining rate of profit in the late 60's.
    US dollar decoupling from gold.
    The US could then printing as many IOU's as was necessary to keep the world's effective demand sufficient - fiat money.

    But the amount of money created by the Fed & other central banks (fiat money) has far exceeded productive growth.
    Hence the asset-price inflation in stockmarkets & property for the last 20 years.
    To keep it going in 2008 required yet more fiat money.

    Now the authorities are between a rock & a hard place.
    They've burdened taxpayers was large debts & need to reduce them to be able to persuade the money markets (the banks) that governments are solvent.
    But to reduce effective demand (as the cuts do) takes us back to the original problem.
    Hence they will print more fiat money - QE2.
    This fits in with currency depreciation & export growth (if others weren't doing the same).
    It should be obvious it's all going to go wrong - cuts or not.

    No Ponzi scheme can last for ever.
    Capital devaluation/destruction will happen.
    And it will be happening alongside currency debasement.

  • Comment number 2.

    Any action is only based on theory. No "precedent" is in fact completely comparable.

    None of this appears to have any scientific basis at all. I am sure the IMF model is state of the art as far as economists are concerned but it can only guide towards a hypothesis.

    There is no experimental peer review, only critique based on the usual economists jumble of philosophy and astrology with a hint of anthropology thrown in.

    The only test is in the real world where politics then dictates that the hypothesis will absolutely not be debunked until another one comes along that suits the moment of yet another new false dawn.

  • Comment number 3.

    I can appreciate all the work that has gone into this piece. Thank-you.
    But the deficit reduction plan cannot work. It can lead lots of very bright people down the economic/statistical trail to nowhere, but the deficit reduction plan cannot work because, before anything is done, financial institutions must be regulated so tightly that they cannot draw an independent breath without some financial regulation slowing them down. Can you honestly see that happening?
    I have just watched a rather lengthy preview of a movie that helped to ease a little of my anxiety about how the economy works; I realized my thinking was not paranoid.
    The Film-maker is Charles Ferguson; the movie is entitled “INSIDE JOB”.
    The film contends to expose the truth behind the economic crisis of 2008 and the global financial meltdown that is still costing trillions.
    The research is mind-blowing; the interviews intense and occur with financial insiders, politicians and journalists.
    INSIDE JOB traces the incestuous relationships that have developed among corrupted politics, regulation and financial institutions.
    In Ferguson's last movie “No End in Sight”, the last line is:
    “You were robbed. There was a bank robbery. And the bank robbery wasn’t done by someone who came in with a gun, it was the bank president.”
    Yes, that's the plain and simply truth!
    “Inside Job,” depicts an even larger heist; it breaks down complexity into manageable bites, complexities that led to the rise of an out of control financial industry which ended in the financial meltdown of 2008.
    There’s interviews with
    - politicians,
    - financial insiders, and
    - journalists.
    Ferguson maintains the collapse was completely unavoidable. (Here I disagree. I think it was avoidable; I think the financial collapse was well planned, worked perfectly, allowed money stolen from the American people to be used for nefarious purposes OUTSIDE the country. I am still trying to follow this trail.)
    President Reagan (Tea Party Hero) began a process of deregulation. Ultimately this led to the S&L crisis in the ‘80s and the financial meltdown of 2008.
    Ferguson: Once the preview was avaiable: “We received many retractions from some of the people we spoke with. They even tried to take back their permission, but of course they could not. They had signed off and gave their permission….They are used to being treated the way they are usually spoken to by White House correspondents and they’re used to people being nice. I think they were surprised.”
    Poor dreamer, Ferguson, hopes that once people grasp what took place, they will demand that the government again regulate the financial industry.
    Three problems here:
    1. Will people really grasp what has happened? How they have been robbed?
    2. Will they see the answer as financial regulation so tight that bankers can barely breath?
    3. Is it too late. Are the elite bankers in such overall control that politics and parties no loner matter; and if so, what can be done about it?

  • Comment number 4.

    All very interesting - but sufficiently complex to allow one to avoid drawing any conclusions. Still, I'd like to share two relatively simple thoughts with people and would welcome reactions:

    (a) The four componenets of GDP are Government spending (not actually falling, despite all the talk of cuts, but set to grow at roughly 1.8%pa over the next four years): Consumer spending (likely to fall in real terms as wages fall behind inflation and people pay off their debts: and likely to tank if big job losses start to come along): private investment (Treasury figures have lending to companies falling by roughly £5bn per quarter): and net exports (people keep saying exports are up, which they are, but imports are up more and trade deficits are rising). So which of these factors is going to turn things around and produce the 7% rising in tax revenues that the Treasury needs to reduce the deficit by the end of this Parliament - and how is it going to happen?

