Deconstructing David Blanchflower
Mark Bathgate 1:17pm
What with his new column in the New Statesman and his articles for other outlets, David Blanchflower – a former member of the MPC – really does seem to enjoy laying into the Tories. Problem is, much of what he says fails to convince – so much so, in fact, that I thought I'd bash out a quick fisk of his Guardian article from last Friday. Here's the full article with my comments in bold:
We are in the midst of the worst recession most people alive have ever experienced, or will probably ever experience. It is already worse than the 1980s and it isn't over yet. The only comparison is to the 1930s (my parents, now in their 80s, can remember how bad it was). The monetary and fiscal authorities have so far managed to prevent a recession turning into a depression – but it still could, especially if David Cameron and George Osborne have their way.Some people seem to think it is all over and have called an end to the recession. Far from it, normality is a long way off. It will take a very long time for output, employment and unemployment to return to pre-recession levels. As Mervyn King said at a press conference recently: "It's about levels, stupid."
The evidence is that financial crises are especially harmful and have especially long-lasting effects. Hence any recovery is likely to be slow and anaemic at best.
The solution to this is fixing the banks as Norway/Sweden/Finland did when faced with similar problems in the early 1990s. Leaving a broken banking system to push ever higher interest charges onto it’s customers is the recreate the mistakes of the Great Depression and Japan in the 1990s.
The simple lesson when you are deep in recession is that a serious policy error is to reverse stimulus too early, which then sends the economy crashing into a depression. This is what happened in the United States in the 30s. Monetary and fiscal policy were tightened before recovery was firmly established, which drove the country back into a deep recession at the end of 1937.
I believe this is why George Osborne is constantly going on about the importance of sustaining easy monetary policy, while David Cameron emphasises the importance of inflation stability – with stable inflation being the best way to keep mortgage rates low. The experience of many European and smaller Anglo-Saxon countries over the past quarter-century is that, ultimately, excess government debt drives up interest rates, regardless of where the unemployment rate is.What caused the Great Depression was the failure to hold interest rates low and, in particular, allowing the banks to try to pay for their losses by constantly increasing margins to their customers. It wasn’t that government didn’t spend enough money.
And this week into the current economic crisis stepped the Tories with their ill thought-out plans for (a lack of) recovery. Cut public spending here, freeze public sector wages there, reduce the benefits of the poor, raise the pension age, and so on. It was hard to see any group that stood to benefit from their proposals.
Aside from every mortgage holder and taxpayer in the country perhaps? These "ill thought-out plans" being very similar to those which proved highly successful in Canada, Sweden and Australia in the 1990s, and which are strongly recommended to the UK right now by the IMF and European Commission.
Lesson one in a deep recession is you don't cut public spending until you are into the boom phase. Keynes taught us that. The consequence of cutting too soon is to drive the economy into a depression. That means rapidly rising unemployment, social disorder, rising poverty, falling living standards and even soup kitchens. The Tory economic proposals have the potential to push the British economy into a death spiral of decline that would be almost impossible to reverse for a generation.The debate at such times is not about big government versus small government. It isn't about moving this service from public to private sector because the private sector can do it better. The debate here is about maintaining levels of aggregate demand. In a deep recession the choice is: the government does it or nobody does it; it is public spending v no spending. You don't worry about paying off debt when you are at war: you have other priorities. Win the war first.
Actually, very low mortgage rates allow people to pay debt and maintain spending. The list of countries who’ve got out of recessions while cutting public debt and spending in the last 30yrs is very long.
To cap it all, the leader of the opposition, in his speech to the Tory conference, amazingly discussed what he called option one – the possibility that the UK should default on its debt. Mr Cameron, you shouldn't even be raising such possibilities. It's exactly what markets want to hear from a potential leader – you have actually even considered defaulting on our debt? Unbelievable. Better to have said nothing honestly.
Let’s get this straight: the guy making a pitch for being Prime Minster of the UK shows that he realises borrowing money to the point where you have no means of repaying it risks a default, and Blanchflower thinks that's a bad thing? I think it’s a good sign David Cameron may be thinking hard about the repercussions of continuing on this debt-ridden path.
