Showing posts with label household. Show all posts
Showing posts with label household. Show all posts
Thursday, 5 October 2023
Tuesday, 28 April 2020
Should we be scared of the coronavirus debt mountain?
The pandemic has necessitated huge borrowing – but post-crisis austerity would be the very worst way to deal with it
When the central bank buys the debt it does so by creating money. Under ordinary circumstances one might worry about that causing inflation. But given the recession we face that is a risk worth running. Indeed modest inflation would help us by taking a bite out of the real value of the debt.
Of course, ensuring that the central banks continue their crisis-fighting methods into the recovery period will itself require a political battle. Fearmongering about inflation is the close cousin of fearmongering about debt. We should resist both blackmails. We have the institutions and techniques to neutralise the coronavirus debt problem. We owe it to ourselves to use them.
‘A world in which coronavirus debts are repaid by a wealth tax would look very different from one in which benefits are slashed and VAT is raised.’ Photograph: Ben Birchall/PA
We do not know how this pandemic will end. We do know that we will be poorer when it’s over: GDP is plunging around the world.
We also know that there will be a towering pile of IOUs left from the bills run up during the crisis. When it is over we will have to figure out how to repay them – or whether to repay them at all. That question will decide the complexion of our politics, and the quality of our public infrastructure and services for years to come. Unless we tackle this issue, coronavirus debts will be the battering ram for a new campaign of austerity.
The scale of the challenge is huge. Hard cases like Italy grab the headlines. Its debt currently stands at 135% of GDP. As a result of the crisis it will likely rise to 155%. But it is no longer an extreme outlier. According to the IMF, the debt ratio of the average advanced economy will exceed 120% next year. In the US, the debt to GDP ratio may soon surpass that at the end of the second world war.
These numbers are impressive, daunting even. They offer an open door to conservative scaremongering. The first move in that tradition of debt politics is to invoke the tenuous analogy to a household. In this picture, debts are a burden on the profligate; a moral obligation that must be honoured on pain of national bankruptcy and ruin.
There are some circumstances in which this analogy is apt, specifically when you are an impoverished and desperate country dependent on foreign creditors who will lend to you only in the currency of another country, most commonly that of the US. Many poorer countries are in this position. Few rich countries are. Indeed, one of the definitions of being an advanced economy is that you are not.
Advanced economies borrow in their own currency and overwhelmingly from their own citizens. For them, the household analogy is profoundly misleading. In fact, those seeking to rebut the misconceptions of the household analogy sometimes say we merely owe government debts to ourselves.
That is a liberating thought. It makes clear that we are not in the position of a subordinate debtor nation. But it has a dizzying circularity to it. If we are our own creditors, are we not also our own debtors – master and slave at the same time? Ultimately, it is a bon mot that relies on treating the economic nation as a unit. That may look like liberation, but it is an illusion achieved by removing the real politics of debt – which are about class, not nationality.
Historically, government debts were assets owned by the middle and upper classes, the famous rentiers. And taxes were overwhelmingly indirect and thus fell disproportionately on lower incomes.
Today, the richest still own a disproportionate share of government debt. But the liabilities of the government are now widely distributed. They are staple investments for pension funds and insurers. Government debt is not simply a burden; it is a highly useful financial asset, offering modest interest rates in exchange for safety. It is all the more useful for the fact that the government lives for ever and will generate revenue for ever through taxation. So it enables very long-term planning.
The tax base today is much broader than it was a century ago. But who pays taxes – and who does not – remains one of the most urgent questions of the moment. A world in which coronavirus debts are repaid by a wealth tax or a global crackdown on corporate tax havens would look very different from one in which benefits are slashed and VAT is raised. And it is very possible that debt service will be taken out of other spending, whether that be schools, pensions or national defence.
As the great Austrian economist Joseph Schumpeter remarked in the aftermath of the first world war, “the budget is the skeleton of the state stripped of all misleading ideologies”, the truest reflection of the distribution of power and influence.
It is a distributional issue. But not only that. Debts may also affect the size of the cake itself. As we know only too well, a regime of austerity that keeps taxes high and government spending low is not conducive to rapid economic growth. And yet for debt to be sustainable, what we need is growth in GDP – to be precise, growth in nominal GDP, which includes real economic growth and inflation. Inflation matters because it acts as a tax on debts that are owed in money that is progressively losing its value. Price stability, the objective of monetary policy since the 1970s, no doubt has benefits for everyone, but most of all the creditor class.
This is the awesome dilemma we will face in the aftermath of Covid-19. This is the battle for which we must brace. Not right now, but once the immediate crisis has passed. After the financial crisis of 2007-08, it was in 2010 that the push for belt-tightening began. Like revenge, austerity is a dish best served cold.
Progressive politics cannot, of course, shrink from a battle about budgetary priorities. But it should resist fighting on the terms set by austerian debt-fear. In the circumstances of the UK or the US, alarmism about debt is false. And how false is being demonstrated by the crisis itself.
There is one mechanism through which we can ensure we truly owe the debts to ourselves. That mechanism is the central bank. Its principal job is to manage public debt – and at a moment of crisis central banks do what they must. They buy government debts or, in what amounts to the same thing, they open overdraft accounts for the government.
