Taming Government Debt via Austerity – Ignorance and Conspiracy

A very great deal has been written by economists and others recently about the wisdom of the UK government’s plunge into austerity mode in 2010. The consensus among economists, by far the most common view, is that during a recession, and especially when a country is sovereign in relation to its own currency (ie – it is not tied to gold, or the euro) a policy of government fiscal austerity is contractionary: it reduces GDP in the short-term, tending to prolong the recession.

One might be forgiven, however, having listened to the political and ‘corporate’ class, for believing otherwise. Why politicians and why many business people would wish to promote the opposite view can be argued. Certainly, text-book academic macroeconomics does not support this view. And what little published academic work there is which has been used to support the ‘austerian’ view has been discredited again and again. The reasoning of the ‘austerian’ politicians and business people seems therefore to be based either on ignorance (eg a belief that a whole economy must work like that of a firm or household) or else is based on the ideological view that ‘the state must be shrunk’ and any excuse for shrinking the state is good enough. The text-book macroeconomic academic consensus says that in a recession and when government debt is higher than it ‘should’ be, a sovereign government, like the UK’s, should definitely have a ‘credible’ proposal for getting the debt down in the medium to long term – but not aim to do so in the short term: because of the damage such a policy would cause and its hysteresis effect. One of many very recent blog posts covering this issue by a respected UK economist – Simon Wren-Lewis – is here.

In this post Simon Wren-Lewis politely and cogently argues with one of the few contrarian economists – Ken Rogoff – and takes him to task for forgetting the fact that the UK has its own currency and can thus ignore the risk of ‘market panic’ caused by high debt because it has the means to deal effectively with such a panic.

But more significantly a paper was recently published by the IMF which looks at how, and under what circumstances, government debt may be reduced by means of a policy of fiscal contraction. Basically, it shows that only 26% of fiscal consolidation efforts (defined as a large adjustment in fiscal balances ignoring interest rate payments) were successful when growth is below a country’s historical average. In contrast, when growth is above average, the success rate increases to 41%. I, personally, would not have said that even a 41% success rate was good – but that is another issue. Essentially, the paper says that in the relatively few instances where fiscal contraction worked when growth was below a country’s long term average a few very special conditions existed: a critical one of these conditions was ‘a lift from a depreciating exchange rate and solid export growth—channels that are largely blocked for many countries in the current environment of near-zero central bank interest rates and slow global trade’. The UK has certainly had a depreciating exchange rate – but there has been no ‘solid export growth’, nor could there have been, for pretty obvious reasons.

The fact that we now seem to be very slowly coming out of our recession in the UK is quite irrelevant. The point is that we still have a poor export performance, productivity is one of the lowest of the developed countries, and business investment has still not taken off. Indeed latest ONS data shows that UK business investment was 8.5% lower in the third quarter of this year than in the second quarter. No wonder productivity is low. But even if things were better than that, it would certainly not prove that the government’s policy has been successful. Eventually most recessions do end, no matter how badly managed – so the fact that it may have ended (or may not… if we are having a ‘dead cat bounce’) means nothing: the point is, it has been unnecessarily prolonged by ignorant mismanagement or, worse, a conspiracy to ‘shrink the state’. Being a lifelong believer in the cockup theory of history I do not use the word ‘conspiracy’ lightly.

No ideology in an advanced country should have been sneakily allowed to cause the misery of declining incomes (for the majority, natch), unemployment, under-employment and the cuts in social welfare for the least privileged that this one has. It will have long term effects which are very nasty – the polite term for this being hysteresis.

Edit 18 Nov 2013: Mr Carney says ‘glass half full’ – but with no increase of GDP *per capita* since 2010, still declining business investment and still no export growth, despite a heavily depreciated pound – this does not look like any kind of sustainable recovery to me… Just ordinary people digging into their savings and borrowing more. The game will be well up before the next election I think


Score Inflation in Restaurant Reviews

Ever since the demise of The Egon Ronay guide we’ve used a number of guides to help us choose restaurants: Michelin, Gault Millau (with its delightful French turn of phrase), Time Out – depending on where we are geographically.