There was one bit of his speech I thought sounded like quite a good plan, which he dismissed. That was what he called his option two: "We could encourage inflation, which would wipe out the value of the debt, making it easier to pay off." Sounds like a good idea to me, and probably to you.Moderate inflation would help all the people in negative equity; rising asset prices would certainly help, and are one of the stated purposes of quantitative easing. A few years of inflation, around 5% or so, would be a really good idea. Keep interest rates low for the foreseeable future, keep the stimulus going.
Mortgage holders can pretty quickly work out that much higher inflation equals higher mortgage rates. Say inflation does go to 5 percent - that would mean mortgage rates around 8 or 9 percent, given our previous experience with that level of inflation. Will anyone finding the money to pay a mortgage each month feel better off, or spend more, if they have to stump up twice the amount each month?Debt has service costs as well as principle repayment – the higher inflation, the higher the interest rate, the higher the cost of the mortgage.
In addition, most people in financial markets would view the deliberate targetting of much higher inflation to reduce the effective value of debt as a "default". Something as unsubtle as a 3 percent rise in the CPI target rate would rather make that point clear to international markets. Argentina tried this approach recently, and most folk tend not to view this as a success. There are very good reasons why countries have very consistently seen low inflation as a good thing.
One possibility is to keep the Bank of England's inflation CPI (consumer price) target at 2% until there is any possibility of hitting it and then simply raise the target. Or perhaps replace the CPI with an index that includes house prices, which would have the same effect of allowing monetary policy to remain loose. We don't need the central bank to reverse policy too soon either. We need to create some inflation for a while.Cameron concluded his speech arguing for his third option – "for me the only option". He went on: "We must pay down this deficit. The longer we leave it, the worse it will be for all of us." Actually, wrong: the longer we leave it, in a recession, the better it will be for all of us. I personally would vote for option two and certainly would never even consider discussing option one.
Previous
Red Rag
October 13th, 2009 2:22pm Report this commentWho needs a useless, economically and numerically illiterate shadow chancellor, when you can do the donkey work for him. Next week, how Osborne was right about the £3 billion balls up and the NIESR were wrong.
Boo
October 13th, 2009 2:37pm Report this commentOne thing that keeps getting mentioned is that cutting public spending will cause things to spiral into a second depression. However, the world economy has changed. Particularly in terms of trade. International trade tanked before the great depression, so the options to stimulate the economy was limited to the government and the private sector. Is that still the case? Is this example still valid?
As for the grow your way out of debt argument. I believe we the choice of a W shaped recovery where the economy rebounds then crashes as nothing is learnt and L shapped recovery where the debt is slowly cleared from our system. I see no potential in the grow your way out of debt solution in either model
General Zod
October 13th, 2009 2:38pm Report this commentBlanchflower's supposed prescience ignores the fact that he was pushing for interest rates to be cut while the housing market was still accelerating in its upward trajectory. If the MPC had followed his advice then, the bust would have been even worse.
If you keep saying the same thing, there is a strong chance that eventually you will be right. It worked for Paul Krugman too.
Mandeep Kaur
October 13th, 2009 2:42pm Report this comment*Yawn* who is Mark Bathgate and where was your (ahem) 'expert' economic analysis when it came to foreseeing the recession and the huge monetary problems the last two governments have led us to since 1991? That's one thing David Blanchflower can immediately convince us, the undecided public, with - credentials.
James W
October 13th, 2009 2:52pm Report this commentNice post - but why do you let Blanchflower have the last word?
Percy
October 13th, 2009 3:21pm Report this commentIs there an election any time soon? Politicians and economists waffle on about this and that but the truth is most things in Britain are vastly over priced and the only way most of us have been able to stay afloat is the lashings of cheap credit that has been swilling around.
You don't need to be a rocket scientist to work out that once QE stops and rates rise, things may get a lot worse again. It really feels like we're in some kind of phoney war.
luke
October 13th, 2009 3:24pm Report this commentGood effort..
