Kindle Notes & Highlights
Well, in reality and for the most part, voters are not stupid. What matters to them is the economy and jobs. That much is clear. But the information they’re given to base their decisions on is often biased, wrong, wilfully distorting the truth or even a downright lie.
Among those featured in Prospect’s 2014 list of fifty top world thinkers, seventeen were economists – the next highest category being philosophers, with thirteen entries. Economists are sought for business decisions, for policy advice, or simply to explain to non-economists what is going on in the world.
Perhaps it was a euphemism, but whosoever might have been sleeping on the job was rudely awoken by the crisis that began in 2007, which by 2011 had seen the UK lose a bigger percentage of GDP and world trade than any other major economy.
GDP stands for ‘gross domestic product’: this is a measure of the value of all goods and services produced within the boundaries of the UK within a year.
If we add the income we earn from our overseas assets we get gross national income.
GDP is useful for tracking the general direction of travel of the output of an economy, and is usually correlated with other important things such as the level of employment and overall tax receipts, but be wary of it as a measure of welfare (see Chapter 10). For example, its measurement has recently been extended to include prostitution and drug trafficking, and these dubious contributions will now be deemed to have boosted GDP by between £7 billion and £11 billion, whereas the wholly praiseworthy contribution of somewhere between 1.7 and 2.1 billion hours of extra help each year provided by
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The current Great Recession is an example of an economic event that has its origins decades earlier. After a long post-war regime of close bank regulation, reflecting the bank failures of the Great Depression, the UK financial sector was ‘liberated’ by Mrs Thatcher in the 1980s by what was called the ‘Big Bang’. The Big Bang helped to release banks from their role as strict disciplinarians imposing prudence on themselves and their clients, and increasingly turned them into hard-sell purveyors of credit.
Public spending, or at least the government’s deficit, was too high, but any good economist can shoot down in seconds the claim that it caused the financial crash in 2007, the crash that would lead to the Great Recession over the six years from 2008 (see Chapter 2).
Even so, the debt-to-GDP ratio was still one of Europe’s lowest and, until the crisis, less than Labour had inherited from the previous Conservative government.
Economists may quibble on the details, but the famous McKinsey graph clearly shows that it was the build-up of private debt, not government debt, that caused the economic fragility: government debt actually fell dramatically as a percentage of overall debt.
Overwhelmingly, it was not reckless public spending that caused the economic crisis: it was reckless banking that took place unchecked by governments and often encouraged by light-touch financial regulations.
Another graph, from the Treasury itself, makes it clear that the massive increase in the deficit was driven not by government expenditure (even though government expenditure always tends to rise in a recession as more people become eligible for welfare payments), but by the collapse in tax revenues caused by the crisis:
The gap between the lines is the government deficit and you don’t have to do much reading between the lines to see that the deficit was the result and not the cause of the recession.
Recent research seems to suggest that a BMI of between 25 and 30, which is classed as ‘overweight’, is likely to lead to a longer life!
Economists actually agree far more than is commonly appreciated, but most of this agreement goes on quietly behind the scenes, as thousands of economists work day-to-day advising businesses, charities, government and the media.
United Nations projections indicate that world population will nearly stabilise at just above ten billion after 20628 – still a large size to deal with, presenting challenges for food, transport and the environment.
Despite recessions and quite a few crises along the way, the world’s pace of economic change is accelerating. For example, and a very big example, in the last thirty years, economic reforms in China have lifted well over 600 million people out of poverty, about ten times the current population of the UK, an unprecedented and truly astonishing rate of poverty relief.
In 1990, the British economy was 2.5 times larger than China’s; by 2013, China’s was 3.5 times larger than Britain’s! In 2013, for the first time, less than 50 per cent of world GDP came from the advanced economies.
Today, competition is really between these cities rather than between nations. London has become the richest global economic city, with a life of its own, often standing alone and seemingly unattached to the rest of the UK.
If the Conservatives win the next election, will they be able to achieve their pledge to return the government’s consumption of goods and services, much of which goes on welfare spending, to its smallest share of national income since 1948? Could even a Labour government sustain the welfare state at anything like the level of provision we have grown accustomed to? Economics continues to be the very substance of politics and is still what drives the world and our futures.
Cost–benefit analysis (CBA) can be applied to a very wide range of decision making. In demonstrating the benefit-to-opportunity cost ratios of project A against project B economists are really asking the annoying but intensely practical question ‘Are you really sure you want to commit your resources to this and not that?’
But the public debt amounts were trivial compared to the size of the build-up in private debt, created by finance run amok.
It’s clear that it was not the public debt that was bloated, it was private debt, and in particular the debt created by the unbridled greed of the financial institutions.
The Treasury’s own chart in Chapter 1 shows that the deficit was overwhelmingly the result of collapsing tax revenues, not high spending, following the financial crisis that caused the recession.
Knowing that the government would be forced to bail them out, banks could indulge in what economists call ‘moral hazard’: making decisions about how much risk to take, safe in the knowledge that someone else will pay the price if things go wrong.
