Wednesday, 6 June 2012

A welcome return to common sense: now for delivery

Two weeks ago, I wrote this:
When I'm asked in interview or articles to sum up concisely why I think the government should change course on fiscal policy, I usually say something like this:
"with long-term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest.  This is not just basic macroeconomics, it is common sense. "
From today's Independent:  
A senior government source told The Independent:
"While a lot of families are struggling and have no disposable income, there are others who are quite cash rich but have nowhere secure to put their money where they can be guaranteed a decent return. Because interest rates are as low as they are, there is the potential to tap into this money and get it invested in infrastructure which will have a dramatic effect on Britain's long-term growth."  
The benefits of investing in infrastructure were twofold, the source said.
"Not only will it provide a welcome kick-start to the economy at a time when growth is sluggish, but infrastructure improvement will also help Britain's long-term competitiveness and encourage investment from overseas. In that way it is a win-win situation."
There is no meaningful difference here: the argument about the economics of whether we need more government borrowing (on or off balance sheet) to increase demand and investment spending is over.  The issue for the government now is delivery and implementation: can they actually do it, quickly enough and on a scale big enough to make a difference?  Too much time has been wasted already.  


  1. It's a shame that in the modern world economists and commentators can only comprehend this infrastructure expenditure coming from centralised government, fed by more borrowing which lumbers the taxpayer further in debt.

    What is being proposed here isn't off-balance sheet debt, like the PFI elephants in the room that Brown lumbered us with, it's debt raised from private individuals and institutions who, importantly, choose to lend the money. Whereas taxation isn't a choice.

    You don't need to go that far back in history to find plenty of successful examples of infrastructure financed by private expenditure: the railways, the transatlantic telegraph cables, etc.

    Sadly we all too easily fall into believing the paradigm of the late 20th century, that only government can afford to build infrastructure by taxing the people.

    1. I think you are more than a little confused here.

      "Infrastructure expenditure coming from centralised government, fed by more borrowing"

      which you seem to disapprove of, is of course financed by:

      "debt raised from private individuals and institutions who, importantly, choose to lend the money."

      because government debt is raised in exactly this way. No-one is forcing people or institutions to buy gilts or National Savings products.

    2. It isn't really though is it - because at an aggregate level the options at that point are to buy government bonds at a high rate of interest or leave them as bank reserves at the central bank at a low rate of interest.

      So the interest rate differential between the BoE and the government 'forces' people to buy gilts. It would be mildly irrational not to.

      Of course a much more sensible policy would be to just borrow the money directly from the BoE and cut out the middleman. Then the interest paid would circulate back to the Treasury via the Bank dividend.

      The cost of government borrowing is always zero - since it owns the central bank.

  2. Thenewliberty:

    I see privately financed infrastructure as being a path dependence problem: if growth is uncertain, returns on infrastructure are uncertain, and people probably won't invest. If only one bridge or road gets built, it won't have a significant effect on growth, so it isn't a good bet for its investors.

    However if investors are confident 1000 roads (power stations, docks, whatever) will be built, the growth effects in total become much bigger and more reliable. So each individual investment becomes more attractive in itself.

    Government can therefore have a role in coordination, even if it doesn't put the money up itself. This is a role the UK government has half-heartedly tried before (eg with cluster strategies) but without enough volume it won't really work. Let's hope this time they do enough.

  3. The real question We should have been asking is why hasn't a solution to the continuing Global Financial Crash been proposed and debated. The shocking answer I have come up with is that those with the power to get us out of this mess have decided it is not in their interest to fix the world economy.

    Consider that under austerity the relative wealth of the World's richest people has increased significantly. For example, the Times Rich List of the 1000 wealthiest people in the UK has shown that their combined wealth has increased by 5% in the last 12 months to a new record high of £414 billion-

    Back to the point though, which is to compare the effect of austerity on the super rich and the other 99.999% of the population.

    The effects of the austerity policies propagated by the Tory led coalition have been severe and immediate on nearly all of us but the ultra wealthy. Average incomes, for example, have dropped by over 6% in the last year in the UK (according to ONS earnings figures). Indeed austerity is likely (with only 10% of the Tory cuts actually implemented so far) to intensify and carry on for at least a decade. For example, presenting its analysis of 2011 autumn statement, the Institute for Fiscal Studies predicted real median household incomes would be no higher in 2015-16 than they were in 2002-3. In other words, more than a decade will have passed without any increase in living standards for those on average incomes. The same analysis estimates 1 in 4 children will also end up in poverty by 2015.

    So the implications are clear. Osborne's current policies lead to rising incomes for the ultra rich but grinding poverty for everybody else.

    But what would reverse this balance and result in policies that
    increased living standards for the 60 million UK citizens and constrain the skyrocketing growth in inequality caused by the massive income gains of the ultra wealthy?

    To my mind the reason the entire right wing press, the Institute of Directors, CBI, economic think tanks, Tory donors and so forth are behind the austerity drive is the role of wage equalisation in international trade.

    It has been known for a long while that when two countries enter a free trade agreement, wages for identical jobs in both countries tend to approach each other. After the North American Free Trade Agreement (NAFTA) was signed, for instance, unskilled labor wages gradually fell in the United States, at the same time as they gradually rose in Mexico. The same force has applied more recently to the various countries of the European Union.

    The implication of this are massive as globalisation has begun to open up the huge workforces of China and India who are currently paid much lower wages than their US and European counterparts.

    Given that we know, through Factor Price Equalisation, as long as
    we continue free trade, that the wages of these workers are going to equalise over the next 20 years.

  4. There are of course two ways that wages could equalise.

    In the first scenario Governments in Europe and the US
    deliberately pursue their current austerity program's and suppress workers wages. The wages of workers in China and India gradually rise to meet the EU and US levels and the converged wages for workers in a decade or two's time is low.

    This scenario of course supplies much larger profit margins to
    the ultra wealthy owners and managers of multinational corporations as their wage bill is low. Bankers are happy as austerity allows greater indebtedness of households to persist and inflation isn't allowed to eat into the real interest paid by households on the debts owed to those that have lent the money.

    As a side benefit, privatization of the profitable parts of the
    state (e.g. tuition fees, the NHS, police, roads etc) under the excuse of austerity allows further tax payer backed profit opportunities for multinationals.

    The other scenario for wage equalisation is sovereign debt monetization, tax reform , financial transaction taxes, Keynsian stimulus etc. These policy responses are not to be welcomed by the global elite. These economic policies would result in rising living standards, higher employment and economic growth but they would also circumvent the austerity for the hundreds of millions of citizens in the US and Europe and result in wage equalisation of EU/US workers at a higher level with workers in China and India. This is an unacceptable outcome for the worlds global elite who will lose profit margin from the higher wage bills they will need to pay their workers.

    This is the reason we see the forces of business, high Torydom, all right wing economists and so forth lobbying so hard for austerity and the continuation of misery. Your job is to oppose them.