OBR shows how austerity killed growth

The OBR published a short note last week showing the impact on growth from the fiscal decisions taken by the Coalition Government. This is not a revelation. The OBR has said before that austerity would have and has had a negative impact on growth, but the chart it produced with this note is quite striking. Here’s the chart.Screenshot 2015-10-27 at 6.13.47 PM

It shows that following the crash, Labour’s discretionary fiscal policy (that’s active changes to government spending and taxation) had a positive impact on growth of around 0.3% in 2008/9 and 2009/10. Labour enacted a fiscal stimulus, but not a very big one.

It’s what this chart shows about the period after the 2010 election though that’s most interesting. After assuming power in 2010, the Coalition embarked on it’s policy of austerity. When it was formed, the OBR actually thought austerity in the first year would have a bigger negative impact than it in fact did, but it still provided a drag on growth of about 1% in 2010/11. 2011/12 was actually the year when austerity really started to kick in. When the OBR made it’s first forecasts though, it thought austerity would have a negative impact on growth of around 0.6%. In actual fact though, it was more like 1%.

It’s fairly well known now that despite the rhetoric, George Osborne actually responded to terrible growth figures in 2011 and 2012 by easing up on austerity, and this can be seen clearly in the chart above. In 2012/13, the government’s discretionary fiscal policy had a very small negative impact on growth, turning to a very small positive impact in 2013/14.

In 2014/15 though, the year before the election (coincidentally I’m sure), George Osborne’s discretionary fiscal policy made a positive contribution to growth of over 0.3%, which is more than Labour’s stimulus provided after the crash. So growth is only at the level it is now because of the positive impact of fiscal policy, something that many Conservatives don’t want to hear.

We are to believe that more cuts are on the way as Osborne tries to achieve a surplus by 2019/20, but if he goes ahead with the cuts implied by his plans – tax credits being only one part of it – it seems likely this negative drag will continue. Coupled with prospects for growth in the rest of the world looking bleak, it seems unlikely that growth can persist alongside spending cuts. Something will have to give.


A Tale of Two U-Turns

Today was a day of U-turns. One for the Tories, one for Labour. For the Tories, David Cameron decided to pull out of bidding for a Saudi prisons contract, over concerns for human rights and the death penalty in Saudi Arabia. The wily Michael Gove appears to have leaked the story of a Cabinet row in a (successful it seems) bid to paint himself in the best possible light, but others may wonder if Jeremy Corbyn’s public calls for the contract to be pulled also had something to do with it. Whatever the truth, Cameron’s decision seems to be popular as U-turns go.

For Labours part, Shadow Chancellor John McDonnell made a significant U-turn of his own. This one has gone down like a lead balloon within his own party, even though it’s a very good about turn for him to make. Two weeks ago he appeared to commit Labour to voting for George Osborne’s Fiscal Charter; a ridiculous document which would commit future governments (in theory, but not in practice) to run fiscal surpluses in ill-defined ‘good times’. McDonnell appears to have signed up to it to try to allay concerns about Labour’s ‘fiscal discipline’. He has now changed his mind and should be applauded for doing so, although it will be embarrassing for him for a few days and has caused serious ructions in the Labour Party. Veteran MP Mike Gapes (who it seems has been having a lot of fun today) summed this feeling up succinctly today Tweeting:

It’s no secret that many (most) Labour MPs actively despise McDonnell, so it should be no surprise that they look to pounce on any perceived errors in judgement. The important thing though is that he has now made the right decision on the Fiscal Compact and now has a chance to make a coherent case against austerity. They should probably now try to get as many ‘experts’ as they can onto the airwaves to trash the Fiscal Compact. That shouldn’t be too hard.