That has two effects that, acting together, have the potential to negate debt as a political issue. Central bank intervention lowers the interest rate. If interest rates are held down, debt service need not be an onerous burden. At the same time, the central bank purchases remove government IOUs from private portfolios and put them on the balance sheet of the central bank. There, they are literally claims by the public upon itself.
We do not know how this pandemic will end. We do know that we will be poorer when it’s over: GDP is plunging around the world.
We also know that there will be a towering pile of IOUs left from the bills run up during the crisis. When it is over we will have to figure out how to repay them – or whether to repay them at all. That question will decide the complexion of our politics, and the quality of our public infrastructure and services for years to come. Unless we tackle this issue, coronavirus debts will be the battering ram for a new campaign of austerity.
The scale of the challenge is huge. Hard cases like Italy grab the headlines. Its debt currently stands at 135% of GDP. As a result of the crisis it will likely rise to 155%. But it is no longer an extreme outlier. According to the IMF, the debt ratio of the average advanced economy will exceed 120% next year. In the US, the debt to GDP ratio may soon surpass that at the end of the second world war.
These numbers are impressive, daunting even. They offer an open door to conservative scaremongering. The first move in that tradition of debt politics is to invoke the tenuous analogy to a household. In this picture, debts are a burden on the profligate; a moral obligation that must be honoured on pain of national bankruptcy and ruin.
There are some circumstances in which this analogy is apt, specifically when you are an impoverished and desperate country dependent on foreign creditors who will lend to you only in the currency of another country, most commonly that of the US. Many poorer countries are in this position. Few rich countries are. Indeed, one of the definitions of being an advanced economy is that you are not.
Advanced economies borrow in their own currency and overwhelmingly from their own citizens. For them, the household analogy is profoundly misleading. In fact, those seeking to rebut the misconceptions of the household analogy sometimes say we merely owe government debts to ourselves.
That is a liberating thought. It makes clear that we are not in the position of a subordinate debtor nation. But it has a dizzying circularity to it. If we are our own creditors, are we not also our own debtors – master and slave at the same time? Ultimately, it is a bon mot that relies on treating the economic nation as a unit. That may look like liberation, but it is an illusion achieved by removing the real politics of debt – which are about class, not nationality.
Historically, government debts were assets owned by the middle and upper classes, the famous rentiers. And taxes were overwhelmingly indirect and thus fell disproportionately on lower incomes.
Today, the richest still own a disproportionate share of government debt. But the liabilities of the government are now widely distributed. They are staple investments for pension funds and insurers. Government debt is not simply a burden; it is a highly useful financial asset, offering modest interest rates in exchange for safety. It is all the more useful for the fact that the government lives for ever and will generate revenue for ever through taxation. So it enables very long-term planning.
The tax base today is much broader than it was a century ago. But who pays taxes – and who does not – remains one of the most urgent questions of the moment. A world in which coronavirus debts are repaid by a wealth tax or a global crackdown on corporate tax havens would look very different from one in which benefits are slashed and VAT is raised. And it is very possible that debt service will be taken out of other spending, whether that be schools, pensions or national defence.
As the great Austrian economist Joseph Schumpeter remarked in the aftermath of the first world war, “the budget is the skeleton of the state stripped of all misleading ideologies”, the truest reflection of the distribution of power and influence.
It is a distributional issue. But not only that. Debts may also affect the size of the cake itself. As we know only too well, a regime of austerity that keeps taxes high and government spending low is not conducive to rapid economic growth. And yet for debt to be sustainable, what we need is growth in GDP – to be precise, growth in nominal GDP, which includes real economic growth and inflation. Inflation matters because it acts as a tax on debts that are owed in money that is progressively losing its value. Price stability, the objective of monetary policy since the 1970s, no doubt has benefits for everyone, but most of all the creditor class.
This is the awesome dilemma we will face in the aftermath of Covid-19. This is the battle for which we must brace. Not right now, but once the immediate crisis has passed. After the financial crisis of 2007-08, it was in 2010 that the push for belt-tightening began. Like revenge, austerity is a dish best served cold.
Progressive politics cannot, of course, shrink from a battle about budgetary priorities. But it should resist fighting on the terms set by austerian debt-fear. In the circumstances of the UK or the US, alarmism about debt is false. And how false is being demonstrated by the crisis itself.
There is one mechanism through which we can ensure we truly owe the debts to ourselves. That mechanism is the central bank. Its principal job is to manage public debt – and at a moment of crisis central banks do what they must. They buy government debts or, in what amounts to the same thing, they open overdraft accounts for the government.
That has two effects that, acting together, have the potential to negate debt as a political issue. Central bank intervention lowers the interest rate. If interest rates are held down, debt service need not be an onerous burden. At the same time, the central bank purchases remove government IOUs from private portfolios and put them on the balance sheet of the central bank. There, they are literally claims by the public upon itself.
When the central bank buys the debt it does so by creating money. Under ordinary circumstances one might worry about that causing inflation. But given the recession we face that is a risk worth running. Indeed modest inflation would help us by taking a bite out of the real value of the debt.
