Monday, Jun 14, 2010
I'm not sure about the claim that DB is a "top economist"
Sky: Top Economist Warns Of 'Double Dip' Recession
A leading economist has warned the Government's proposed spending cuts risk plunging the UK back into recession.
Posted by mr g @ 11:18 AM (1772 views) Add Comment
28 Comments
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1. peter said...
He's actually an +ignorant+ economist rather than a leading one.
Like the other Keynsian economists, he makes the mistake of thinking that government spending can create growth. Of course he ignores the fact that anything they spend has to come from productive people first.
Before anyone takes him too seriously, it's worth remembering what he said about the economy before this trouble began. Yes, it was nothing - he didn't see any trouble coming.
People like him enjoy the power and influence they do because what they say happens to fit in nicely with the interests of the welfare warfare state: ie big government and continuous inflation, which lets them take away people's savings without taxing them.
2. simon68 said...
Massive government spending could not stimulate growth and astronomical increase in gilts or treasury notes issue can only fret the market. Growth depends on how you spend your money on productive activities (e.g. build infrastructure where benefits last decades, help SME and industries to manufacture things and export things).
I am interested to know where international capitals are flowing into or out of:-
http://img571.imageshack.us/img571/9250/best1.gif
http://img14.imageshack.us/img14/5339/worst1.gif
3. mark wadsworth said...
This whole line of argument seems ridiculous to me.
Above and beyond a certain level (and we are beyond that level), government spending is merely redistribution. If that's universal benefits or education vouchers, then great*. But if all they do is take £40,000 from the private sector and create an extra non-job, it's just pointless. Because yer non-employee takes his salary and then spends it on stuff that the private sector provides. The state sector does very little apart from transfer consumption opportunities from some people to other people, while reducing total output capacity - don't forget that for every 1 non-job created, one-and-a-half proper jobs in private sector are destroyed (or not created).
Conversely, creating (or at least not destroying) a private sector job costs the Treasury very little - all you do is reduce VAT or Employer's NIC (preferably to 0%) and more jobs are created/fewer jobs destroyed, and of course those extra private sector jobs are still paying income tax, not claiming benefits etc - so overall it is revenue positive (or at worst, revenue-neutral).
* Don't forget that total cost of DWP welfare and state pensions plus tax credits plus state education system, plus tax breaks for pension 'saving' is in the order of £270 billion per annum, which would make a tasty Citizen's Income of £86 a week for everybody. Or give pensioners a Citizen's Pension of £140 a week each and cut everybody else's CI to £73 a week (to cover basic needs plus education costs for children, so kids get say £50 a week education voucher plus £23 child benefit).
Or whatever.
4. nickb said...
Peter,
I'm afraid I disagree. The British state has the power to issue its own currency, it's therefore not in the same position as Greece or the other Eurozone countries. Government spending can stimulate the economy (e.g. it's the massive war mobilisation effort that lifted economies out of depression pre-WW2) but it all depends on the details of how it is financed. Selling bonds to non-bank financial institutions will be fiscally neutral, but using the central bank's credit creation powers would not be. Crushing the public sector will probably worsen the economic situation on the ground, whether or not you think these people are 'productive', because you will be taking consumers' incomes away.
Nick
5. simon68 said...
Whether money supply expansion could stoke up inflation depends on productive activities in the economy. Just have a look at China, the Chinese government pumped trillion of money into the economy coupled with foreign FDI from Taiwan & Hong Kong/Singapore/Qatar etc but it can still contain inflation to below/around 3%, Why?
It’s because of China can sustain a 9% to 10% GDP growth each year. It’s a real growth not zombie growth since all pumped monies have been channelled to bullet rail, water plant, nuclear power plant type of infrastructure projects.
6. nickb said...
@Simon
What you say concerning inflation seems sensible, but concerning real stimulus much also depends whether your economy is at full employment. In the great depression you had farmers throwing milk away whilst unemployed people starved. These people were just as 'productive' as they were before the depression in terms of their ability to actually do work. But the money supply had vanished because of debt deflation, so people were not able to contract for mutual advantage through the market as they had done before.
Nick
7. titaniccaptain said...
I agree with Nickb.....
Also I would like to add that in the private sector vs public sector argument we mustn't assume that all profit taken within the private sector will get redistributed here in this country and that can also work on the regional level....... only taxable profit is a guaranteed take from the private sector....and that's not even guaranteed.
Time for a coffee.
8. titaniccaptain said...
Oh yes and a quick take from a one of our writers.....on the topic of house prices.....
http://www.economicvoice.com/time-to-sell-the-house/50010968
9. simon68 said...
The 1 trillion pounds public debts together with 1.5 trillion household debts will have to be repaid whether through VAT or income/profits tax increase or stealth tax (hyperinflation)/pounds devaluation or combination of them. The burden will ultimately filter down to each UK family one way or another, so don’t think you can get away from it.
http://www.debtbombshell.com/
10. simon68 said...