As we used to travel abroad a fair amount for work we used Zagat quite a lot. Zagat depends wholly on the reviews of the punters. So obviously you have to believe in crowdsourcing etc at least a little bit. We used to find it reasonably reliable albeit not perfect. But we did notice that restaurants in New York, San Francisco, etc seemed to get higher ratings for ‘Food’ than the equivalent quality in London. It seemed easier for a New York restaurant to get a high score, of, say 28 out of 30. OK – that’s no big deal.

Recently, however, I’ve noticed two interesting discrepancies in London. There is a great little Tapas place in Camden Town, inner North London. It’s little more than a ‘caif’, really. But the food is honest and tasty, rustic and not ‘refined’. It’s well-priced. It gets a Food rating of 25 out of 30 in Zagat, which seems perfectly reasonable to me. However, we recently discovered a really nice Tapas place in Westbourne Grove, near Notting Hill, inner(ish) West London. There, the food is both tasty and refined and adventurous. Both places seem equally very busy. And we shall continue to go to both places although Westbourne Grove is further from home. But here’s the thing. The somewhat posher and also better Westbourne Grove place gets a measly 22. I have no idea how to begin calculating whether there is any statistically significant difference between any scores in Zagat. For a start you have no idea how many people are rating the restaurants. So we have to take them at face value or not take them at all. And Zagat has, in the past at least, definitely been useful to us. But it struck us as an odd difference. It should, to our way of thinking, have had a better score than the Camden Town place, not a poorer score. I kind of hypothesised that the possibly better-heeled Notting Hill crowd had higher expectations than the Camden Town crowd. And maybe foodie Londoners have higher expectations than foodie Washingtonians (DC). So Zagat scores are geographically sensitive.

So far so good. I can live with that – within limits.

But the limit was breached a couple of nights ago when we explored a restaurant in Highbury/Islington area of slightly grungy inner North London which had been given a 28 Food score. We thought – that should be interesting.  The important thing to note is that the highest score for Food in the London Zagat appears to be 29. That’s for The Waterside Inn – (way out of London). Some really, really posh and also truly excellent and well known places get 28 in Central London. So, what about this place? Folks, it was… err… OK. But is was certainly nowhere near the quality of a Central London 28.  In fact, by comparison I would only have given it a 20 or 21 – perhaps because of possible food sourcing policies – and, err, not sure -  a bit higher than the estimable Cote chain – restaurants within which tend to be given a Food score of 18, and which I’m very happy to eat in, thank you. To be fair, this place was priced quite reasonably – ‘decent’ local eatery prices.

But there you have it. Punters’ scores are as heavily influenced by who they are and where they live as the actual quality and sophistication of the food itself. I should not be in the least bit surprised by this. It’s in all the psychology textbooks in one context (aha! Context! Framing! etc, etc) or another. It’s just that a food guide punter ‘score’, especially that which is an average of those given by a large (?) number of people, has an aura of objectivity to it – which is totally unwarranted in reality.

Or maybe we were just there on a bad night? Perhaps Chef was on holiday? Dunno.

Bring back Egon Ronay?

EDIT
My lady wife points out to me that we should expect to see many more discrepancies in Zagat – since it was taken over by Google and has become free. Before, you needed to be some kind of committed foodie to write a review for Zagat – as you needed to pay for the guide. Now, however, anyone, committed foodie or not, can and, at the behest of the owner (or, indeed, an aggrieved diner), may write a review, whether or not they know or care anything about restaurant food quality. Expect many more reviews of poorer quality…


What if We Are Seeing a Dystopia in The Making – Caused by The Third Industrial Revolution Finally Reaching its Tipping Point?