Of course, ensuring that the central banks continue their crisis-fighting methods into the recovery period will itself require a political battle. Fearmongering about inflation is the close cousin of fearmongering about debt. We should resist both blackmails. We have the institutions and techniques to neutralise the coronavirus debt problem. We owe it to ourselves to use them.
Wednesday, 24 April 2019
Low national savings rates stores up trouble ahead for Britain
Households, companies and government are all in deficit for the first time since the 1980s writes Chris Giles in The FT
The Scottish economist Adam Smith described Britain as a nation of shopkeepers in his book The Wealth of Nations, published in 1776.
Today, the UK is simply a country of shoppers. Rarely has Britain been consuming so much and saving so little.
As a nation — which statisticians break down into households, companies and the government — Britain spends far more than it earns. On this measure, the UK borrowed 5 per cent of national income in 2015, according to the OECD, the Paris-based international organisation.
This implies that UK households, companies and the government spent 5 per cent more than they earned in that year and financed the deficit by borrowing from overseas.
Britain was still borrowing 5.1 per cent of gross domestic product from foreigners in the third quarter of 2018, according to latest data from the Office for National Statistics on so-called sector balances. Since the 2016 EU referendum, every large sector of the economy — classified as households, companies and the government — has been in deficit at the same time: a situation last recorded in the boom years of the late 1980s.
Senior UK policymakers have long worried that running an economy on such low levels of national savings would be storing up trouble for the future, but they have often been at a loss to find solutions.
Mervyn King, former governor of the Bank of England, regularly expressed concern over Britain’s adeptness at consuming but felt he had to pump it up further at the BoE by keeping interest rates low for fear of a slump.
He called this a “paradox of policy” and noted an irony in his 2016 book The End of Alchemy that “those countries most in need of this long-term adjustment [to higher national savings levels], the US and the UK, have been the most active in pursuing the short-term stimulus”.
Such is the alarm over the lack of national savings that the ONS issued a stern warning in its most recent release about Britain’s accounts. Rob Kent-Smith, head of GDP at the ONS, said last month that “households spent more than they received for an unprecedented nine quarters in a row”.
Martin Weale of King’s College London, a former external member of the BoE’s Monetary Policy Committee, expressed concern that low rates of national savings would lead to future disappointment with living standards.
“National savings is important because if you have a situation where people want to retire you have to ask how they can do it,” Professor Weale said, noting that savings can come from many places — for example, companies’ contributions into defined benefit pension schemes.
“You can save for retirement, you can hope young people will pay for your retirement, you can decide not to retire, or I suppose you could retire and starve,” said Prof Weale. Happy countries, he added, tended to be those with high national savings rates.
Many economists are, however, not nearly as worried. David Miles of Imperial College London and another former MPC member said that low national savings rates might be a flashing warning light, but “the more one delves, if there is a problem, you won’t find it in the aggregate [national savings rate] number” produced by the ONS.
Instead, people should estimate whether households are saving enough for their future needs, companies are investing sufficiently for their long-term prospects and government is maintaining the fabric of the nation, Prof Miles added. In each case there will be some parts of each sector that are fine and others where there are problems, he said.
These issues show up in the measurement of individual sectors by the ONS: government borrowing is now at its lowest level since the early years of the millennium, for example.
In the households sector, the fact that spending is now higher than income relates partly to low savings. But much of the trend is due to sharply rising investment in new homes, which counts towards spending, and paints a much less concerning picture of households’ finances because the sector ends up with valuable assets. Recommended UK economic growth UK economic analysis creates Goldilocks dilemma
But as a nation, one thing has changed for the worse — and this used to be Britain’s get-out-of-jail-free card.
Throughout decades of heavy borrowing by the UK from overseas, policymakers could say British investments abroad were more valuable than equivalents made by foreigners here. So the country’s net investment position — the overseas assets owned by UK residents compared with British equivalents held by foreigners — was positive.
That changed substantially after the financial crisis, and the net investment position is now persistently negative.
Samuel Tombs of Pantheon Macroeconomics said this means “the UK’s dependence on external finance will continue to grow and its stock of external liabilities will increase”.
As any company will verify, in a future downturn a weak balance sheet signals vulnerability and spells trouble.
The Scottish economist Adam Smith described Britain as a nation of shopkeepers in his book The Wealth of Nations, published in 1776.
Today, the UK is simply a country of shoppers. Rarely has Britain been consuming so much and saving so little.
As a nation — which statisticians break down into households, companies and the government — Britain spends far more than it earns. On this measure, the UK borrowed 5 per cent of national income in 2015, according to the OECD, the Paris-based international organisation.
This implies that UK households, companies and the government spent 5 per cent more than they earned in that year and financed the deficit by borrowing from overseas.
Britain was still borrowing 5.1 per cent of gross domestic product from foreigners in the third quarter of 2018, according to latest data from the Office for National Statistics on so-called sector balances. Since the 2016 EU referendum, every large sector of the economy — classified as households, companies and the government — has been in deficit at the same time: a situation last recorded in the boom years of the late 1980s.
Senior UK policymakers have long worried that running an economy on such low levels of national savings would be storing up trouble for the future, but they have often been at a loss to find solutions.