Paul Turnbull
October 13th, 2009 3:28pm Report this commentIn the Guardian he calls for higher asset (house) prices, whereas in the New Statesman he demands help for the young. Anyone else see a slight contradiction here?
Dean
October 13th, 2009 3:30pm Report this commentThere is a very old debate between Keynesians and monetarists about how best to revive a depressed economy without fuelling inflation. Keynesians tend to favour aggressive use of fiscal policy, while monetarists favour activist monetary policy.
All you have done here is re-state this traditional debate - which will be familiar to any Economics A level student - without shedding any real light on the topic. You simply assume that the Keynesians are wrong.
I'm glad you're not on the MPC. If you were, you'd realise that life is not that simple.
As always, the general public will discover from their own bitter experience who is right and who is wrong. If the Keynesians are correct, Britain will return to recession (or experience a stalled recovery) once the Tories start implementing their fiscal retrenchment programme. However, this may stave off the need for interest rate increases in the medium-term, because other things being equal overseas investors will demand a lower risk premium on gilts to the extent that they have confidence that the country's overall debt level is sustainable.
What is clear is that Cameron was quite wrong in his speech last week to lay the blame for the current crisis with "big government". This recession, unlike previous downturns, had its origins in a global financial crisis that is really without precedent, in terms of both its scope and severity. This crisis in turn had its roots in a long period of easy money (caused by overly accomodative monetary policy), excessive faith in free markets, and poor risk management by major financial institutions.
It is worrying that neither Cameron nor Osborne had much to say about this last week. Their tactic of trying to present the current recession as a consequence of Labour mis-management seems to have worked politically, but it is a gross over-simplification. The financial crisis originated in the US under a right wing administration which believed (wrongly) that markets could never fail. This and not the dangers of big government is the key lesson of the crisis.
oldtimer
October 13th, 2009 3:31pm Report this commentBlanchflower has, I believe, misquoted Cameron re sovereign default. Cameron said some states had in fact done so, not that he considered it an acceptable option or outcome. Cameron was quite clear and absolutely right to speak up for sound money.
The inflation route (favoured by Blanchflower) is full of pitfalls. It destroys savings and those that depend on them. It raises the cost of capital for new investment thus destroying jobs as well.
Cameron/Osborne did not produce a full draft budget. Their thoughts and intended actions on taxation were left unsaid. We need to hear them first before Blanchflower`s dismissive remarks can be taken seriously.
Marbury
October 13th, 2009 4:04pm Report this commentThis is, if I may say so, a rather soporific type of fisking (fiskings are generally meant to be sharp, witty, and stylish, aren't they?). Anyway, I have a question. And it's a genuine one. Why do we need to pay down the debt as urgently as Cameron (and Nelson) suggest? The US, Germany and Japan have higher debt-to-GNP ratios then us and they're spending like mad. Indeed, Britain has has had a higher debt-to-GNP ratio than it has today for most of the last 250 years, and won a few wars in the meantime. There's no sign of the markets losing faith in our creditworthiness (quite the opposite in fact). So why the panic? I only ask. Short and sharp answers please.
greenslime3
October 13th, 2009 4:11pm Report this commentI thought that the banks had been raising their margins over the last few months. That, and the fact that they really don't want to lend any money to anyone who needs it anyway - apart from nice, safe, governments. Preferably sovereign governments in order to avoid currency risk. Their lack of willingness to lend, despite protestations to the contrary (to politicians and the media), is evidenced by demands for unachievable deposits for mortgages and suchlike (I saw one case where someone was denied a mortgage because he had an outstanding parking ticket). And where they do lend, the rates are sneaking up. The banks are in derisk mode and that won't change until they have refilled their coffers - they are still technically bust. They want to do this as quickly as possible and until the balance sheets are repaired, more will go back to them than is lent out (negative lending). Politicians can twist as many arms as much as they like; for now the bankers will ignore any pain that causes because they have to.