OK, so we appear to be coming out of a demand-led recession (or, as a few would have it, a supply-side recession)… provided there are no more ‘shocks’ (China? Ungovernable USA? More eurozone shenanigans?). However since UK business investment is currently down further to more than 8% less than last year, and since the UK trade deficit is stubbornly large despite severe sterling devaluation, and since we have a relatively (to other countries) severe productivity problem, I’m far from convinced our debt ratio will be much improved in the medium term.  I’m also pretty convinced that ‘ordinary people’ will not see much benefit from the growth we do achieve in this ‘recovery’.

But I do also wonder if what happened and is now happening is not only a normal, albeit rarish kind of finance-triggered recession, exacerbated by misguided government austerity policies and their aftermath, but rather a ‘tipping point’ adjustment as an underlying IT/robotics technological revolution has finally reached escape velocity, while increasing globalisation also did the same? Maybe business doesn’t need to invest more?

What would that imply for the future?

There is some interesting research regarding the effect of computerisation on jobs in the UK and in the USA and other ‘developed economies’ too This doesn’t excuse appalling governmental mismanagement via austerity policies with doubtless appalling hysteresis effects on the part of the UK, the Eurozone and, to a lesser extent, the USA. But I wonder if the longer term problem isn’t one rather more equivalent to that of anthropogenic global warming – which hasn’t yet caused its major shock, (but surely will).  In this case, the issue being that there are simply too many people who need jobs for the jobs that will be available – both middle and working class – in the short to medium term. I have no idea how long the employment disruptions of the first two industrial revolutions (say, steam/rail and electricity/internal combustion engine), actually lasted. But I have a nasty feeling feeling that this third industrial revolution’s disruption to people’s employment prospects in the developed economies and, later, worldwide, is going to last much longer and produce much more severe unrest and even revolutions, as large proportions of our populations simply become ‘unemployable’ and feral, while the uppermost tier of our societies – the global elite – live in gated communities which may cut their dependence on the people and infrastructure among and within which they reside.

It would, of course, be theoretically feasible to avoid such an outcome if the production potential and profits could be widely distributed so that ‘ordinary people’ did not need to work very much – their main function becoming simply to consume (l believe Kornbluth got there early, with his novella The Marching Morons in the 1951, if it wasn’t Keynes a couple of decades earlier). But without a nasty revolution it looks to me more like the coming dystopia of Elysium

EDIT: Noted for further thinking: http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2013/10/abundance-revolution.html (and multiple links…) Goodstuff!


Austerity: The UK Government’s Current Motives Are Not The Original Ones

It looks as if the UK government’s austerity drive to reduce the deficit in haste no longer has the objective of improving the economy. It has other objectives.

It looks this way because the excuses for austerity not apparently actually improving the economy are transparently weak. They boil down to ‘our main export markets are in a terrible state, the global economy is in a pretty poor state, other countries are in the same boat, so we are doing the best we can under highly adverse circumstances; but don’t worry – we are getting there, slowly – just look at our improving employment situation‘.

This is transparently weak because, for a start, it ignores the fact that our major companies are simply not investing. These companies do not need to borrow (or borrow much) to invest as they are generally sitting on large cash-piles. So while it is true that our SMEs may be experiencing difficulty raising funds – because the banks are still in a ‘delicate’ position – if our major companies were to be investing we would be seeing some real growth. But they are not, despite the once-alleged confidence building effects of the austerity policy. This is because they are fearful there won’t be enough demand to justify their investment in new products, new plant, new machinery. They see a lack of demand stretching into the future. This demand shortfall arises because consumers do not have the wherewithal or confidence to go out and spend. For some years now, their wages and salaries have not kept pace with consumer prices and they are nervous about their jobs. One major reason why their wages remain ‘stickily’ low.

But what about our ‘improving’ employment situation? Well, it’s true that private employment has grown and even outpaced the engineered decline in public sector employment. But at pretty low wage levels. And anyway, there is a marked decline in productivity associated with these employment improvements. More private jobs is not translating into more production and growth. Cheap labour is being hoarded by firms and hired, too, as a cheaper or less risky alternative to capital investment. And in the service sector much labour is being expended fruitlessly chasing more business which refuses to materialise because this is a negative-demand-led recession.