Arguing against “really simple” economics

I blogged earlier about Labour’s decision to sign up to George Osborne’s “fiscal compact” and whether or not that was a good idea. I’ve just been reminded of a bit from Thursday’s Question Time when a member of the audience talked about being “really simple” with the government’s budget being just like his own. I wonder if this kind of thinking is was prompted John McDonnell’s move yesterday. As you can see in the video, economist Yanis Varoufakis quite succinctly set the audience member right, prompting applause from the rest of the audience. It shows that this kind of “common sense thinking” can be countered quite easily if the will is there. I suppose the question is whether the bloke who asked the question changed his mind after the exchange, or still thinks he is right:

Labour chooses to play on away team’s turf for next five years

The Labour Party Conference starts tomorrow and on its eve, Labour’s Shadow Chancellor John McDonnell gave an interview to the Guardian in which he committed Labour to signing up to George Osborne’s “Fiscal Charter”, which commits the government to running a surplus by 2019-2020 and beyond in ‘normal times’. In effect, the fiscal charter is meaningless because governments don’t have total control over either their spending or the amount of tax they collect, so the government’s budget balance is largely dependent on factors outside its control. That said, it was a ‘clever trick’ designed by George Osborne to trap Labour. I guess they were supposed to reject it on the perfectly reasonable grounds that it’s economically illiterate, after which Osborne and co. could paint Labour as ‘fiscally irresponsible’.

McDonnell’s decision then is a tactical one. One would hope he realises the fiscal compact is nonsense, but he has decided for whatever reason to go along with the charade. In doing so he is like a sports captain who agrees that his team will play all their games away from home. It doesn’t mean you won’t win the league, but it does make your task a lot more difficult. McDonnell is clear that committing to ‘live within our means’ does not mean a continuation of austerity for the poor, but rather a shift of the burden onto those on higher incomes.

Playing on the away team’s turf in this context means you must cost every policy along the lines of “We will pay for x by raising tax on y or cutting spending on z”. You also need to get organisations like the Institute of Fiscal Studies to mark your homework and say “yes the sums add up”. If your plans include raising taxes on the rich, there will be no shortage of people queuing up to tell you apocalyptic consequences will follow as a mass exodus of ‘wealth creators’ ensues. Labour should be ready for this. They’ll also be attacked along the lines of their plans not being believable. “You can’t trust Labour” etc etc.

The alternative for Corbyn’s Labour would have been to bring the Tories onto their home turf. They started to do that, even getting the term “Corbynomics” coined. Some of the ideas within Corbynomics – PQE in particular – took a look of flak and they now seem to have backed away from them somewhat. To me though, they had sparked quite a bit of interest in academia and they could have used that as a launch pad to start to talk about the economy in new and much more interesting ways. It would still have been tough, but it would have been in keeping with Corbyn’s “new politics” vibe.

So now they are playing on the Tories home turf instead of their own, can they still win? It’s not impossible, but it makes anything they propose open to the same old attacks. If I had to guess, I would think Corbyn and co. realise they will face the constant threat of a coup from now and for the next five years, so are trying to head that off by appeasing some in the party. There’s an idea that what you say in opposition and then what you do when in power don’t have to bear too much similarity to each other – Osborne is keenly aware of this – but whether McDonnell’s tactics are wise here, I’m not so sure.

Lessons for Corbyn in “Lerner’s Law”

I’ve seen a couple of references to “Lerner’s Law” on Twitter in the last couple of days and thought “What’s that?”. Before anwering this question, let’s wind back a bit.

Who is Lerner?

Abraham (Abba) Lerner was a Russian-born British economist, who, writing in the 40s and 50s developed a theory he called “functional finance“. JM Keynes was aware of some of this work, and there is evidence he agreed with much of it. Unfortunately Keynes died before really exploring Lerner’s ideas. If he had, maybe what we think we know about “Keynesian economics” would look a lot different today.

Lerner’s functional finance is a key plank of what is today called Modern Monetary Theory (MMT), and it was one of MMT’s key figures Warren Mosler who I first saw mention “Lerner’s Law”:

So what is Lerner’s Law?