greenslime3
October 13th, 2009 4:12pm Report this commentI thought that the banks had been raising their margins over the last few months. That, and the fact that they really don't want to lend any money to anyone who needs it anyway - apart from nice, safe, governments. Preferably sovereign governments in order to avoid currency risk. Their lack of willingness to lend, despite protestations to the contrary (to politicians and the media), is evidenced by demands for unachievable deposits for mortgages and suchlike (I saw one case where someone was denied a mortgage because he had an outstanding parking ticket). And where they do lend, the rates are sneaking up. The banks are in derisk mode and that won't change until they have refilled their coffers - they are still technically bust. They want to do this as quickly as possible and until the balance sheets are repaired, more will go back to them than is lent out (negative lending). Politicians can twist as many arms as much as they like; for now the bankers will ignore any pain that causes because they have to.
Alex
October 13th, 2009 4:16pm Report this commentThis clown Blanchflower sat on MPC meetings for years electing to keep interest rates low and thus fuel the biggest bubble seen in 200 years of capitalism.
He's totally discredited why should anybody take any notice of what he's got to say?
Mirtha Tidville
October 13th, 2009 4:31pm Report this commentBlanchflower appears to be someone who values his own opinions very highly and to the exclusion of all else.I for one am very grateful he is no longer on the MPC.A very dangerous man to have around monetery policy. In short another left wing numpty..
Gawain
October 13th, 2009 4:44pm Report this commentDean, somewhat unfair methinks. Keynsians like you have to be able to assure us that the inflationary route would be more palatable. My experience of having to feed a young family on baked beans in the early 90's because that is all we could afford when the mortgage rate went north of 15 % is that this choice can hurt those you don't want to hurt badly. To be fair to Blanchflower he was honest enough to answer the question "when do we stop quantitative easing" on Newsnight a couple of weeks ago with "we just don't know". Many of us would much rather address the problems sooner rather than later, which means monetary discipline.
Chris lancashire
October 13th, 2009 5:01pm Report this commentDean is quite right that this is, to a large extent, a classic economic argument. True also, that financial mismanagement was a fundamental cause. However, he fails to mention that we entered this recession with a structural budgetary defecit of (depending who you listen to) £75bn - £100bn which was entirely down to G Brown's spending splurge.
I, for one, do not swallow the "global" line - this recession is deeper and longer and the recovery more protracted due to Labour's out of control, wasteful spending.
TrevorsDen
October 13th, 2009 5:12pm Report this comment"What is clear is that Cameron was quite wrong in his speech last week to lay the blame for the current crisis with "big government"."
What an absolute skip load of Horlicks. Between 2001 and 2008, that's after he stopped following conservative spending plans and the onset of the credit crunch, Brown ran up deficits of £200 billion. And that was in the good times of positive growth. That is all the result of 'big government'. The deficits even before the credit crunch were unsustainable.
Wake up you dopes out there - Brown has been spending like a drunken sailor in a brothel. It is going to be awfully painful getting that spending under control. Even IF the economy picks up with some enthusiasm the revenues will be hard pressed to make a dint in the spending Brown has unleashed.
The BoE point out we have a structural deficit of 10% of GDP -- what is that but not the results of BIG GOVERNMENT.
BTW
the partial and political antics of political appointee Blanchflower give the lie to the so called 'independence' of the Bank.
A J Scott
October 13th, 2009 5:21pm Report this commentMr Blanchflower deserves (for example) Argentina, but they don't deserve him. Send him to the Moon or Jupiter or somewhere where they need this sort of loony.
Fernando
October 13th, 2009 5:28pm Report this commentMy recollection of inflation in the 1970s was that it was like a forest fire: difficult to control once it started. We spent thirty years trying to damp it down.
Hamish McRae made a couple of good points regarding Blanchflower’s ideas in Sunday’s Independent...
" But there are two powerful arguments against permitting the deficit to continue at present levels. One is that beyond a certain point a fiscal deficit stops boosting the economy and actually has the reverse effect. The other is that you cannot go beyond a certain deficit because the markets won't let you: you simply cannot borrow the money at an acceptable rate.