    As yet I have seen nothing to suggest that there is a policy to encourage people/businesses to invest: and given that such investment will only be made in the hope of making a return thereon, what steps are the government proposing to take to make the UK an atractive/profitable place to invest - in preference to growth markets elsewhere in the World?

    (b) There has been talk of inflation helping out here: but inflatio can only create more tax revenues if people earn and/or spend more as a result. It's all very well talking about price inflation and/or devaluation of the currency, but it seems to me that the critical factor here is wage inflation (people earn more so more income tax and NI contributions) and people can spend more in nominal terms - even if they're only maintaining their current level of purchases as prices rise (resulting in more VAT receipts). So, in terms of "will the current strategy succeed?" It seems that the answer is as dependent on wage inflation taking off as anything else - but, for the time being, that doesn't appear to be part of the strategy.

    With the passing of the days of apparently limitless sconsumer borrowing, consumer spending is going to be linked to what we can earn - so what is being done to stimulate earnings growth?

    I would love to hear some real answers to these questions - because if there are none then I can't see us getting anywhere fast.

  • Comment number 5.

    What was it that Bertold Brecht wrote:

    'Don't rejoice in his defeat, you men. For though the world stood up and stopped the B******, the Bitch that bore him is in heat again.'

    We can't work out a solution to the current mess until we address what the real problem is - and regulate or do something about it. Unbridled Capitalism is evil.


  • Comment number 6.

    There is only so much that theory can do and economics is known as the dismal science. I do question the use of the word `science' in this context. We are living in an economy and not in an academic experiment. The simple truth is that nobody knows.

    How many economists can dance on the head of a pin and if there is sufficient could they then go through the eye of a needle?

    The fact that nobody knows suggests to me that policy is best left to the pragmatists. There is only one standard left: namely, does it work? Macro attempts to stimulate activity need to be treated with suspicion as such solutions can often be worse than the initial problem.

    I have been asking for some time now what will the Coalition do to switch the economy back into value added activity and the exporting of value added product. It is not a case of just pulling a switch and off we go. There is first the critical need to reverse a grim economic process that has been going on for the better part of a decade, long before the banking crash, as economic activity was deliberately channeled into the finance industry and government leaving most of the rest to just sink or swim. Most sunk and their staff went to work for the government or took to a life on benefits.

    For private sector investment to work we need demand, we need finance, we need markets, we need products and we need trained people. Finance, markets and products can be found but where do we find the demand and what happened to all the trained people?

    I don't think the Coalition has a clue but should be given an O for Optimism. Our problems go a lot deeper than just a tweak here and a tweak there. The idea is right but moving from theory to practise is always the hard bit.

    A clue to the future can be found in the fact that two of the main elements in the value-adding sector are aerospace and pharmaceuticals. These already have strong relationships with government through defence and the NHS. It is these sectors long nurtured by the state which will have the capability to lead the charge. Hopefully they will drag the rest of us along behind them.

    Government must now nurture all the economy and not just the banks and itself. We need to create jobs for the people; good jobs, value-adding jobs with a future. Yet this in turn will necessitate a major cultural change in commercial behaviour: the next big question has to be is private sector management up to the challenge?

  • Comment number 7.

    "-Public spending will fall from 48% of GDP to 41% in 2014-15 (according to SR2010)" One wonders how this has been calculated and what model has been used. Cutting public sector budgets is not identical to cutting the deficit or even public expenditure because of the symbiotic relationship with the private sector and between public sector heads e.g. civil servant becomes redundant, receives severance much of which is saved, pays no taxes/NI, gets JSA, housing ben, and if with family tax credits, spends less private sector receives less. Now extrapolate that over several hundred thousand workers and the effect on the economy is not a simple cuts equal loss to be made up by private sector. It is deflationary and probably a negative impact on the deficit.

    Do you really think that these measures have been well thought through in macro terms when the implications of reducing child benefit are still ricocheting around Westminster and the media. "to make the austerity work the way it's intended to," - just what was the intention beyond the rhetoric?

    Clearly your final paragraph was a subtle satire on the credibility of the CSR.