David Cameron, George Osborne and Nick Clegg are none of them stupid. Neither (now, at least) are they ignorant. They know all this stuff. So what is their stated excuse for not abandoning their policy of short term fiscal consolidation – though, of course, it is now not quite so short term because the end-of-this-parliament targets are definitely going to be missed, and the government has admitted it? When, instead, they could be borrowing – at what are actually negative real interest rates – in order to boost demand through increased capital investment in productivity-enhancing infrastructure, building works, school repairs, more housing, etc? All things which are really needed, and which would, much of it from the get-go, have significant economy-boosting effects. The stated excuse is that to be seen to be changing the austerity policy and embarking on a borrowing ‘binge’ when the national debt is ‘so large’ in relation to GDP would cause the bond markets to freak out. The markets would suddenly cease purchasing UK government bonds. And this would result in a rapid rise in market interest rates on the bonds significantly increasing the price of government borrowing in the future. Also, they claim, the UK would lose its AAA status because the government would have lost credibility in its perceived ability to reduce the deficit and ultimately the national debt. Um… well the credit rating agencies are going to do that anyway, and soon. Because, clearly, the government is failing in its endeavours to fix the economy, while the deficit remains stubbornly high, with debt still increasing in relation to GDP. GDP is still bumping along the bottom, if not actually decreasing, further exacerbating the debt-to-GDP ratio. Obviously the best way of actually reducing this ratio would be to increase GDP, the denominator in the equation. We really, really need growth.

There is also, of course, a major unstated reason for not changing policy: that no senior politician can be seen to admit they were wrong, as this would have a seriously deleterious effect on their personal credibility and future career path. Tough one that… Moral dilemma, eh?

So therefore the purpose of continued austerity is now no longer to fix the economy, but (i) to try to hold off a sudden rise in UK government bond interest rates (a sudden drop in demand for bonds) and (ii) to shore up policymakers’ personal credibility until ‘something turns up‘. This is just finger-in-the-dyke stuff. It can’t help but fail. Even more disturbing is that, actually, there is also a third reason (iii) that some Very Serious People, possibly including Mr Osborne – but if not, certainly people he rubs along with at dinner parties, perceive government debt as immoral. They do, too. They may give reasons for this, relating to future generations – reasons which don’t generally hold water. This is really ideological, emotional, not susceptible to argument. Oh, and a related fourth reason (iv) The belief that the state must be shrunk so that the well-off can keep as much of their income as possible and not be burdened by more than the minimal amount of taxation: purely ideological, this one, to put it politely.

So – there we have it: four motivations for continued sharp fiscal retrenchment – none of which actually relate to the reason we were given for front-loaded fiscal retrenchment at the outset: that this austerity would cause the private sector to invest and grow. This was the myth of ‘expansionary austerity’. A myth, by the way, cleanly, neatly and tightly debunked in an essay/paper from the USA’s Center for Economic Policy Research (CEPR) published some 7 months ago. Here (PDF).

Way back in 2010 Olivier Blanchard of the IMF clearly said ‘Commandment II: You shall not front-load your fiscal adjustment, unless financing needs require it’. That was in June 2010.

All this is not to say that the national debt is too low, or just right. The national debt is, by general agreement, even among KrudeKrugmaniteKeynesians, too high in relation to GDP. A credible plan for its reduction – and therefore reduction of the deficits which feed it – is definitely needed. But we do not have such a plan at the moment. Plan A has, indeed, been discredited. To be at all credible, a rational plan needs to be stated now, to be implemented when GDP does significantly turn up in what looks like being a sustained manner. Austerity in a time of growth may be a virtue. In a time of depression/recession it is definitely a self-defeating ‘sin’. As the IMF pointed out way back then.