I’m not sure it’s actually known widely as such, but what Mosler alluded to was a passage from Lerner’s 1951 work “Economics of Employment”. Bill Mitchell quotes this passage in his latest book “Eurozone Dystopia”. I found the relevant section here. Bill writes:

“Lerner’s work also contains a very clear message for progressive thinkers who are reluctant in the current debate to think outside of the confines that the neo-liberals have created. For example, Labour politicians in the United Kingdom confront the austerity debate with claims that they would ‘fix the budget’ over a longer time period to avoid the massive damage that immediate austerity brings. Of course, even debating the ‘health’ of the fiscal position in terms of some financial ratios is ceding ground to the conservatives, ground that is illegitimate. Lerner (1951:15) called progressives who argued in this way ‘proponents of organised prosperity’ and argued:

A kind of timidity makes them shrink from saying anything that might shock the respectable upholders of traditional doctrine and tempts them to disguise the new doctrine so that it might be easily mistaken for the old. This does not help much, for they are soon found out, and it hinders them because, in endeavoring to make the new doctrine appear harmless in the eyes of the upholders of tradition, they often damage their case. Thus instead of saying that the size of the national debt is of no great concern … [and] … that the budget may have to be unbalanced and that this is insignificant when compared with the attainment of prosperity, it is proposed to disguise an unbalanced budget (and therefore the size of the national debt) by having an elaborate system of annual, cyclical, capital, and other special budgets.

Progressives should first and foremost seek to educate the public about how the economy and money actually operate and what opportunities the government has to act on our behalf to advance our wellbeing. If we think in this way, then options that have been constructed by the neo-liberals to be ‘dangerous’, ‘radical’ or ‘taboo’ will start to appear reasonable and grounded in reality.”

So simply stated, Lerner’s Law would be something like “If you try to present your ideas cloaked in the language of you opponents, it will do your cause great damage”.

This offers a lesson to Corbyn and his supporters. Corbyn has manfully tried to present policy ideas that currently sit outside what is thought ‘possible’ within the current orthodoxy. He has done so though while trying to present himself as being enthusiastic about balancing the budget, or at least the ‘current’ budget. He has also talked about how he would ‘pay for’ his policies by raising taxes on the rich. Both of these are examples of disguising ‘new doctrine’ as old as Lerner wrote, and leave him open to attacks from those holding on tight to the old.

Mosler, in his Tweet embedded above invokes Lerner’s Law to criticise the idea of “People’s Quantitative Easing” as proposed by Richard Murphy and adopted by the the Corbyn campaign. It takes an idea that is actually quite revolutionary (Overt Monetary Financing), and cloaks it in the language of something that was on the unorthodox edge of current orthodoxy (Quantitative Easing). This has opened it up to all kinds of criticism (for example the recent FT letter signed by 55 economists).

When it’s suggested that ‘progressives’ should adopt different language to try and explain alternative policies, it’s sometimes replied that this is a hopeless cause as the current orthodoxy is so ingrained in the public’s minds. Lerner has an answer to this (quote also referenced from Bill’s book):

The scholars who understand it [the “new doctrine”] hesitate to speak out boldly for fear that the people will not understand. The people, who understand it quite easily, also fear to speak out while they wait for the scholars to speak out first. The difference between out present situation and that of the story [The Emporer’s New Clothes] is that it is not an emporer but the people who are periodically made to go naked and hungry and insecure and discontented – a ready prey to less timid organisers of discontent for the destruction of civilisation.

Let’s speak out!

Osborne’s ‘clever’ games should come back to bite him in the end

In a sane world, the news today that George Osborne’s wishes to enshrine in law a new ‘fiscal framework’ to ensure future governments only borrow in ‘exceptional circumstances’ would be greeted by laughter followed by the Chancellor’s immediate resignation for economic illiteracy.

Unfortunately, we do not live in a sane world. We live in a world where the idea that a governments finances are comparable to a households finances is a zombie that just won’t die. Many people – including many who should know better – will nod sagely at this news and think it’s a great idea.

This latest wheeze from Osborne is clearly designed to expose Labour’s perceived weakness on the economy (as if they could get any weaker). Faced with this, what should Labour do?