  • Comment number 8.

    ..Of course it's only a model, and an abstract one at that. ..

    all models of reality are abstractions otherwise its reality?

    as for the final question then if as Mervy has said the world economy is a zero sum game either you are picking someone else's pocket or they are picking yours? If china wasn't playing its own 'economics' but joined the rest through currency movements then imbalances would flatten out so no one would notice too much strain. But then that would be 'counter revolutionary ? One must ask if politically china is able to join the capitalist system? The answer must be no. Not without the collapse of the communist party. We have a cold war again. 2 systems fighting it out. This time china has chosen the weapons of the west ie trade and currency and used them to beggar us and enrich themselves while the deluded here say its 'globalisation or market forces' rather than what it is -economic warfare. China's 'communism' is winning.

  • Comment number 9.


    communist china's objective is not to win some battle of ideas like russia tried but just to become rich because the rich always win and have their ideas dominant no matter how barmy. money is power. wealth is a wmd. In the same way its a mistake to ignore organised crime till they are so rich as to be untouchable so its wrong to ignore china's objective because at some point they become so rich you are powerless to do anything about it.

    the free marketeers who defend 'globalisation' [aka as currency manipulation] will march into the poor house created by china still saying its just market forces.

    it is no surprise the front bench do not debate detail. uk politics institutionalises incompetence.

  • Comment number 10.


    To summarise your thoughts in a few words...WHERE'S THE INDUSTRIAL POLICY going to come from?

    But what else should we expect from a bunch of PPE's and lawyers who are still directing the show.

    Maybe they'll be able to philosophise, economise and legislate a way out of this depression.

    Oh well, I guess it's back to 'shagging the brand' for a few more years.

  • Comment number 11.

    Pie charts are really very simple, and almost as easy to interpret as a table of values. So thank goodness for presentation graphics software, which can generate false 3-D effects (Why? - the data is two dimensional) and nasty gradient fill effects, to make them much more difficult to read. Another triumph for Powerpoint?

  • Comment number 12.

    dinosaur - I really enjoyed this short essay on powerpoint:

    Highly recommended!

  • Comment number 13.

    Thanks for the analysis. I think your instincts are well placed. In particular I think the "risk free rate" is a bit of kaballah - there are only interest rates.

    These policies priviledge one section of society - banks/government over others workers/small business and can be best appreciated by considering government and the banking system as a whole.

  • Comment number 14.

    I can't see how the austerity measures can possibly work without knocking away all that carefully constructed support for house prices on the one hand, and turning the poor into the desperate poor on the other.
    I think that in the end they'll be left with no option other than extending their self imposed five year time limit and do it over two parliamentary terms after all.
    The reason the two front benches are not debating these issues is because they are scared of inflaming the public. Look at how this week the questions about housing benefit have lead to days of debate and analysis in the media. If the opposition leader was to stand up and ask questions about, for instance, more QE leading to higher inflation and how that would effect people's income and spending power, it would spark a wider debate in the media making people generally more aware of what is going on. Topics raised during PMQs always attract scrutiny therefore they keep the arguments within carefully proscribed point in scaring the children.
    I'd like to see Miliband ask Cameron to define exactly who he means when he refers to 'the vulnerable' and keep on asking him till he gets an answer. Ask him to qualify and quantify 'the vulnerable'. This insistence that however bad the pain gets 'the vulnerable' will be protected is the glue that holds the coalition together. How can an opposition hold the government to account over its promise to protect 'the vulnerable' if no one can accurately define who these people are? It either means something, or it means nothing. I'm not holding my breath though, I think what Miliband meant when he said that he would be 'responsible' in his opposition to the cuts was that he will turn up every week and bowl a succession of gentle full tosses that Cameron will be able to dispatch to the boundary without breaking sweat.
    I also think that now is the right time for someone to take a long hard objective look at whether house prices in the UK really are sustainable at their present value. Look at how much prices inflated between 2002 and 2008, I don't know anyone who bought for the first time between those dates that doesn't have a mortgage of 7 to 8 times their salary. You can make credit as cheap as you like but its not going to make any difference unless you are going to lend at those kinds of multiples again. If you are not, then prices have to fall. I wonder how many first time buyers there were between 02 and 08? 1 million...2? Lets say 2...On the basis of 2 million people mortgaged up to the eyeballs the banks maintain that every home in the UK has more that doubled in value and will stay that way. Is that realistic? Even when we thought we were rich property was too expensive, what is it really worth today.