Mervyn King, former governor of the Bank of England, regularly expressed concern over Britain’s adeptness at consuming but felt he had to pump it up further at the BoE by keeping interest rates low for fear of a slump.
He called this a “paradox of policy” and noted an irony in his 2016 book The End of Alchemy that “those countries most in need of this long-term adjustment [to higher national savings levels], the US and the UK, have been the most active in pursuing the short-term stimulus”.
Such is the alarm over the lack of national savings that the ONS issued a stern warning in its most recent release about Britain’s accounts. Rob Kent-Smith, head of GDP at the ONS, said last month that “households spent more than they received for an unprecedented nine quarters in a row”.
Martin Weale of King’s College London, a former external member of the BoE’s Monetary Policy Committee, expressed concern that low rates of national savings would lead to future disappointment with living standards.
“National savings is important because if you have a situation where people want to retire you have to ask how they can do it,” Professor Weale said, noting that savings can come from many places — for example, companies’ contributions into defined benefit pension schemes.
“You can save for retirement, you can hope young people will pay for your retirement, you can decide not to retire, or I suppose you could retire and starve,” said Prof Weale. Happy countries, he added, tended to be those with high national savings rates.
Many economists are, however, not nearly as worried. David Miles of Imperial College London and another former MPC member said that low national savings rates might be a flashing warning light, but “the more one delves, if there is a problem, you won’t find it in the aggregate [national savings rate] number” produced by the ONS.
Instead, people should estimate whether households are saving enough for their future needs, companies are investing sufficiently for their long-term prospects and government is maintaining the fabric of the nation, Prof Miles added. In each case there will be some parts of each sector that are fine and others where there are problems, he said.
These issues show up in the measurement of individual sectors by the ONS: government borrowing is now at its lowest level since the early years of the millennium, for example.
In the households sector, the fact that spending is now higher than income relates partly to low savings. But much of the trend is due to sharply rising investment in new homes, which counts towards spending, and paints a much less concerning picture of households’ finances because the sector ends up with valuable assets. Recommended UK economic growth UK economic analysis creates Goldilocks dilemma
But as a nation, one thing has changed for the worse — and this used to be Britain’s get-out-of-jail-free card.
Throughout decades of heavy borrowing by the UK from overseas, policymakers could say British investments abroad were more valuable than equivalents made by foreigners here. So the country’s net investment position — the overseas assets owned by UK residents compared with British equivalents held by foreigners — was positive.
That changed substantially after the financial crisis, and the net investment position is now persistently negative.
Samuel Tombs of Pantheon Macroeconomics said this means “the UK’s dependence on external finance will continue to grow and its stock of external liabilities will increase”.
As any company will verify, in a future downturn a weak balance sheet signals vulnerability and spells trouble.
Thursday, 24 August 2017
No alternative to austerity? That lie has now been nailed
Owen Jones in The Guardian
Ever since the banks plunged the western world into economic chaos, we have been told that only cuts offer economic salvation. When the Conservatives and the Lib Dems formed their austerity coalition in 2010, they told the electorate – in apocalyptic tones – that without George Osborne’s scalpel, Britain would go the way of Greece. The economically illiterate metaphor of a household budget was relentlessly deployed – you shouldn’t spend more if you’re personally in debt, so why should the nation? – to popularise an ideologically driven fallacy.
Greek debt crisis: ‘People can’t see any light at the end of any tunnel’
But now, thanks to Portugal, we know how flawed the austerity experiment enforced across Europe was. Portugal was one of the European nations hardest hit by the economic crisis. After a bailout by a troika including the International Monetary Fund, creditors demanded stringent austerity measures that were enthusiastically implemented by Lisbon’s then conservative government. Utilities were privatised, VAT raised, a surtax imposed on incomes, public sector pay and pensions slashed and benefits cut, and the working day was extended.
In a two-year period, education spending suffered a devastating 23% cut. Health services and social security suffered too. The human consequences were dire. Unemployment peaked at 17.5% in 2013; in 2012, there was a 41% jump in company bankruptcies; and poverty increased. All this was necessary to cure the overspending disease, went the logic.
At the end of 2015, this experiment came to an end. A new socialist government – with the support of more radical leftwing parties – assumed office. The prime minister, António Costa, pledged to “turn the page on austerity”: it had sent the country back three decades, he said. The government’s opponents predicted disaster – “voodoo economics”, they called it. Perhaps another bailout would be triggered, leading to recession and even steeper cuts.
There was a precedent, after all: Syriza had been elected in Greece just months earlier, and eurozone authorities were in no mood to allow this experiment to succeed. How could Portugal possibly avoid its own Greek tragedy?
In 2016 – a year after taking power – the government could boast of a 13% jump in corporate investment
The economic rationale of the new Portuguese government was clear. Cuts suppressed demand: for a genuine recovery, demand had to be boosted. The government pledged to increase the minimum wage, reverse regressive tax increases, return public sector wages and pensions to their pre-crisis levels – the salaries of many had plummeted by 30% – and reintroduce four cancelled public holidays. Social security for poorer families was increased, while a luxury charge was imposed on homes worth over €600,000 (£550,000).