Addendum

1. How does our debt to GDP ratio actually look? Is it as bad as it is claimed? Well, it is not brilliantly good. But putting it into a historical perspective shows that it is not actually all that terrible, either. Here are some charts. So we need to do something to bring it down. But all that now-now-now panic was totally unnecessary. (EDIT: And long after this was originally written, a paper by Reinhart and Rogoff widely used to justify debt panic, has been thoroughly debunked for (i) sloppy use of Excel, (ii) deliberate exclusion of data that didn’t fit the thesis and, (iii) perhaps the greatest sin, assuming causality and ignoring the possibility of reverse-causality: high government debt results in slow growth, when it could equally be that slow growth causes high government debt).
2. Did the last government cause the sharp increase in national debt? Well, it did happen on their watch. But that was because of the extreme financial crisis caused by the meltdown of the banks, requiring an expensive bank rescue operation, and causing a sharp drop in tax receipts.
3. Could we have been in a stronger position when all this actually started? Probably. But Spain and Ireland were paragons of fiscal rectitude, and still got sunk by their banks (and the euro and the ECB – but that is another story). The UK was not particularly fiscally profligate before this all happened. The fiscal deficit of the UK was actually less than 3% of GDP at the time. Not so bad, as it happens. Similar to the USA and France. But, of course, if the banks had been better regulated… Well, that’s another story. And the blame for that can certainly be laid at the door of Gordon Brown. However, the Conservative party at the time was all for very light-touch regulation too.

EDIT
There is one potential flaw in the argument that the government should switch course, and borrow for investment in beneficial infrastructure, etc, etc… But nah… That’s for others to elucidate… If they have some evidence, that is…

…Oh well, all right then. The potential flaw is that – although I do not believe it would happen, it is, theoretically possible that some muddled thinking on the part of some people in ‘the markets’, combined with herding, might result in either refusal to buy new UK government debt, or, if not immediate, a sudden rise in their yields (free market interest rates) as those who had bought the new debt (mainly banks) found that they could not sell it on at prices above or equal to what they had bought it for. In other words, if the UK government were to abandon current austerity policies and borrow for worthwhile capital-type investment to boost GDP (fiscal stimulus, yay!) interest rates on UK debt might possibly go stratospheric.

As I said, I don’t believe this would happen. But, if it did… what would happen then? The answer, from history, seems to be here. Nice charts and explanation from that KrudeKeynesianKrugman (KKK). So, not Greece, nor Spain, nor Ireland today. But but France in the 1920s. When an awful ‘bond vigilante’ strike actually happened. So France, which had started with an enormous post WW1 debt problem, recovered strongly. what a surprise! The effect of the sharp rise in French bond yields caused a sharp decline in the value of the franc (surprise? No). Resulting in increased exports (surprise? No). Some inflation eroding the value of the debt (but definitely no Weimar, note). And on to a full economic recovery. France boomed in the 1920s – until the Great Depression. But that is a whole other story.

Meanwhile here is a blogpost and chart chart snitched from Not The Treasury View (aka Jonathan Portes and NIESR) which says it all about the current recession, compared with previous ones.


To Snitch Or Not To Snitch?