Once a government is seen to be going beyond a certain point in its fiscal deficit, people become frightened and take actions that undermine the fiscal boost. They become aware that policy is unsustainable. So they do everything they can to make themselves bullet-proof. Companies cut back on investment and pay back debt; individuals try to build up savings. Only when they are confident that the government is being responsible do they resume their normal activities."
John Maynard
October 13th, 2009 5:31pm Report this commentBlanchflower is the new Vince Cable. He somehow blagged his way into a "high profile" position for a little while, in which he contributed nothing of substance, and now plans to spend the rest of his life dining out on it.
Just another small component of the Labour dirty-tricks freak show.
Dean
October 13th, 2009 5:59pm Report this commentIt is absolutely clear that Britain would have been far better placed to weather the storm of the credit crisis and ensuing recession if Labour had not built up a huge deficit during the boom years. The Tories are quite right to castigate Brown for this. In fact, the Tories' analysis of the specifically UK dimension of this crisis is pretty spot on.
But what makes this recession different from those of the 1980s and early 1990s is the fact that it originated in the global financial system, and the Tories seem to have very little to say about this. Sure, they've scored easy political points by criticising the FSA and the tripartite system. But they seem to have nothing of interest to say about banks' risk management failings or the reforms that will be necessary to repair the banking system and make it stronger in future so that we don't have to go through this nightmare again.
This is a major issue of deep concern to the taxpayers who have had to pay for the bank bailouts, but the Conservative Party is silent on it. Why?
Mike Wilson
October 13th, 2009 8:11pm Report this commentWhat I dislike most about Blanchflower's analysis - and his actions when on the MPC - is that he seems to believe that growth driven by debt is sustainable. Even in the so called good years consumer debt was growing at a massive rate. Between 1997 and 2007 the debt owed by the people of this country more than doubled - from 650 billion to 1.43 trillion. Now, most people borrow money to spend. So, we can assume that that extra 800 billion of borrowing was spent buying things - houses, cars, conservatories, holidays etc.
That is where the growth in the economy came from. A massive increase in debt funded by ever more arcane ways of inventing money by the banks - CDOs, MBSs etc.
When the banks finally owned up (to each other) that they did not trust the assets backing their packages of debt - they stopped lending - to us! The minute they stopped lending it was as if a tap had been turned off. The economy turned instantly from growth to recession. Proof, if it were needed, that the growth that Labour boasted about for 10 years was based on debt.
During the boom in asset prices what did Blanchflower constantly want to do? Drop interest rates! It was his constant mantra.
Now the banks can't lend to consumers in the same insane way they used to, Blanchflower wants the government to take over doing the borrowing - and spending the money on our behalf.
So, first we get ourselves, personally, up to our necks in debt. Not it is the government's turn. And who has to repay the 'government' debt? Why, us! Of course! It is our debt - taken on by the government on our behalf.
So, add government debt to the 1.43 trillion we already, collectively, owe and where are we? Banana republic levels of debt.
Please, please keep pointing out that Blanchflower is a complete idiot. He really is dangerous. Some people listen to him!
Confusious
October 13th, 2009 8:34pm Report this commentI am confused.
Brown believes that while we are at rock bottom we should carry on as we were.
He has spent all the treasury pot,so he borrows and prints money.
He assures us there is no need for cutbacks or restraint in the public sector,he has saved 500,000 jobs, Yet nay on 4 million are unemployed,ie not working and claiming some benefit or other.
He has promised to flog off a few stuff that will fetch next to nothing, yet will 'halve' the 1.4 trillion defecit.
This by the way, we won't start to 'pay down'until it reaches this figure.
Cameron believes there should be a freeze on public sector pay,cuts in parliament members,a cut in cabinet ministers pay,a freeze on council tax, stamp duty to apply on homes OVER one million pounds,a cut in public sector waste and a general control on what taxes are spent on.Cuts in business taxes and incentives for businesses to hire people.