The promised disaster did not materialise. By the autumn of 2016 – a year after taking power – the government could boast of sustained economic growth, and a 13% jump in corporate investment. And this year, figures showed the deficit had more than halved, to 2.1% – lower than at any time since the return of democracy four decades ago. Indeed, this is the first time Portugal has ever met eurozone fiscal rules. Meanwhile, the economy has now grown for 13 successive quarters.
Ever since the banks plunged the western world into economic chaos, we have been told that only cuts offer economic salvation. When the Conservatives and the Lib Dems formed their austerity coalition in 2010, they told the electorate – in apocalyptic tones – that without George Osborne’s scalpel, Britain would go the way of Greece. The economically illiterate metaphor of a household budget was relentlessly deployed – you shouldn’t spend more if you’re personally in debt, so why should the nation? – to popularise an ideologically driven fallacy.
Greek debt crisis: ‘People can’t see any light at the end of any tunnel’
But now, thanks to Portugal, we know how flawed the austerity experiment enforced across Europe was. Portugal was one of the European nations hardest hit by the economic crisis. After a bailout by a troika including the International Monetary Fund, creditors demanded stringent austerity measures that were enthusiastically implemented by Lisbon’s then conservative government. Utilities were privatised, VAT raised, a surtax imposed on incomes, public sector pay and pensions slashed and benefits cut, and the working day was extended.
In a two-year period, education spending suffered a devastating 23% cut. Health services and social security suffered too. The human consequences were dire. Unemployment peaked at 17.5% in 2013; in 2012, there was a 41% jump in company bankruptcies; and poverty increased. All this was necessary to cure the overspending disease, went the logic.
At the end of 2015, this experiment came to an end. A new socialist government – with the support of more radical leftwing parties – assumed office. The prime minister, António Costa, pledged to “turn the page on austerity”: it had sent the country back three decades, he said. The government’s opponents predicted disaster – “voodoo economics”, they called it. Perhaps another bailout would be triggered, leading to recession and even steeper cuts.
There was a precedent, after all: Syriza had been elected in Greece just months earlier, and eurozone authorities were in no mood to allow this experiment to succeed. How could Portugal possibly avoid its own Greek tragedy?
In 2016 – a year after taking power – the government could boast of a 13% jump in corporate investment
The economic rationale of the new Portuguese government was clear. Cuts suppressed demand: for a genuine recovery, demand had to be boosted. The government pledged to increase the minimum wage, reverse regressive tax increases, return public sector wages and pensions to their pre-crisis levels – the salaries of many had plummeted by 30% – and reintroduce four cancelled public holidays. Social security for poorer families was increased, while a luxury charge was imposed on homes worth over €600,000 (£550,000).
The promised disaster did not materialise. By the autumn of 2016 – a year after taking power – the government could boast of sustained economic growth, and a 13% jump in corporate investment. And this year, figures showed the deficit had more than halved, to 2.1% – lower than at any time since the return of democracy four decades ago. Indeed, this is the first time Portugal has ever met eurozone fiscal rules. Meanwhile, the economy has now grown for 13 successive quarters.
During the years of cuts, charities warned of a “social emergency”. Now the Portuguese government can offer itself as a model to the rest of the continent. “Europe chose the line of austerity and had much worse results,” declared the economy minister Manuel Caldeira Cabral. “What we are showing is that with a policy that restitutes income to the people in a moderate way, people get more confidence and investment returns.”
Portugal has increased public investment, reduced the deficit, slashed unemployment and sustained economic growth. We were told this was impossible and, frankly, delusional. And so British workers endured the longest squeeze in wages since the 19th century, while the coalition did not even come close to meeting its commitment to eradicate the deficit by 2015. Why? In part, because low pay means workers paying less tax, receiving more in-work benefits, and spending less money. Portugal is increasing demand; the Tories suppressed it.
Portugal’s success is both inspiring and frustrating. All that human misery in Europe – and for what? What of Greece, where over half of young people languished in unemployment, where health services were decimated, where infant mortality and suicide increased? What of Spain, where hundreds of thousands were evicted from their homes? What of France, where economic insecurity fuelled the rise of the far right?
Portugal and Britain offer lessons for social democracy too. In the aftermath of the bankers’ crash, social democratic parties embraced austerity. The result? Political collapse. In Spain, support for the socialists fell from 44% to the low 20s as the radical left Podemos ate into their vote. In Greece, Pasok almost disappeared as a political force. In France, the Socialists achieved little over 6% in the first round of this year’s presidential elections. And in the Netherlands this year, the Labour party slumped from a quarter of the vote to less than 6%.
By contrast, the two social democratic parties that have broken with austerity – in Portugal and Britain – are now performing better than almost all their sister parties. Indeed, polls show Portugal’s Socialists now 10 points clear of the country’s rightwing party.
Europe’s austerity has been justified with the mantra “there is no alternative”, intended to push the population into submission: we have to be grownups, and live in the real world, after all.
Portugal offers a powerful rebuke. Europe’s left should use the Portuguese experience to reshape the European Union and bring austerity across the eurozone to a halt. In Britain, Labour can feel more emboldened in breaking with the Tories’ economic order.