I just came back from our local Supermarket-Local/Express (well-known retailer). I paid for some confectionery at the self-service tills. As I waited at the front of the queue for a till to become free, I noticed that the woman at the left-hand till had taken her last item – a packet of eggs – straight from the resting shelf, across the scanner, onto the ‘bagging area’ without actually scanning it. Not surprisingly, the till complained ‘Unexpected Item In Bagging Area’. So she put the eggs back on the shelf before the scanner, paid for the items she had scanned, and then took the eggs she had not scanned and placed them in her bag.
Should I have complained loudly ‘Madam you didn’t scan your eggs!’, or should I have gone up to her before she left and offered to pay for her eggs? Maybe I should have simply rushed to the security guard and pointed her out as she was leaving the shop. Instead, what I did was precisely nothing. I scanned my confectionery, paid and left (actually I was sufficiently distracted that I forgot to pick up my own receipt. It would have been ironically funny if I’d been stopped).
I don’t know if this was truly the reason for my deciding not to snitch on her, or offer to pay for her goods, or quietly tell the guard – but this is my rationalisation: From the way she was dressed, she was obviously no well-off celeb chef out to get something for nothing perhaps because of some sense of victimhood, deprivation, entitlement or whatever (like, say, Antony Worrall Thompson of recent like fame). Neither did she look like the local squire/dowager or actor kleptomaniac. I might have been happy to snitch on any of them. Actually, she looked like someone who’d just got off work from a low-paid job and needed the eggs but didn’t actually have the money to pay for them. So – I didn’t want to embarrass her, or get her into trouble. And I reckoned that shoplifting is a normal part of retail life. Don’t they even call it ‘shrinkage’ in the trade? (Most of it due to staff, actually, I was once told). It has to be indirectly built-in to the price-setting algorithm of the retailer. Thus the rest of us – the other customers – end up paying for it. Depending on how much ‘shrinkage’ there is, maybe we pay up to 10% more than we might otherwise pay (or maybe lower profits are declared, and the management and shareholders pay – but I suspect not).
So… to snitch or not to snitch? That is the question… My answer is ‘it depends’.


Inflation – Getting My Head Around it… With ‘Common Sense’ (Oh Dear)