Maybe both will have the same outcome but Brown's will have to be the same as Cameron's when it comes to paying back the debt.Maybe in two to three years time.
Cameron's will be dealt with over the next few years, so when we come out of this and ACTUALLY do start to grow,there will be less debt to pay
SO-
We can tighten our belts now and owe less debt(Cameron/Osborne).
Or we can spend, borrow and print money,end up with a massive debt(Brown/Darling),then
end up doing it Cameron/Osborne's way after all only with worse cuts.
Will Brown or Cameron get the country out of trouble quicker and less painful, or are neither ways correct?
H E L P!
Numb Skull
October 13th, 2009 9:07pm Report this commentMissed it somewhere in all that fog.
What was option two again?
James Kilfoy
October 13th, 2009 9:21pm Report this commentPeople who bought houses in the last two or three years deserve to lose them. They overpaid, and they ought to be punished for that. If you're not punished for overpaying, there is no meaningful mechanism for setting prices. So why focus on mortgage holders as the ones who deserve to receive the bulk of the government's largesse? They're either (a) those who have benefited the most from windfall gains from the insanity of the last ten years, or (b) the clowns who bought at 8x salary. Neither of those groups are worthy of special help.
Marbury
October 13th, 2009 10:55pm Report this commentTo the person quoting Hamish McRae: HM believes the government's use of fiscal policy to avert a depression has been a success. Is he right on that too?
abacus
October 13th, 2009 11:16pm Report this commentKeynes also said "in the end, we're all dead". So we listen to his teachings WHY???!!! Besides, his most basic thesis is corrupted by the modern 'keynsians', he said run budget deficits in recessions PAID FOR BY SURPLUSES ACCUMULATED DURING PERIODS OF ECONOMIC GROWTH. We ran deficits during the economic growth, yet brown klings to his musings as though they were sent down the mountain in stone
Charles Babbage
October 14th, 2009 9:23am Report this commentNo mention about house price inflation? Most major parties have turned a blind eye to the impact of house price inflation over the last 10 years. If inflation is a bad thing, why is rising housing costs ignored? The age of first time buyers has increased and the average deposit for a home is now around £40,000 . High house prices impacts on quality of live for many people as they end up compromising on size of accommodation because of the cost. Perhaps, economic policy should be steered away from seeing the home as cash machine to one that encouraged enterprise and business creation, innovation and job creation especially in “green businesses”. I would rather see measures such as extremely low corporation tax and help for small business paid for my a gradual introduction of capital gains tax on house sales.
Pedro
October 14th, 2009 9:51am Report this commentMarbury-does the debt level matter.I get rather tired of the continual"our debt levels are no worse than anyone elses" arguement,it allways make me think of 2 terminally ill pateinets comparing potential lifepans -just because everyone else is in the sh.t doesn't make our solutions acceptable.Having had a rant,theer are some specific points however-one of the differences this time & also with so called comparable countries is the extent of TOTAL debt i.e personal debt(£1.3 trillion?),corporate debt ,unfunded public sector pension liablities,Pfi liabilities etc.Add this lot to the disclosed public debt & the total is horrendous.There is also the issue of annual structural deficits set in motion by Crash Gordon whereby the already horrendous public debt just grows inexorably.
Yes it is a problem because even at current low interest rates(artificially so due to QE which will have to be reversed at some point)debt servicing eats up an ever increasing amount of National income.
You also need to consider the structural side of whatever economies you are comparing-we have a decimated manufacturing base,a poorly educated workforce,an over reliance on finacial services & property,poor physical infrastructure,an ill thought out long term national energy policy,a weak currency..I could go on-the point is,absolute debt levels cannot be considered in isolation.
Japan,Germany & America(the latter to a lesser extent)do not suffer these problems to the same extent & America has the rather obvious advantage of having the worlds reserve currency!
Believe you me,the future is not bright..and the last thing we need is yet further debt piled up to suffocate any putative recovery.