  • Comment number 15.


    Thank you for reminding me as to my previous comments as to the destruction of quality brands by margin obsessed marketeers.

    The industrial policy has to come because it is necessary. Whether it comes within the life-time of the Coalition is open to question. However, the evidence is quite clear that we cannot have the society for which most people in this country seem to aspire without an industrial policy coupled to an objective of full employment.

    In my view, if the state is to mean anything it is to facilitate the development of a broad economy involving metal bashing, steel production; metal, plastic and wood shaping, painting and finishing, fabrication and assembly among so many other functions that will both produce desirable product that can be sold overseas at a profit and create employment for all the people. There is already evidence that the commercial benefit of shorter, more secure supply chains is leading business to refocus on domestic production in preference to the Far East.

    The evidence that the strong performers in the so-called private sector are those businesses which already enjoy a strong relationship with government in one form or another provides us with the clue as to where to direct policy for the future.

    We have to accept that the ideology of free markets presented by The City during the boom years was nothing more than the emanation of foul breath from an elite secure in their reality that the state would always support their privileged status. This ideology is now a dead duck and the free market just another idealism poured over reality as if it were some custard to disguise the shrivelled and dessicated pudding underneath.

  • Comment number 16.

    #14 muggwhump

    House prices are not sustainable at the present levels. How deep the developing price collapse will be remains to be seen. They do need to come down in order to become sustainable (I use that word with caution).

    My fear is that the drying up of mortgage availability coupled to a collapse in demand will induce a policy of further QE from the Bank of England seeking to evade a secondary banking crash as mortgage debt implodes in bank balance sheets.

    We need property prices to fall much like they have collapsed in Ireland and Spain for the simple reason the presumed values were so overblown they constituted the insane side of plain silly. Furthermore a fall in houise prices will encourage the building of more houses as there will no longer be a market need to maintain scarcity.

    Asset prices need to be much lower to facilitate the manufacturing revival. These have become overblown in the boom and present a barrier to any return to economic normality. I think it fair to say that in the UK we have not had economic normality for quite a few decades.

    During the recent boom we confused the reading of the entrails of slaughtered companies with real economic activity. We don't need economists now; we need production managers.

  • Comment number 17.

    "-In a "normative" economy, where information flows transparently and everybody acts rationally, a deficit does not produce a stimulus to the economy because consumers rationally react to the future tax hike implied by saving. This is the so-called Ricardian equivalence model.
    Its critics believe it has no relevance to a modern economy.

    -Next, in times of crisis, because rationality goes out the window, a "right sized" deficit/stimulus can work - and therefore reversing it can cause a second recession. This is the common ground between Keynesians and neo-liberals.

    - Finally there is a situation of a "too big" deficit: "When deficits are too large and/or spending levels too high, instead of providing a boost to demand large deficits actually impair growth, and so fiscal consolidations, far from driving additional contraction or limiting recovery, actually promote faster growth and more rapid recovery."
    (Policy Exchange, op cit, p26)"

    For those prepared to pay close attention:

    1. 'Normative' is co-extensive with 'how things should be'. That is to be contrasted with how things empirically are.

    2. The only way that anyone 'should be' writing about economics today is in terms of the empirical laws of Behavioural Economics (and I mean Herrnstein, Rachlin etc, not Kahneman's and friends' misleading cognitivisation (appropriation) of it), and the, the ceteris paribus clauses must be taken from parameters comprising genetic diversity (i..e population measures of ability which have been covered here at length in the past. We have these data (the DfE has these data and so does ETS for the USA) and they are in the public domain.

    Knowledge of these data is what's driving what's happening. I strongly suggest Newsnight starts paying attention to these and not to what the likes of neocon 'think-tanks' like Policy Exchange have to say. Newsnight should know better, but evidently, once bitten.........?, if you know what I mean.

  • Comment number 18.


    Mervyn King makes a stand for reform as banks seem intent on forgetting

    'That's why, amid all this talk of benefit cuts and half-built aircraft carriers, the real budgetary conundrum is banking reform. The debt-soaked balance sheets of the UK's top 10 banks have ballooned in recent decades to 459pc of national income, compared to 97pc in the US. The West can't afford another bail-out of its too-big-to-fail banks – and that's particularly true of the UK.'

  • Comment number 19.