The topic of ‘helicopter money’ recently arose in a family discussion. Helicopter Money, I guess, is the modern equivalent of digging holes in the road and then filling them up again (or, with extra redundancy, digging holes in the road, putting money at the bottom of them, filling them up again, then paying people to get the money…). Or something similar that Keynes may or may not have said in jest.
The government dropping money from helicopters would, of course, never run politically.
But the only slightly more ‘respectable’ notion of the government spending money (borrowed at current extra low interest rates, or maybe just created at the stroke of a pen (‘printed’), or collected by VAT-taxing pasties and caravans) on ‘infrastructure’, like roads, high-speed rail, new or modernised schools – or, indeed, anything that would (a) put more people to work and (b) have a long-term beneficial effect in its own right, might just be feasible politically. Though, laudable though this might sound, the chances are currently rather slim of it happening here in the UK.
The argument for doing this is that the private sector is in ‘saving’ mode – private individuals paying down debt, and companies sitting on their plentiful cash-piles (oh yes – this is true) and refusing to invest in new or improved products – because they fear there would be no demand – because, surprise, surprise, we are in a recession… So, if people will not spend, and companies will not spend/invest – how is the economy going to grow? Exporting does not offer salvation right now, with so many other countries battening down the hatches. Thus, only by the government spending and thus stimulating local demand by increasing the amount of money in circulation.
The notion that if the government cuts its spending this will ‘release’ businesses to invest/spend has proved to be wrong in this recession. Though it would be right in a situation where the government was competing for investment-money with the private sector. But it is not.
Thus the main argument against the government increasing its spending is that it will just cause inflation. The spectre of Weimar/Zimbabwe is invoked. I’m ignoring the cliched chant ‘you can’t borrow your way out of a debt crisis’ because it is truly meaningless – as it confuses a sovereign country with a household within a country – and they are not at all the same thing. What is true of a part is definitely not true of the whole in this case. Fallacy of composition. A household or a firm cannot create money out of thin air, but a sovereign country may do so to pay off its debt, or it may borrow at such advantageous terms for so long that the debt would be eroded over the long run by ‘normal’ levels of inflation (eg 2%). It may do the latter for as long as ‘the markets’ are willing to purchase its bonds at an interest rate that the government can afford to service.
But I want to get back to the issue of ‘inflation’.
I’m not going to get into Keynesian versus Monetarist versus Austrian versus Modern Monetary Theory versus Rational Expectations stuff here. Rather, I’m going to try to apply ‘Common Sense’. Common Sense is often handy. But it is also often dangerously misleading. I think it was Einstein who said something to the effect that it was nothing more than the sum of the prejudices we have acquired by the age of 18. It amounts to a series of handy simple algorithms – simple instinctive thinking which may or may not lead to correct answers, depending on whether the actual situation in which it is being applied does accurately reflect the situation which led to the creation of the algorithm in the first place. It is a sometimes useful quick alternative to thinking things through from first principles. So we need to keep the dangers in mind as I try to apply Common Sense.
So, inflation. I’m going to mainly use the definition of ‘too much money chasing too few goods/services’. What is ‘too much’? Enough money to cause the demand for the goods to exceed the supply. If the demand exceeds the supply, the price of the goods/services will increase. So the ‘value’ of the money (in terms of what it will buy) goes down. Ah… but while this must always be true in the very short term, for the less immediate term an increase in demand for goods and services will lead to an increase in their supply, as the sector supplying the goods and services aims to increase turnover and profits by supplying more goods/services to meet the increased demand. At least, it will do so if it has the capacity to create more of these goods/services (and it believes the demand increase is not just a short term blip). If, on the other hand it does not have this supply capacity, or cannot create it quickly, then we get persistent and probably runaway inflation. It becomes runaway (Weimar, Zimbabwe) when people demand higher wages to meet their day-to-day needs as the value of the currency ‘in their pocket’ has declined such that it will not meet their needs, and they believe that this will continue and get worse . A vicious spiral results. Inflation may also be imported, as when the demand for some internationally traded commodity (oil, energy, minerals, food) increases on the international markets to exceed the supply to the international markets. It is also imported if the domestic currency declines in value on the international money exchange markets causing prices to increase domestically. My common sense may deceive me if I fail also to take account of all this stuff.
OK – so let us look at the current UK situation. Helicopter Money or any other form of increased government spending will increase the amount of money in circulation, and, provided people are prepared to spend this money and not simply shove it under the mattress or put it in a bank (as they might under conditions of ‘deflation’, as a store of future wealth) will lead to increased demand for goods and services, which will lead to (at least) a ‘firming up’ of prices. The question is – does the UK economy have the capacity to increase the supply of goods and services to meet this increased demand? We do know that businesses – especially large ones – have the financial resources. They are sitting on a lot of cash. And borrowing for them is getting cheaper and easier. They also have under-used capacity. We can deduce the latter by the fact that UK productivity levels are currently rather low. And, we have historically high levels of unemployment. So – assuming all this spare capacity is not ‘structural’ (eg outdated/obsolescent plant, the unemployed labour not having necessary skills) it should be easy for UK PLC to increase supply. This will not always be the case as there are ‘hysteresis’ effects: make someone unemployed for long enough and their skills become outmoded, or they lose their skills and they become square pegs looking to fill round holes. We must assume this is already beginning to happen, but it is unlikely to be so serious yet as to cause us to say that our excess capacity is a mirage. So – there should not be any reason for UK PLC not to increase supply to meet the increased demand generated by the dreaded fiscal stimulus of government action. So we then get a virtuous circle of increased money supply leading to increased demand leading to increased supply and thus growth, more taxes being collected, less spent on welfare, etc, etc.
Ah, but I hear you say, what about the bond and currency markets? Won’t they lose confidence, causing the price of openly traded Treasuries to drop and the yield to increase unsustainably, while the value of the pound will drop causing the price of imported commodities etc to increase, leading to inflation which would then run away because of increased labour costs as workers demand and get more money? Here we come back to common sense… Why should this occur if the UK embarks on a fully fledged growth strategy? If the markets sense sustainable growth on the horizon they will cheer. True – there is often an unfortunate herd instinct in the markets, but in order for them to lose confidence they would need to believe that the government’s new strategy will squeeze private investment out, or that it will lead to nothing more than inflation. Which means that they believe in the wrong kind of common sense. Disproved by recent events. Only an external oil price shock could derail this strategy. Hello Iran? No, surely not…