Crowding out (economics)
In economics,"crowding out"is any reduction in private consumption or investment that occurs because of an increase in government spending. If the increase in government spending is financed by a tax increase, the tax increase would tend to reduce private consumption. If instead the increase in government spending is not accompanied by a tax increase, government borrowing to finance the increased government spending would increase interest rates, leading to a reduction in private investment. There is some controversy in modern macroeconomics on the subject, as different schools of economic thought differ on how households and financial markets would react to more government borrowing.
Usually when economists use the term "crowding out" they are referring to the government spending using up financial and other resources that would otherwise be used by private enterprise. However, some commentators use "crowding out" to refer to government providing a service or good that would otherwise be a business opportunity for private industry.
11. nickb said...
Simon,
Where is the crowding out mechanism when the central bank spends money into existence (e.g. by crediting the accounts of government departments who then spend it)?
I disagree about the public sector debts "inevitably" being paid by households (though I agree that this will be the way that the government will attempt to go) because of this.
I pit my link against your deficit hysteria link: http://bilbo.economicoutlook.net/blog/?p=9899
Nick
12. uncle tom said...
Simon68,
Don't believe the offical inflation figures in China - I was there recently, and it's clear that inflation is becoming a very serious issue. It is probably closer to 20% than the offical 3%.
I don't believe that the solution to the structural deficit lies in greater taxation. The state sector has become too big, and the cost of works commissioned by the public sector has soared in recent years. The reasons need to be analysed and addressed.
There is far too much paper being shuffled around pointlessly, especially in the health, defence, welfare and education sectors; and much of that comes down to worshipping the god of covering one's a*se.
A simple principle that could be adopted would be to make schools and hospitals lawyer free zones - that if you accept free services from the state, you have no right to sue if things go wrong. That does not mean that mistakes should not be investigated, or damages paid (if they are genuinely warranted..) - but that the obscene legal beanfeast (which loves to spin things out for years as it feathers its own nest) - is cut entirely out of the equation..
Slashing the legal aid budget would do no harm also. Even when there is no doubt as to guilt, a lawyer representing someone accused of murder can currently expect to nett over over £100k in fees at the taxpayer's expense..
..why?
13. hpwatcher said...
Where is the crowding out mechanism when the central bank spends money into existence (e.g. by crediting the accounts of government departments who then spend it)?
The money has not just beeen confined to government departments though. There have been floods of money going all over the place.
I disagree about the public sector debts "inevitably" being paid by households (though I agree that this will be the way that the government will attempt to go) because of this.
But it's always been the same - taxes go up.
14. simon68 said...
To: Uncle Sam
Although most government in the west could manipulate the CPI figure via changing the composition of the underlying consumer products mix for survey, but China need not to do so since China is still a communist country. It can and does implement administrator orders to push down/control retail price of items such as electricity charge and petroleum. It has in the past ordered State Enterprises such as China PetrChem to reduce the retail price for petrol below the costs of production where no enterprises in the world could do.
15. simon68 said...
Those money defray from Central Banks is basically used to buy toxic assets or non-performing loans or taken those out of the financial institutions’ books into the public books.
16. sureseam said...
One of the things that perplexed me about the property market was that the regional rural communities had house prices that almost competed with urban centres of employment.
Much made sense when I realised that after many years of Labour government - most (60%+) of the jobs in these areas are funded by the tax payer.
So then as public expenditure needs to be cut the regional rural will bear a brunt of house prices returning to price ranges they should never have left. It will be a nasty transition and the parties wot does it will not be forgiven lightly.
And otherwise sane folk will recall the happy go lucky naughties before the "nasty" tories got back in (and had to pay back the money spent on Labours attempts to bribe the electorate).
Blanchflower is right to think that the answer to our problems includes economic growth but wrong to imagine that excessive government expenditure has a helpful effect in getting there.
17. nickb said...
Simon,
Yes but the way this done was ineffective against credit seizure. It need not have been. http://blogs.ft.com/maverecon/2009/09/what-can-be-done-to-enhance-qe-and-ce-in-the-uk-and-who-decides/
Nick
18. simon68 said...
Why QE does not work? Simply all toxic assets and CDO & CDS kind of derivative products are property mortgage related not SME businesses. Unless you can lure people flocking back into the property market otherwise any attempt to restart the credit expansion is destined to fail.
19. simon68 said...
excessive government expenditure is never a problem.
the problem is whether the expenditure is being put into good use, in productive use………….
20. nickb said...
Simon,
We can't equate all attempts to stop the money (credit) system imploding, though, with attempts to reignite the credit bubble. So, negating the effects of the 'toxic waste' has to be combined with measures (credit controls) to stop that happening. I agree with you that credit needs to be channeled to productive activity. The real problem, then, is that currently over 2/3 of the credit money supply is created as mortgage debt. So it seems to me that the current situation points to the need for fundamental monetary reform.
Nick
21. the number cruncher said...
I am all for balancing our budget and to follow a real Keynesian model of running surpluses in the boom and deficits in the bust, the Keynesianism ascribed to allowing 'huge deficit spending' purported by some of the more libertarian contributors to this site bemuses me, and has nothing to do with the economist as I have read his works.
mark wadsworth @ 3 and others
Your view of public sector 'non'-jobs and private sector 'real' jobs is gross oversimplification. There are many, I would say the majority of public sector jobs are real jobs, that contribute to the economy in a way that increases our economic activity and efficiency. There is also a huge amount of private jobs that are a drag on economic development and efficiency.