Their immediate reaction appears to brand it a ‘political stunt’, which is exactly what they’ve said every other time Osborne has tried one of these tricks. Labour haven’t said whether they will support this measure or not, but I think they should congratulate the Chancellor on his excellent idea and support it wholeheartedly. Then, when the mythical surplus proves illusory, they can batter Osborne with his own words. And if they ever do get back into power, they can just pretend they are sticking to the rule while doing the opposite. That’s pretty much what the Coalition did for 5 years, but hey, that’s just politics right?

There are a lot of reasons why Osborne’s surplus is not attainable for more than a year or two as Ann Pettifor sets out pretty clearly here:


no matter how determined he may be, the Chancellor cannot eliminate the deficit – the balance between government income and expenditure.

While you and I can cut our overdrafts by cutting our spending, or by increasing our income – the all-mighty Chancellor cannot do the same. The public sector deficit is not dependent on his actions, or the government’s policies. It is dependent on economic activity in the economy as a whole. If the economic ‘cake’ (that is employment) shrinks, the government deficit will rise. As the ‘cake’ expands, the government deficit will fall.”

And for a longer explanation of the damaging effects of austerity, I can recommend todays Billy Blog.

Low paid, informal work is unlikely to be a stepping stone something better as promised

Via Billy Blog, I found this interesting report published by the OECD. It’s a report on inequality and it has this to say on what it calls “non-standard work”:

“Promoting equality of opportunities is not just about improving access to quality education but also ensuring that the investment in human capital is rewarded through access to productive and rewarding jobs. Before the crisis, many OECD countries were facing a paradoxical situation: their employment rates were at record high levels and yet income inequality was on the rise. Typically, rising employment might be expected to reduce income inequality as the number of people earning no salary or relying on unemployment benefit falls. However in recent decades the potential for this to happen has been undercut by the gradual decline of the traditional, permanent, nine-to-five job in favour of non-standard work, typically part-time and temporary work and self-employment. More (often low skilled) people have been given access to the labour market, but at the same time this has been associated with increased inequalities in wages, and unfortunately, even in household incomes.”

The economy is now in ‘recovery’, but this trend which started before the crash has not abated. We are seeing ‘record high’ employment rates again, but no rise in incomes, while we see big rises in temporary or “zero-hours” jobs, and a big increases in self employment, much of which is very low paid, with those newly self-employed reliant upon working tax credits to get by.

When asked about this, Government Ministers will often argue that “any job is better than no job at all”, or that a low paid or zero-hours job will for many be a stepping stone to something better. For some this may be true, but the OECD qualifies this heavily though, saying:

“While associated with lower job quality, non-standard work can be a “stepping stone” to more stable employment – but it depends on the type of work and the characteristics of workers and labour market institutions. In particular, temporary work can increase the chances of acquiring a standard job compared with remaining unemployed in the short run by some 12 percentage points on average. But this is not true of part-time work or self employment, which do not increase the chances of a transition to a standard job… In addition, transition rates remain low when considering a longer time span: less than 50% of the workers that were on temporary contracts in a given year were employed on full-time, permanent contracts three years later.”

As much as the Government trumpets the UK’s high employment rate then, it’s to be hoped that it keeps an eye on job quality as well as quantity. Those taking on part-time, temporary or self-employed roles as there is nothing more permanent available can easily get stuck in that type of work rather than it being a ‘stepping stone’ to something better. Ministers should be concerned with this rather than being complacent, because it is a problem that could have long term impacts and effect everyone, not just those stuck in ‘non-traditional work’.

MMTers: Does Adair Turner have a point?

There’s quite an interesting interview with Lord Adair Turner published here. This bit in particular caught my eye:

“I think the crucial thing, the crucial question you need to answer when you accept that we can do fiat money creation is how to discipline and I’m going to address this subject in a lecture in Germany in February, because some of my very senior German friends have said to me, “Adair, you’re absolutely technically right that this is possible”, but, without quite putting it this way, they say, “we mustn’t tell the people!” Because if the people know, and if the backbenches of Parliament as well as the small elite technocrats know that this is possible, people want to do it – not to the extent of 2% of GDP or not just when we’re in a crisis – they’ll want to do it to the extent of 10% of GDP every single year because the Chancellor of the Exchequer will know that he can always create some fiat money so the head of the Department of Health will come through and say, “so why don’t I have some of this?”