EDIT:
Regarding the imported inflationary effects of a possible decline in the external value of the currency through running a budget deficit, that wise old coot, the Conservative-leaning Samuel Brittan, in a recent FT blog, quotes himself thusly: “A permanent secretary under an earlier Labour administration once asked me what I thought were the limits to permissible Budget deficits. My answer was: ‘Up to the point where the gains to output and employment are offset by the inflationary effects of a fall in the exchange rate.’ I thought it more important to state the principle than to give a spurious back-of-the envelope numerical estimate. Even the principle is slightly ambiguous. There could still be valid differences of opinion between those who regard inflation as an evil in its own right, to be weighed against any output stimulus, and those who worry mainly about the effects of raised inflationary expectations in offsetting the output effects of the stimulus.”


Some Thoughts on Global Warming Denialism on Both Sides

Global warming denialism might come in a number of forms:
1) Denial that the Earth is warming at all;
2) Denial that Earth is warming outside of ‘normal’ variation caused by ‘normal’ solar energy output changes and/or position of the solar system in the galaxy;
3) Agreement that the Earth appears to be warming, but denial that there is any persuasive evidence that the cause is manmade (ie – it is not ‘anthropogenic’); this requires the assumption that vast numbers of climate scientists are either mistaken, or are taking part in a conspiracy of one kind or another, or both: either a political conspiracy with an political-economic agenda, or a conspiracy to ensure employment and funding for climate scientists, and both;
[3 & 2 essentially amount to the same thing - depending on timescale definitions of 'normal']
4) Agreement that there probably is ‘some’ anthropogenic global warming, but that the dangers have been grossly exaggerated with respect to the size of the eventual global temperature increase and its effect on human society.
5) Agreement that there may be some anthropogenic global warming (AGW), but that there is, as yet, insufficient evidence to decide definitively, and, even if AGW is occurring, how dangerous this is likely to be.

I do not propose to go into the science at all. Just like the majority of people on all sides of the debate, I’m not equipped to do so. There is a very interesting and informative blog, which goes into the science a bit and which appears to take the point (5) stance here. It’s in two excellent parts.

My own view is that funding and peer pressure may indeed play some part in the research undertaken and the views publicly expressed by climate scientists, some of whom have become somewhat emotional. However, I believe that science is a self-correcting exercise and also I generally prefer cockup theories to conspiracy theories, except where the conspiracy in question is one by what outgoing President Eisenhower warned against: the Military-Industrial-Complex (which we should, perhaps, now call the Industrial-Energy-Financial-Complex…) – who are always so happy to accuse others of conspiracy, because they think that’s how everyone behaves.

Therefore, I am convinced that there is global warming and that it is at least largely anthropogenic. Further, I am quite sure this will be a direct cause of major calamities, societal disruptions, wars and large numbers of deaths on a global scale unless we do something quite fast.

I am also convinced that it is politically impossible to do something fast where it counts most: in the major developed countries and Brazil, China and India.

I am also extremely bothered by the fact that among many who otherwise share my beliefs about AGW, there is too often only one solution proposed: cut our emissions of greenhouse gases. Not that I don’t think we should. We really, really should. But, as I said, I think that is impossible: it won’t happen in time.

The neglected solution (ideally as-well-as) is to develop technologies for controlling our climate by other means. But, unfortunately, this is widely considered, by those who are otherwise on the side of the angels, to be a heretical proposal. Of course there is a risk of unintended consequences. But that should not be an excuse for near-theological objection to mitigation policies, which need to be developed and trialed. From time to time I read in the press that this or that mitigation technology is being considered, trialed, experimented with. But then I hear very little about it, aside from the loud commentary concerning it not getting to the root cause of our problem: mitigation seems to be politically and theologically incorrect.

I don’t think there is too much time left, really. All the knowledgeable estimates for the advent of practical fusion power place it between 20-40 years into the future. Germany has recently cancelled all its fission-power deployment. I think we should be doing all we politically and practically can to mitigate the problem of anthropogenic global warming.

We could start by admitting that we will not be able to solve it ‘properly’ in good time.


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