The issue is not that we are spending to much on the state sector, it is that we are not driving both sectors to greater efficiency and effectiveness. There are many jobs in a balanced economy that just cannot be achieved efficiently by the private sector. (also our system of tax collection is very silly and we need to move to LVT)
As we have seen with the banking sector, telecommunications and many other industries the private sector gravitate to oligarchy and monopoly seeking economic rents as opposed to earned profits. This inefficiency is colossal and is just as much, if not more, a danger to our economic progress than the state sector inefficiency.
The state sector has a problem with inefficiency and the fact that the management seek a steady state and some Ar*e covering. This can be pursued by having more truly autonomous NGO's and sate supported co-operatives is another model. The German model of state ownership of part of a business is one more model. Leadership from politicians on efficiency, risk taking and innovation. The public and the media needs also to be educated to accept some events as acceptable and not crucify politicians for issues that they are not really responsible for.
The problem with the social credit systems is you would still need state bureaucracy for child protection, invalidity, home helps etc, it does not eliminate all elements needed to run a functioning state safety net. Again your calculations are grossly simplistic in what is the role of a functioning state. A pure social credit system would eliminate many of the forces that create social cohesion. I fear a simplistic social credit system would create ghetto areas of dreadful inequality, in housing, education and access to services far more than we do have at the moment. I like some aspects of a social credit systems, but your simplistic calculations, and laissez faire assumptions make me very fearful that a lot of people at the very bottom of society will end loosing out big time.
22. simon68 said...
A mortgage lending of anything more than 80% house value isn’t a prudent business at all, especially if the mortgagee holds 2 or even 3 properties. Any turbulence in the housing market of 15% fall could easily wipe out your equity.
23. simon68 said...
To: the number cruncher
“There is also a huge amount of private jobs that are a drag on economic development and efficiency.”
Iv’ got you. You must be referring to BBBPPP, ha!
24. simon68 said...
To: the number cruncher
Perhaps UK should follow China’s communist system where all largest businesses are State owned Enterprises. It adopts capitalist system in running the economy but by totalitarian on political side, right?
25. the number cruncher said...
simon68 @ 24
NO - we have enough crony capitalism in our government already thanks you very much
26. Jim Green said...
NickB, you may be interested in this - an excerpt from ‘Government Debt and Credit Creation: A Study of the Creation of Credit and its effect on the British Economy’, a report published by the Economic research Council (ERC) in December 1981. In 2010 the numbers are all a lot bigger, but the principal and the message is as relevant as ever:
‘’A quote from the Economic Reform Club's (now part of the ERC) series of papers 'The Banks and the War', IIIrd Paper, published in 1943, put the position clearly, describing the situation where Government does not have full control of credit:
"...it is apparent that no new (credit) money can be created except through the banking system, which issues it as an interest-bearing debt owed to them by the Nation.
The result of this has been the piling up of an enormous burden of debt on which succeeding generations of our people will have to pay huge sums each year in the form of interest and Sinking Fund.
As the banking system in creating this money is merely using the Nation's credit by liquifying it, the right of the Banks to treat such created credits as a loan and to receive payment of interest thereon is unjustifiable, and it is therefore submitted most strongly that they are not entitled to anything more than an agreed fee based on the extra work devolving upon them by the handling of these funds, in a manner similar to that in which the Bank of England is compensated for the management of the National Debt and of the Fiduciary Issue."
The power to issue bank notes has provided for the Government. since 1945, about £19,OOO million of revenue, of which £9,300 million arises from the increase in notes issued, and £9,800 million from the interest saved on government securities held as backing for the issue.
In 1980, the Government borrowed £11,154 million and spent £8,661 million paying interest on previous debts. The interest payments represented 10.6% of Central Government current expenditure.
The power of the banks to increase credit has meant that the Government has foregone revenue, since 1945, of over£30,000 million, of which £14,OOO million arises from the increase in credit , and £17,OOO million from the interest the Government could have earned if the credit had been issued as notes.
Under the present system the Government could have sold direct to the Bank of England Issue Department government stock and received notes in exchange. Interest paid on this stock would have gone to the Issue Department and in turn been credited back to the Treasury.
The effect on total money supply and consequently on inflation would have been nil.’’
27. letthemfall said...
@3 is mark wadsworth at his most glib. Show us how govt spending above a certain (?) level is redistributive, and under what conditions. What are these non-jobs? Why are they non-jobs? I could list an array of private sector jobs of dubious value (non-jobs?), which after seeing the Dispatches programme would have to include a large portion of the banking sector (though I think we already agree they are a useless and overpaid shower). And you'd abolish welfare and state education for a "citizens income"? Doesn't sound very tempting - unless you're wealthy of course.
28. the number cruncher said...
letthemfall @ 26 - My respect, you said in one paragraph what it took me six.