Economics Politics

Cameron and Osborne sunk my Economy

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A version of this post appeared on LabourList on 1st August 2012.

Economy Boat
The ‘Economy’ in calmer waters (Photo by Kerstin)

The charge sheet against Messrs Cameron and Osborne as the architects of the coalition’s economic strategy is growing, and it may not be long before they, like their buddies Andy Coulson and Rebekah Brooks, find themselves in the dock.Not perhaps the dock of the Old Bailey, but the dock of public disgust at their approach to the economy.

 It is forgivable to get economic strategy wrong – for those who have understood Keynes’s real message, uncertainty is the prime feature of economics. What is unforgivable is to propagate clear untruths about the recession that is threatening the livelihoods and incomes of so many.

It is no longer credible to blame past debt, either public or private, for declining UK economic activity. Despite a high loading of public debt (resulting primarily from the consequences of the banking crisis rather than lack of fiscal prudence) the government is having little difficulty in servicing that debt. Currently, it can borrow for 10 years at only 1.5% per year – which means as long as inflation remains greater than that figure the government is effectively being paid to borrow!

For some, certainly, their private debt levels are making them unwilling to spend, but the counterpart of private debt is always private wealth – the cash lent has to end up somewhere. The key to getting the economy functioning is to get that wealth flowing back to those that need it to repay debts and to provide an adequate living for their families. Cutting back on infrastructure and public service contracts achieves quite the opposite.

Moreover, to shift those debt contracts that are most immovable, new loans are needed to allow those that want to provide goods and services – small and medium sized businesses and the unemployed and underemployed – to be matched up with those that want to receive them. The banking system must stop providing profit to the wealthy from high-margin money-shifting, and start providing guarantees and the regional focus to create jobs and demand.

What about the Eurozone? Certainly, demand from the EU has been affected by recent sovereign debt and banking crises. But as shown here, France and Germany within the Eurozone have not suffered anything like to the extent we have. And in fact the value of our exports to the EU remains around 30% higher than they were in 2009, and exports to countries outside the EU over 50% higher! So to lay the blame for the UK’s poor performance anywhere outside our own country and the coalition’s mismanagement is the most blatant nonsense.


4 replies on “Cameron and Osborne sunk my Economy”

I like your post on “Keynes real message”. To me one of the most important posts I’ve read on the Econ blogosphere is Golem XIV discussing the evolution of risk ratios.

This seems to fit with your points on ‘the arbitrary and inequitable distribution of wealth and incomes’ and “This power is frequently used to move market outcomes away from those favouring people, our communities and the environment to those giving the greatest profit. This may be done by the use of advertising, political lobbying, predatory pricing and other tactics.”

We’re at this point because of the unnecessary creation and mis-allocation of excessive private sector credit. Now while it’s clear, sans proper credit writedowns, that only government debt can offset needed private sector deleveraging, the key is to avoid repeating with public debt this ‘arbitrary and inequitable distribution of wealth and incomes’.

Otherwise it just turns into Japanese style can kicking which will ultimately lead to public insolvency only rectifiable by creating debt free money – printing, with all it’s consequences.

Hi Dave. I’m familiar with David’s work (see here) and the post you link to is cogently expressed and I think essentially correct. When you say ‘the unnecessary creation and mis-allocation of excessive private sector credit’ this sounds a little ‘Austrian’, by which I mean it suggests that there is some sort of optimal total credit level that can be observed directly or indirectly, and that this will arise from an un-interfered-with free-market. This is, of course, just faith-based economics, with no basis in reality!

Rather than building up more public debt, I think we would do better to have more ‘private’ debt that is ‘socially’ directed and guaranteed. This probably does need to go with rather more in the way of write-downs as the big banks are shrunk to manageable size.

Hi Diarmid, It probably sounds a little Austrian because I am a *little* Austrian, I also think I’m a little Keynesian and a little MMT, the only thing I think I’m not at present is a monetarist. Idealogy in my opinion is the bane of economics. The Austrian part of me thinks all economists should be made to commit to memory Hayek’s pretense of knowledge speech but fundamentally I don’t think Austrians understand credit. I do however think their idea of misallocation of credit is a good one. We basically experienced a massive miss-allocation of credit for unproductive use largely facilitated by the use of the distorted risk weighted assets regulation Golem XIV talked about.

In regards to ‘socially’ directed credit, I think this would be useful in normal times but I’d prefer if government were one step removed, i.e. fix the risk asset weightings to bias credit creation away from assets and more toward business and production. Positive money talk about credit guidance which I think is similar.

I’m not sure however that this will help us get out of the mess we are currently in, much of the private sector’s main concern is to deleverage. The only thing I think that can help that at the moment is fiscal policy. It’s for this reason that I currently think the government should be running a *moderately* stimulative fiscal policy aimed at infrastructure – I think over the medium term the return on this would more than offset the increase in debt especially at the currently low rates and the stimulative aspect will help cushion the private sectors much needed deleveraging.

Thanks to the pointer to Hayek’s Nobel Prize lecture. It is a nice summary of the Austrian/austerian position. And in putting forward the superiority of that model, seems to be something of a contradiction of his own accurate critique of ‘scientific’ economists!

Indeed, Austrians appear not to understand credit. Their problem seems to be that they treat it as being a commodity in limited ‘supply’, and so with a single market price – the ‘natural’ interest rate. Under these conditions ‘misallocation’ of credit becomes much more serious and irreversible, thus their focus. Whereas as your Keynesian and MMT parts will tell you, credit can generally always be made available for any viable project, subject to risk, monitoring costs and in a reserve-based system obtaining the necessary reserves. In which latter case, it may make sense to expand total credit, if that expansion results in an increase in the proportion of productive (business and production) over unproductive (derivatives trading etc.) activity.

There are material limits to projects and monitoring, of course, but no-one can really know those limits in advance and in any case they are continually changing with technology. There are therefore positive and negative feedback effects in the ‘market’ for credit, with likely multiple ‘equilibria’. This explains a role for government in the banking system.

Having said that, I agree with you that the government’s role should be as stabiliser and guarantor, and that actual credit-issuance decisions should generally be devolved to regional and community level.

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