Jack R
October 14th, 2009 9:52am Report this commentAs a non-Labour, non-Lib Dem voter, it surprises me to see how simplistically anti-Keynesian the Tory Party economic hierarchy is.
Economist Roger Bootle has a thoughtful piece in the 'Telegraph' of a year ago. An excerpt:
"We have just been through a period when the Keynesian approach was often derided. Partly thanks to Mrs Thatcher, it was widely believed that the finances of the collective could be regarded like the finances of an individual household. We are now emerging, blinking and still unbelieving, into a new Keynesian age.
"This will bring two huge problems for our politicians and policy-makers to address. First, what is the most effective, and least inefficient, way of employing the Keynesian remedy? Second, when depression conditions have passed, as eventually they will, how can we successfully put the great man back in his box, and trim back the pump-priming role of the state?"
(Google: 'roger bootle keynes'.)
Simon Stephenson
October 14th, 2009 10:51am Report this commentI wish I could find somewhere the answer to Marbury's question:-
"I have a question. And it's a genuine one. Why do we need to pay down the debt as urgently as Cameron (and Nelson) suggest? The US, Germany and Japan have higher debt-to-GNP ratios then us and they're spending like mad. Indeed, Britain has has had a higher debt-to-GNP ratio than it has today for most of the last 250 years, and won a few wars in the meantime."
It's the argument thrown out periodically by Gordon Brown. Since there are other major countries with public debt levels way above ours, and they're not experiencing armageddon, why should we conclude that moving to these debt levels will be armageddon for the UK?
The fact that it seems to be only Gordon Brown making this argument is ominous, since the last time he told anything straight was probably back beyond the Cuban Missile Crisis, but no one, to my knowledge, has actually come out and explained why the argument is false.
And yet it must be false, mustn't it, because otherwise there would be zillions of Labour-leaning economists screaming it out at every opportunity, and there would also be all the non-Labour economists who would know that their fixation with eventual debt-reduction was built upon a considerable overstatement of the downside of high public debt levels.
Could it be that the peculiarity of the UK situation, in contrast to the other countries with higher public debt levels, is that we also have huge private debt levels as well? That much of the high public debt in Germany and Japan, for example, is offset by a high level of nett private financial assets, so that, in effect, much of the public debt is owned domestically, rather than by foreigners?
Pedro
October 14th, 2009 10:56am Report this commentSimone Stephenson-I have tried to answer the question above.As someone else has pointed out,this line is trotted out by the labour party spokespeople on a regular basis & is a complete simplification of a very multi dimensional problem.
Mike
October 14th, 2009 11:14am Report this commentI'm with those of your correspondents who believe thet the "Keynsians", on the whole, are having the better of the argument - incidentally I was impressed by the quality of the contributions in this debate - but what disturbs me is that no political party seems to have articulated a clear strategy for managing the economy over say the next five years taking into account the recovery from the recession (which hasn't happened yet), the fixing of the banking system so that future catastrophes are guarded against while at the same time the system remains competitive and how the level of public debt is going to be managed down once strong recovery is underway. This strikes me as particularly difficult with many opportunities for missteps.
Simon Stephenson
October 14th, 2009 2:33pm Report this commentPedro : 10.56am
Yes, thank you. I'd not read your earlier comment before I wrote mine - I guess because it hadn't then been posted.
If Brown's claim is nonsense, why hasn't someone, somewhere, written authoritatively to refute it? If, for example, it is indeed the case that German and Japanese public debt levels are hugely mitigated by very low private nett debt, and that this doesn't apply in the UK, why hasn't Brown's argument been put to bed by public demolition? Apart from anything else, if Brown himself is living with a false belief that UK public debt levels can rise significantly without much damage being done, isn't it more than slightly important to the national interest to make clear to him why this belief is faulty?
Or is it everyone else who is seeking to defend a position that is widely-held but faulty? Is Brown largely correct? Is there in fact much more scope for public debt expansion than is being admitted by the mainstream? We have to remember that if Keynes is right the most effective way out of recession is for the shortfall in private demand to be taken up by temporary fiscal overspending. To deny ourselves this route back to balance because of an imaginary fear about public debt levels would be very much second-rate politics.