    #Paul, excellent post as usual, cheers for commenting on the IMF, do you think that 'EU leaders clinch pact to defend euro' has anything to do with the MAP (mutual-assessment-process)

    'A permanent fund will be set up to bolster the euro in times of crisis, and the EU will have extra powers of scrutiny over national budgets.'

    this looks like a fund to pay for the admin and a loss of sovereignty, and then they want to change the Lisbon Treaty so that member countries could be sanctioned (fined?) if they try to step out of line.

    Olivier Blanchard discusses The G-20,s "Mutual Assessment Process"


    Anyway, 'what would you have to do to make it work?'

    Give everybody 2 acres and a cow and go round cheering people up :)

  • Comment number 20.

    Well done for highlighting the fact that they are devaluing the pound, hence the savers and prudent are getting well and truly stuffed.

    It matters not wether the condem government do what they do, as labour did before, they now realise it is not a free capitalist system they operate in but they are themselves controlled by the shadow finance sector, the very same sector which caused the mayhem during the last great depression.

    They are sucking off the last remaining remnants of juice from the west and will move on to the east , the uk at best will have a slow and lumbering existence for the next decade.

    The growth rate needed exceeds boom times by a factor of four, so how they hope to achieve it during a recession the mind boggles.
    Needless to say, the mp's have shown their contempt for the proles, and they still have their high salaries and pensions to look forward to no matter who is in charge knowing that a place in business awaits them.
    Free capitalism dies years ago, its a fixed game, as are the stock markets designed to fool the suckers who think it is all regulated and straight.

    What is needed is debt forgiveness and a new transparent way of doing business and government,

  • Comment number 21.

    A reminder of some of the demographics which go into those ceteris paribus clauses. Source is the ONS Annual Abstract of Statistics. It is what we have produced or not produced here, and its distribution of genetic ability which matters (the differential birth rate in the cohort of 700,000 or so. These are our collective skills. These are the elements of our economy. The rest of the talk about the economy is largely hot air. If your basic components are badly turned out, you are in trouble.

    I strongly advise regular posters here, and especially BBC journalists, to start paying closer attention to social engineering than to rhetoric.
    The latter is women's work and contributes little which is constructive to the economy (I suggest it does precisely the opposite in fact). China learned this lesson long ago, and it learned it from British Fabians and other researchers in the fields I draw upon. That is why its government is run by engineers, and why women play only a minor role in governance, even though it is the world's largest socialist country. It is also why it is the world's fastest growing economy.

    England and Wales

    Births Thousands

    1901 - 1911 929
    1911 - 1921 828
    1921 - 1931 693
    1931 - 1951 673
    1951 - 1961 714

    1961 - 1971 832
    1971 - 1981 638
    1981 - 1991 664
    1991 - 2001 647
    2001 - 2007 634
    2001 - 2008 644

    Note Scotland where immigration contributes less. Of all birth today, a disproportionate number are now to mothers not born here. Immigration has clearly been used to swell the number of consumers and compensate for a falling birth rate. But why a) note the mean ability of the immigrants and b) why has the indigenous population not having replacement level size families? Might it be because they have not been happy bunnies?

    When you read of odd people like Jeffrey Sachs (who gave the BBC Reith Lectures in 2007) asserting that 'we' are 'bursting at the seams' demographically, he wasn't talking about reducing immigration was he? He was misleadingly using a collective pronoun which is how many of our problems are created by abuse of quantifying in (intensional contexts are subtle). What was he up to do you think? He was also there for the kills in Russia in the 90s. Look at their birth rate now. See a book written by Stuart Svonkin in 1997 on US activist groups promoting 'liberal' (libertarian?) values in 'defence' of their own interests and 'social justice'.. What they were doing was undermining discrimination - the core of intelligent behaviour by misleadingly equating it with prejudice.

    1000s births
    1901 - 1911 131
    1911 - 1921 118
    1921 - 1931 100
    1931 - 1951 92
    1951 - 1961 95
    1961 - 1971 97
    1971 - 1981 70
    1981 - 1991 66
    1991 - 2001 60
    2001 - 2007 54
    2001 - 2008 55

    Note the dramatic drop in Scotland? Imagine the English figures without Ex Commonwealth immigrants (Muslims especially).

  • Comment number 22.