Throughout Europe’s lost decade, millions of us held that there was indeed an alternative. Now we have the proof.
Portugal has increased public investment, reduced the deficit, slashed unemployment and sustained economic growth. We were told this was impossible and, frankly, delusional. And so British workers endured the longest squeeze in wages since the 19th century, while the coalition did not even come close to meeting its commitment to eradicate the deficit by 2015. Why? In part, because low pay means workers paying less tax, receiving more in-work benefits, and spending less money. Portugal is increasing demand; the Tories suppressed it.
Portugal’s success is both inspiring and frustrating. All that human misery in Europe – and for what? What of Greece, where over half of young people languished in unemployment, where health services were decimated, where infant mortality and suicide increased? What of Spain, where hundreds of thousands were evicted from their homes? What of France, where economic insecurity fuelled the rise of the far right?
Portugal and Britain offer lessons for social democracy too. In the aftermath of the bankers’ crash, social democratic parties embraced austerity. The result? Political collapse. In Spain, support for the socialists fell from 44% to the low 20s as the radical left Podemos ate into their vote. In Greece, Pasok almost disappeared as a political force. In France, the Socialists achieved little over 6% in the first round of this year’s presidential elections. And in the Netherlands this year, the Labour party slumped from a quarter of the vote to less than 6%.
By contrast, the two social democratic parties that have broken with austerity – in Portugal and Britain – are now performing better than almost all their sister parties. Indeed, polls show Portugal’s Socialists now 10 points clear of the country’s rightwing party.
Europe’s austerity has been justified with the mantra “there is no alternative”, intended to push the population into submission: we have to be grownups, and live in the real world, after all.
Portugal offers a powerful rebuke. Europe’s left should use the Portuguese experience to reshape the European Union and bring austerity across the eurozone to a halt. In Britain, Labour can feel more emboldened in breaking with the Tories’ economic order.
Throughout Europe’s lost decade, millions of us held that there was indeed an alternative. Now we have the proof.
Wednesday, 14 June 2017
Yes this really is the end of Tory austerity – because it was never about economics in the first place
Ben Chu in The Independent
“The crisis”, the economist Rudiger Dornbusch once noted, “takes a much longer time coming than you think. And then it happens much faster than you would have thought.” A similar dynamic describes the progress of Conservative austerity politics.
The stunning failure of Theresa May in last week’s general election signalled to Tory MPs that the public have had enough of spending cuts. Though the deficit still stands at £50bn and the national debt is £1,700bn (and rising), austerity is over, we’re now told.
Seven years of Tory lectures that eradicating the deficit for the good of future generations is paramount suddenly fall silent. Politicians who have tarred critics as criminally irresponsible for suggesting an increase in public borrowing have now, in an instant, changed their tune.
People who insisted that if we did not balance the budget at the earliest possible date Britain was destined to become an economic basket case, like Greece, apparently no longer fear such a gruesome outcome. The collapse of the citadel of austerity rhetoric is truly remarkable in its rapidity.
But it was a very long time coming. It became clear within a year of George Osborne’s 2010 “emergency budget”, which forced through huge cuts in capital budgets and an intense squeeze on Whitehall departments and welfare spending, that the austerity medicine was hurting, not helping.
The economy was flatlining, teetering on the verge of recession. Whether this was primarily due to the crisis in the neighbouring eurozone or because the negative knock-on impact of the government’s domestic spending cuts was bigger than initially thought is still debated by economists.
But it doesn’t really matter. Even the conservative estimates of the Office for Budget Responsibility suggest that GDP growth would have been around one per cent higher in both 2010-2011 and 2011-2012, if the Coalition government hadn’t slashed domestic spending on the scale and pace it did.
With interest rates as low as they could go and the Bank of England struggling to support demand through money printing, this was a time for the Government to ramp up capital investment spending to offset the general slowdown – something numerous distinguished academic economists, and even the IMF eventually, urged. It would have made us all better off, putting idle resources to use.
But despite such a capital spending stimulus being permitted under his own fiscal rules, the former Chancellor George Osborne refused to do it. He told us that the international bond markets would lose confidence in the UK’s creditworthiness if we deviated from his original plan – a risible claim given that UK borrowing costs were plumbing new depths as investors around the world ploughed money into government bonds.
The reality was that Mr Osborne didn’t want to do it because it would have meant losing face. He would have had to admit that his previous pigheaded insistence that he didn’t need a fiscal “plan B” was wrong. The credibility risk was not to the UK’s borrowing status but his own political stock.
With the help of a cynically conceived and distorting subsidy to the housing market, the Conservatives managed to eke out a surprise victory in the 2015 general election. Drawing the lesson that austerity had become an electoral asset and useful stick with which to beat Labour, the Chancellor doubled down. He tightened his fiscal rules in a way that virtually the entire economics profession regarded as economically illiterate, making no distinction whatsoever between day-to-day government spending and productive capital spending, and also unveiled a round of large welfare cuts for the working poor.
Hubris set in. And nemesis soon followed. Unexpected parliamentary resistance mounted to Osborne’s welfare cuts, prompting a humiliating reversal on tax credits. At the same time the impact of extensive cuts to policing, schools, social care and the NHS finally became apparent in the form of deteriorating services. It took longer than expected, but it finally arrived.