At one point the UK government’s commitment to supporting banks exceeded £1 trillion, though much of that was ‘bluff’ money offered as reassurance rather than actual aid; banking is all about confidence.
Darling looked to both monetary stimulus (cheap money) and fiscal stimulus (raising government expenditure and – particularly in this case – cutting tax) to fight off the deep recession, and this Keynesian prescription did indeed seem to lift the economy and begin the recovery.
Back in the 1930s, Keynes had explained how one person’s spending was another person’s income.
Hence, cutting spending reduces the incomes of others. As their incomes fall, total spending falls some more, thereby decreasing all incomes even further and hence multiplying the original cuts and producing a downward spiral.
Demand for products falls, so output falls, and so businesses stop investing and consumers save for the uncertain days ahead – or are m...
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Austerity was not only preventing the economy from recovering, it was also keeping down the tax revenues needed to pay off the government’s deficit.
An example of such false economy is the failure of successive government to build homes that has resulted in 95 per cent of the government’s housing budget now being spent on rent subsidies rather than construction!
Even the minority of economists who had originally backed his austerity package now felt George Osborne and his ally in ‘austerity’, the German Chancellor Angela Merkel, were ignoring the vital lessons of Keynes.
Most economists found this a risible argument as the UK, the sixth and sometimes the fifth, largest economy in the world, with its own central bank and therefore bottomless money supply, was never even close to default.
The story that the markets would punish Britain was exaggerated as a bogeyman to scare the electorate into accepting the need for austerity.
So Robert Chote, the well-respected economist at the head of the OBR, felt compelled to rebuke the PM in a public letter: ‘For the avoidance of doubt, I think it is important to point out that every forecast published by the OBR since the June 2010 Budget has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term.’6 In short, austerity had hit growth.
Whatever mistakes Labour made in lessening bank regulation, the Conservatives would have gone even further in the wrong direction.
In short, pre-crisis there was never a gnat’s whisker between the two parties on public spending.
So it is hardly surprising then that it is now recovering more quickly than most other countries, especially as those countries had got back to pre-recession GDP long before the UK did in mid-2014.
Many of the new jobs are in reality simply people scraping about: for many it is a case of an ‘any income is better than none’ recovery as they form a new ‘precariate’ of low-income workers with jobs prospects that are often uncertain week to week, even day to day, with ‘zero-hour’ workers and the reluctantly self-employed.
Wages have seen their biggest squeeze since 1860.
Repeatedly stomping on the economy for ideology-driven reasons and then claiming a victory when the economy belatedly lifts itself off the floor again may be good politics but it is very bad economics.
We can see that before 2010 Alistair Darling was using fiscal policy to inject demand into the economy, and the effect was indeed to lift GDP: this was why there were the beginnings of
Unemployment, and also hidden unemployment, of which there has been much, leaves deep scars. Young people aged 16–24 have suffered disproportionately from the 2008 Great Recession. There is a wealth of research that demonstrates the damage unemployment does to skills, self-esteem and work ethic; for unemployed youth, this imposes costs for individuals and society that last a long time into the
Osborne’s claim that without austerity world markets would be spooked about the UK defaulting on its debt, and so charge us higher interest rates on loans, was always nonsense. It was never going to happen as, again: a) there were no other comparatively safe havens for speculators’ money, and b) most importantly, the Bank of England can ‘print’ limitless amounts of money if needs be (although because markets know it can do this it doesn’t actually have to do it), and, related to this, c) the British government has never failed to repay its creditors.
It was never going to happen as, again: a) there were no other comparatively safe havens for speculators’ money, and b) most importantly, the Bank of England can ‘print’ limitless amounts of money if needs be (although because markets know it can do this it doesn’t actually have to do it), and, related to this, c) the British government has never failed to repay its creditors.
‘Public debt is at about the average for the last 300 years’ sounds a lot less frightening than the much more publicised ‘disaster of unparalleled public debt’. In fact, Britain, an international leader in the management of government finances, has maintained a national debt without default for more than three centuries; mostly, the ratio of debt to GDP has been higher than it is today.
In the twenty-five years from 1945 to 1970, we followed Keynes’s dictum that the government’s deficit is the tail not the dog, that is, that debt is caused by low growth and not the other way around. Keynes’s approach saw the ratio of debt to GDP fall from 225 per cent to 67 per cent.
‘When gross external debt reaches 60 per cent of GDP, [a country’s] annual growth declines by about 2 per cent … in excess of 90 per cent, GDP growth is roughly cut in half.’
For example, another myth put about is that the debt is somehow a terrible burden on future generations as it is owed to someone other than us UK citizens and will therefore have to be repaid. But in fact less than a third of the debt is owed to foreigners. The rest is owed to ourselves. Much of it is held by our own pension and insurance funds: UK citizens will be the beneficiaries of these funds and the proceeds can be redistributed among us by future governments if needs be.