    Enjoyed the post Paul.
    The implication is, as Stanilic says, industrial restructuring and the creation of masses of "real" (as in sustainable) low skill jobs through investment in productive capacity, long term low interest rates, a shot currency, high energy costs caused by the latter, and reduced consumerism. If more jobs are not created, society will disintegrate as the tax revenues will not be adequate for the "safety net" let alone child benefit. Then only the strong, aggressive, criminal will survive. To achieve a more planned economy will require a bonfire of the politics of the free market, taboos such as state direction of the economy will have to be broken as the market will not sort these long term problems out. Then there's the banking sector - a UK bank for reconstruction and development would be a good start. A retail banking sector that takes no risks with savers deposits/pensions etc and a separated, non-government backed Investment Banking sector that can speculate all it likes into oblivion, but not with OPM, Other Peoples Money.
    On a lighter note, Google today celebrates Hallowe'en with an unprecedented 5 parter bringing in the cartoon hound Scooby Doo. All fine in Acts 1-4, lots of magnifying glasses, Shaggy, Thelma and co. In Act 5, however the villain in pink is revealed....a, shall we say, east asian looking character carrying a bag full of what looks like cheap Halloween toys and trinkets. The message is clear if you look for for Scooby Doo!

  • Comment number 23.

    capitalism is dead...let's all go to it's funeral....

  • Comment number 24.

    I think we have been voting for scooby-doo since the mid-Fifties and getting loads of it as a consequence.

  • Comment number 25.

    Just to be clear those figure are the average yearly births in thousands, not the total for the decades. because people are living longer the impact takes a while to work through in terms of falling populations. Still, the point raised elsewhere about the resilience of one group in the face of terrible adversity last century is quite remarkable, lessons should be learned..

  • Comment number 26.

    "24. At 11:37am on 31 Oct 2010, stanilic wrote:
    I think we have been voting for scooby-doo since the mid-Fifties and getting loads of it as a consequence."

    But you've been calling for, and voting for anarchism, and now that you've got it, it isn't what you expected is it? With a smaller and smaller state (20% of the working population is in the public sector and about half of those are in Education and healthcare, and even an armed forces which has been cut in half) what did you think small government would ever amount to other than a freer market and more deregulation, more crime, more predation on naive consumers etc? That's all that anarchism is in practice, less rule, regardless of what idealists ever aged with their fondness of rhetoric. It's just freedom to take candy from kids. That's exactly what you have got, and if someone comes along and points out that lots of the population stop growing cognitively at 11 or so because that's the way their genes are programmed, what do you gave to say to those who say kids need regulating at whatever chronological age, and regardless of how gifted they are at gabbing?.

  • Comment number 27.

    Meanwhile, the fire-sale sell-off of the state’s assets continues unabated...

    Dover 'people's port' buy-out scheme to be launched

    Defra to consult over selling Forestry land in England

  • Comment number 28.

    Just how much lower do long term interest rates need to go?

    And if "the markets" think this is going to work aren't long term interest rates actually going to increase from the current low levels?

  • Comment number 29.

    If you think that the problem is differential birth rates between the races tabblenabble02 why don't you switch off your computer and go out, get a few beers inside you and start a little bit of corrective action?

  • Comment number 30.

    "29. At 7:57pm on 31 Oct 2010, SeanBroseley wrote:
    If you think that the problem is differential birth rates between the races tabblenabble02 why don't you switch off your computer and go out, get a few beers inside you and start a little bit of corrective action?"

    Try to give that some thought. What reasons could you (or anyone else) come up with which would highlight the nature of your contributions there?

    Self-centred people don't easily grasp what's happening in the world, as that directly about them, isn't real to them - they mainly just care about their own place in the world and how they appear to others.

    This is even more evidently so with women which is why their contributions are cute but extremely limited if not child-like. 80% of our economy is now Service Sector (80% is also in the Private Sector), and only about 2.5 million people now work in manufacturing most of which is light, it's even down by half a million from a decade ago. What pattern do you notice? A silly question to put given how I start this paragraph?

    Let's see (by your next post) if you're educable (and objective) enough to be able to analyse your own post and are able to explain to us how and why it was irrational and child-like. If you can't do that, I suggest you're wasting your time watching programmes like Newsnight and making contributions here.

    Some light reading for you

    See table 7.5 in the statistics on the Labour Market in the ONS annual abstract of statistics, and if and when you ever ask what X has to do with Y, instead of sneering, try to think to yourself, that you have been told that such thinking is the start of grown-up, male, thinking which requires disciplined teamwork to be productive.


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