Yet when Theresa May replaced David Cameron as Prime Minister and Philip Hammond replaced George Osborne as Chancellor last year, they didn’t reverse any of the inherited departmental spending or welfare cuts. And they went into the 2017 election with the same old scare stories about Labour’s reasonable capital investment plans, the same old specious lines like “no magic money tree”. Only now has the dam of Conservative denial crumbled.
Reducing the UK’s deficit, which had ballooned to 10 per cent of GDP in 2010 due to the financial crisis, was a necessity. Cutting it without regard for the state of the overall economy and the feedback effects on aggregate demand was unscientific stupidity and wanton vandalism. Austerity, as practiced by the Conservatives, was a policy driven not by economics, but by politics and ideology. The politics was baiting Labour. And the ideology was the desire to reduce the size of the state.
Who was to blame? The prime culprits were George Osborne and David Cameron of course. But Treasury civil servants were also enthusiastic supporters. It was enabled by two senior Coalition Liberal Democrats, Nick Clegg and Danny Alexander. It was endorsed by economists in the City of London and cheered on by Tory-supporting newspapers. It was abetted by ostensibly neutral political journalists, who unthinkingly succumbed to the fatally misleading idea that a government’s finances can be compared to a household’s budget.
They say victory has a thousand fathers whereas defeat is an orphan. But if we look carefully it’s clear the austerity failure of the past seven years has a sprawling parentage.
“The crisis”, the economist Rudiger Dornbusch once noted, “takes a much longer time coming than you think. And then it happens much faster than you would have thought.” A similar dynamic describes the progress of Conservative austerity politics.
The stunning failure of Theresa May in last week’s general election signalled to Tory MPs that the public have had enough of spending cuts. Though the deficit still stands at £50bn and the national debt is £1,700bn (and rising), austerity is over, we’re now told.
Seven years of Tory lectures that eradicating the deficit for the good of future generations is paramount suddenly fall silent. Politicians who have tarred critics as criminally irresponsible for suggesting an increase in public borrowing have now, in an instant, changed their tune.
People who insisted that if we did not balance the budget at the earliest possible date Britain was destined to become an economic basket case, like Greece, apparently no longer fear such a gruesome outcome. The collapse of the citadel of austerity rhetoric is truly remarkable in its rapidity.
But it was a very long time coming. It became clear within a year of George Osborne’s 2010 “emergency budget”, which forced through huge cuts in capital budgets and an intense squeeze on Whitehall departments and welfare spending, that the austerity medicine was hurting, not helping.
The economy was flatlining, teetering on the verge of recession. Whether this was primarily due to the crisis in the neighbouring eurozone or because the negative knock-on impact of the government’s domestic spending cuts was bigger than initially thought is still debated by economists.
But it doesn’t really matter. Even the conservative estimates of the Office for Budget Responsibility suggest that GDP growth would have been around one per cent higher in both 2010-2011 and 2011-2012, if the Coalition government hadn’t slashed domestic spending on the scale and pace it did.
With interest rates as low as they could go and the Bank of England struggling to support demand through money printing, this was a time for the Government to ramp up capital investment spending to offset the general slowdown – something numerous distinguished academic economists, and even the IMF eventually, urged. It would have made us all better off, putting idle resources to use.
But despite such a capital spending stimulus being permitted under his own fiscal rules, the former Chancellor George Osborne refused to do it. He told us that the international bond markets would lose confidence in the UK’s creditworthiness if we deviated from his original plan – a risible claim given that UK borrowing costs were plumbing new depths as investors around the world ploughed money into government bonds.
The reality was that Mr Osborne didn’t want to do it because it would have meant losing face. He would have had to admit that his previous pigheaded insistence that he didn’t need a fiscal “plan B” was wrong. The credibility risk was not to the UK’s borrowing status but his own political stock.
With the help of a cynically conceived and distorting subsidy to the housing market, the Conservatives managed to eke out a surprise victory in the 2015 general election. Drawing the lesson that austerity had become an electoral asset and useful stick with which to beat Labour, the Chancellor doubled down. He tightened his fiscal rules in a way that virtually the entire economics profession regarded as economically illiterate, making no distinction whatsoever between day-to-day government spending and productive capital spending, and also unveiled a round of large welfare cuts for the working poor.
Hubris set in. And nemesis soon followed. Unexpected parliamentary resistance mounted to Osborne’s welfare cuts, prompting a humiliating reversal on tax credits. At the same time the impact of extensive cuts to policing, schools, social care and the NHS finally became apparent in the form of deteriorating services. It took longer than expected, but it finally arrived.
Yet when Theresa May replaced David Cameron as Prime Minister and Philip Hammond replaced George Osborne as Chancellor last year, they didn’t reverse any of the inherited departmental spending or welfare cuts. And they went into the 2017 election with the same old scare stories about Labour’s reasonable capital investment plans, the same old specious lines like “no magic money tree”. Only now has the dam of Conservative denial crumbled.