“So, we have to find…the way I think about what we did with fiat money creation…it’s like medicine which, taken in small amounts, is good for us but taken in large amounts is toxic and fatal and, essentially, we’ve decided that it’s so dangerous that we’ll put it in the medicine cabinet, lock the door and throw the key away. And for most time, throwing away that key hasn’t harmed us too much because there were other things that were so great in the economy but I think we are now in an environment where throwing away the key has harmed us. If we take it out of the medicine cabinet, we’ve got to have a believable set of political economy processes. And I think that’s the challenge to the Occupy movement and people on the radical left: how would you place it in a discipline. Now here’s one way I might place it in a discipline, say we can do it within the framework of an independent central bank: you could have a thing that says the Treasury can have an element of an unfunded deficit or it can write off some of the existing debt owned by the central bank but only with the approval of the Monetary Policy Committee of the central bank in the pursuit of a 2% inflation mandate. They can agree this amount in order to make sure at least that you hit the 2% inflation target but they have control of it. In some way or another you’ve got to place limits on it because central banks independence and rules on non-monetising, they’re like those commitment devices that people who are trying to give up smoking, or diets. On one level, it’s completely arbitrary to say you’re not allowed another chocolate until 4 o’clock in the afternoon rather than 3:59 but you have to do these rules because otherwise you won’t stick to it”.

A point pushed by Positive Money people is that a committee of clever people should decide how much new money to create rather than leaving it to private banks. The passage above seems to me to be quite a clear exposition of this idea. Others would argue that this is anti-democratic, and the decisions should be taken by elected politicians. So my question would be, does Lord Turner have a point?

Greece’s new Finance Minister on his ‘modest proposal’ for the Eurozone

Here is a nice video of Greece’s new Finance Minister Yanis Varoufakis being interviewed in Italy late last year before Syriza came to power. He talks about his ideas for resolving the Eurozone crises (plural) within the confines of  the current rules of the EU. These, he first set out in a paper entitled “A Modest Proposal for Resolving the Eurozone Crisis” (since updated). Notice how scathing he is of the President of the European Commission in particular. In his new role, he needs to be a little more diplomatic perhaps, but it will be interesting to see how he deals with the leaders of the Eurozone as they try to prevent Syriza from pursuing the policies it has a mandate to deliver.

Varoufakis was in Downing Street for a meeting with George Osborne today. It’s interesting to compare and contrast the two men. Varoufakis is a serious economist who has interesting ideas and talks in specifics, while Osborne speaks mainly in platitudes with no background knowledge of the economy whatsoever. Here’s the vid. The interviewer is Italian, but the interview is in English.

How well do people understand the term ‘government deficit’?

Here’s an interesting poll finding from Yougov this week. They asked people the question “How well would you say you understand what people mean when they talk about the government’s deficit?” In answer, 69% said they had a very clear or fairly clear understanding. Not bad then. It’s talked about every day by politicians, so it’s good people understand what it means.

Not so fast though. Yougov followed up by asking “Which of the following do you think best describes the government’s deficit?” The majority (51%) thought “The total amount of money the government has borrowed” rather than the more correct description (“The amount of extra money that the government borrows each year”), which was only picked by 31%. 2% even answered “The total amount of money that everyone in the country has
collectively borrowed on overdrafts and credit cards.” Oh dear.

This is probably good news for the Tories. They can run around saying they have halved the deficit and most people will associated that with lower government debt (which people in turn tend to equate with their own household debt, where more=bad). It’s also bad news for people like me who want to try to explain to people that government deficits might not be an altogether bad thing, and that our government debt is not an issue that should supersede all others. It will also make me more skeptical about any future headlines generated from polling data!

You can find the full tables by clicking on the link above, but here are the headline figures. Interestingly, Labour voters were less likely to say they had a clear understanding of what a government deficit was, but they were no more likely to pick the wrong answer than supporters of other parties.

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