Mark Bathgate
October 14th, 2009 2:37pm Report this commentI think the issue with the level of the government deficit is less about the current level of debt - uncomfortably high by UK standards but less so by those of Italy and Belgium, but the rate at which it is growing. Our national debt has nearly doubled from around 44% of GDP in 2007 to what the European Commission projects will be around 81% in 2010.
In just 3 years the UK will have gone from one of the lowest to highest debt countries in the European Union.
The problem here is not that there's a debt in a recession - that in itself is not a big problem.
The issue is that the structural deficit - that part which would still exist outside recession - is somewhere around 8-10% of GDP. Very crudely, the Government spends 50% of GDP, but takes in only 40% in taxes.
You do not have to go too far with this before compounding effects start to cause a major problem.
It is the structural deficit run up in the boom times that is the real driver of this crisis.
That is why the comparisons to Scandanavia, Australia and Canada in the early 1990s are key - all had major structural fiscal holes to dig out of. All of those countries are in vastly better shape than the UK through this recession btw.
Simon Stephenson
October 14th, 2009 3:45pm Report this commentMark Bathgate : 2.37pm
Mark, thanks for coming back to the thread.
I'm a great believer in keeping argumentative points as they actually are. I see no benefit in forcing the result of an argument by knowingly mis-stating the validity of the points introduced.
So in this case we have the Brown corner arguing that the projected levels of public debt are not serious enough to warrant the potential derailment of the recovery by a rapid reduction of the element of the public sector deficit that is structural.
And the other corner is saying that Brown is wrong, that tackling the problem of the projected levels of public debt overrides the danger that this may snuff out the recovery, even though if the recovery is snuffed out in this way it will make the deficit reduction programme virtually impossible to achieve.
I want to know if we are really between a rock and a hard place, or is it closer to the truth that both sides are points-scoring by overstating the pitfalls in their opponents' policies.
T. Holmen
October 14th, 2009 5:52pm Report this commentThis is quite a good thread.
I think Mark Bathgate is spot on, in that the real problem that the UK faces is that the debt is increasing faster than any other country.
The last time the UK had a debt of this size was at the end of the Second World War. If you look at the label on a bottle of Bishop's Finger Ale, it says that it was first brewed in 1958 to celebrate the end of austerity after the war. By that reckoning, the UK should be ready for another celebratory ale in 2022.
Pedro
October 14th, 2009 6:00pm Report this commentI don't think Brown is arguing that the increase in the public debt is not serious enough to warrant him cutting expenditure & therefore potentially derailing the recovery-this is a crisis of political economy not economic theory.What he is sure of is that a fiscal stimulus of sufficient size will almost certainly stop the freefall in national output in the short term,which will enable him to face the electorate on the back of having saved the country from recession.Whether this is the correct decision for the long term economic benefit of UK Plc is an entirely different matter.My own view is that he is at best deferring the inevitable but at worse compounding the problem.Unfortunately,only time will tell & it could well be my children who have to suffer the effects of Gordons 20year mortgage on the future.There is no econometric model which will enable you to analyse the trade off between additional expenditure/debt now & the possible mitigation of recession but with a long term debt hangover or cutting expenditure/debt now & possibly having a faster recovery over the long term.
However,I doubt the political elite are indulging in such sophisticated discussions.
TGF UKIP
October 14th, 2009 7:24pm Report this commentIn the early eighties The Guardian and BBC had the Combridge Economists to quote ad nauseam, today they've got Blanchflower.
Maggie proved the Cambridge gang to be comprehensively wrong and Ros Altman wiped the floor with Danny Boy on the World at One a few weeks back.
And a welcome to Mark Bathgate and thanks for an excellent post. Has Fraser told you how we appreciate graphs?
Robert Pay
October 16th, 2009 3:07am Report this commentBlamchflower is looking for a Labour peerage. I am sure he would not dare feed this twoddle to his student at Dartmouth.
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