Reducing the UK’s deficit, which had ballooned to 10 per cent of GDP in 2010 due to the financial crisis, was a necessity. Cutting it without regard for the state of the overall economy and the feedback effects on aggregate demand was unscientific stupidity and wanton vandalism. Austerity, as practiced by the Conservatives, was a policy driven not by economics, but by politics and ideology. The politics was baiting Labour. And the ideology was the desire to reduce the size of the state.
Who was to blame? The prime culprits were George Osborne and David Cameron of course. But Treasury civil servants were also enthusiastic supporters. It was enabled by two senior Coalition Liberal Democrats, Nick Clegg and Danny Alexander. It was endorsed by economists in the City of London and cheered on by Tory-supporting newspapers. It was abetted by ostensibly neutral political journalists, who unthinkingly succumbed to the fatally misleading idea that a government’s finances can be compared to a household’s budget.
They say victory has a thousand fathers whereas defeat is an orphan. But if we look carefully it’s clear the austerity failure of the past seven years has a sprawling parentage.
Friday, 9 January 2015
An economy is not like a household budget
Repeat after me: the Australian economy is not like a household budget
Our political and economic thinking has been warped by bad analogies to the point where we can’t see the real economy. The Abbott government is happy to play along
To prosecute its economic agenda, the Abbott government has relied on the constant repetition of economic myths. I’ve previously dealt with the myths of the budget emergency, the debt crisis and the endlessly repeated lie that the carbon tax was wrecking the economy – but these are only the most obvious myths and not necessarily the most important.
This week, Mathias Cormann repeated one of the other great myths of modern government financing, saying that it was “unfair to rob our children and grandchildren of their opportunities [in order] to pay for today’s lifestyle”.
The suggestion that future generations will have a reduced standard of living because of our government debt needs some unpacking.
What is it that limits the standard of living of people in 2030? It’s the goods and services that those people can produce. Goods and services cannot be sent back in time in order to pay for past spending. The standard of living of people in 2030 will be a factor of the number of workers and their productivity, not how much debt their government carries from the past. So where does government debt fit in?
As I’ve explained elsewhere, the finances of a sovereign government with its own fiat currency bear absolutely no resemblance to the finances of a household or a business. The federal government can create money. They don’t create all of the money that they need for all their expenses because that would cause out-of-control inflation.
The obvious conclusion to be drawn from these two uncontroversial facts is that taxation and borrowing are not the limiting factors on government expenditure, inflation is. Acknowledging this completely turns the mainstream commentary on government financing on its head.
The federal government does not need anybody else’s money in the form of taxation or borrowing in order to spend. They can create money. The reason they tax and borrow is to take money out of the economy so that their spending does not cause inflation or affect official interest rates. In other words, taxation and government debt are tools for economic management, not for revenue raising.
You may have to sit with all this for a moment and calm the voice in your head that is telling you it can’t possibly be true. Our political and economic thinking has been so thoroughly colonised by the finance industry that we often find it difficult to see the real economy. The real economy is the labour of workers combined with capital and land to produce goods and services.
How did the massive postwar government debts impact on the lives of people living in the 1950s and 60s? It didn’t. These are often referred to as the “golden years” where inequality fell and the standard of living rose at a dramatic pace. Could the workers in the postwar years send their goods and services back in time to support or pay for the war effort? Of course not, it’s a ludicrous proposition. Abbott and Hockey’s suggestion that future generations will suffer because of today’s government spending is just as ludicrous.
The only way in the real economy that future generations can suffer because of today’s government debt is if the government raises taxes or cuts spending in order to repay the debt and this causes higher unemployment. This is never necessary and governments who advocate this (like the Abbott government) have fallen prey to household finance analogies.
While there is spare capacity in the economy, inflation risk is low and there is room for greater government expenditure. One simplistic measure of spare capacity is unemployment. While there is excess unemployment there is room for more (targeted) government expenditure. In other words, sovereign governments have the capacity toalways maintain low levels of unemployment if they use inflation as their expenditure cap rather than taxes and borrowing.
If unemployment is the only price future generations pay for today’s government debt and the government can always lower unemployment by more spending, what’s the impact on future generations of government debt? None. Why then don’t we just go on a massive spending spree and have huge debts? Because spending beyond the productive capacity of the real economy would cause inflation.
The costs of too much government expenditure are felt immediately afterwards in the form of inflation and are not borne by future generations.
Hopefully now you can see the full picture. Government expenditure today is not limited by taxation or borrowing but by inflation risk. Government expenditure in 2030 will not be limited by taxation, borrowing or previous debt but by inflation risk. When you’re first presented with these facts it can seem like a magic pudding or a perpetual motion machine but that’s just because we’re used to thinking about finances from a household or business perspective.
National governments with their own currency bear absolutely no resemblance to a household or a business. All of the frequently used analogies give a distorted picture of the reality of government finances. To get a clear picture you need to peel back all the layers of finance speak and look at the real economy.
There are many important conversations and debates we should be having about government finances, the role of government, productivity, consumption and leisure. We cannot have them while the government and media commentators perpetuate myths about how our economy actually functions. Ultimately the material standard of living of future generations is going to depend on the productivity of workers and on a safe environment and climate. Now there’s a policy conversation worth having.
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