The UK is on double dip recession.
Osborne offered us his vision two year ago. It was of “expansionary fiscal contraction".
His argument was that the more he cut government spending the more people would spend, liberated by knowing that if he succeeded in his aim of balancing the budget tax cuts would follow, letting them repay debt they'd take on now to spend. It hasn't happened. People who face the prospect of unemployment, increased cost for things that were previously provided by the state, lower pensions, higher cost of childcare and the uncertainty of recession have simply stop spending.
And Osborne argued that as government cutback business would rush to fill the space that he would create in the economy because they would be liberated from the yoke of government interference in their activity. It hasn't happened. Businesses have seen that their biggest customer is not spending and have cut their investment, reduced their employment plans, closed their premise, withdrawn from the High Street and battened down their hatches in the hope of survival: the last thing that they have done is expand.
Of course, all of this was completely predictable, and was predicted. I was one of those who did so. With the Green New Deal group I suggested an alternative approach to fending off recession as long ago as the summer of 2008, before the banking crisis developed. Osborne ignored us then, and I have little doubt that he will ignore us now but the price that we will pay for that will be an enormous one.
I suspect that during the course of this year we will come out of recession, but only just.
Much more importantly, I think unemployment will continue to rise as this year progresses, with there being no prospect of any real reversal in site at any time in the foreseeable future as the government continues its programme of reckless cuts that guarantee a continuing downward spiral in confidence that will reduce investment for years to come, and at the same time will destroy any hope of creating a balance in our economy, or, just as importantly, a balance in our budget.
There is only one way to restore that balance in our economy and that is for the government to spend now on the creation of new infrastructure projects, new green energy projects, on the backlog of repairs that need to be undertaken in our public sector properties, in providing services that people need, and in investing with business in our future in sectors such as non-carbon energy.
This spending will, of course, require additional funding, but there is over £2 trillion invested in pensions at present in this country with more than £900 million (or thereabouts) in the larger pension funds. In that case money seeking a proactive home on which a positive return can be paid does exist. In addition, business itself has £750 billion of cash on its balance sheets right now, none of which is being spent. It is this combined cash that has to be brought into use in our economy if we are to get out of recession and nothing George Osborne is doing will achieve that goal.
We don't, as a result, need corporation tax cuts for big business right now: we need them to pay more tax now so that investment can take place to fund demand for their products. That gets the business cycle going again.
And we need a condition to be placed on pension tax relief saying that 25% of all money going into tax funded pension arrangements has to be invested in projects that can create jobs in the UK right now.
Simple measures like that could get us out of recession. Nothing Osborne is doing can.
It is time for change.
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Let’s look at businessmen’s success in macroeconomics in the UK. They led to over 3.5 million people being unemployed in the 1980s to control a bit of inflation, most backed entry to the ERM in the 1990s to control a bit of inflation, and they took control of ‘deficit reduction’ in 2010. It’s time economics went back to peer review academe which, after an overlong flirtation with micro only, seem to be back in the real world.
Peer review is used to reinforce the hegemony of ideas in economics. Be careful what you ask for
Too true! Nowhere is neoliberalism thriving more than in university economics departments. And economists rarely accept the falsification of their theories by empirical evidence. They’ll only accept falsification by other ‘stronger’ theories that share their own biases and presuppositions while providing greater ‘explanatory power’ or somesuch. Hence why the strongest, most eloquent voices we have on economics in this country come from the likes of Richard, a reformed accountant, not economics professors who are too busy learning ever more complicated maths and indoctrinating undergraduates to actually pay attention to what’s going on in the world.
Besides, all those business people learned their economics somewhere! Don’t believe that just because a subject is studied in a university and people call it a science that it has any of the solutions we need.
Of course there’s Krugman et al. but, by and large, the academy seems to be part of the problem rather than the solution.
I note the reference to the reformed accountant!
And I didn’t go through a 12 point plan to have to agree with you.
“I suspect that during the course of this year we will come out of recession, but only just”
I don’t see why that should be the case, Richard.
Most of the cuts in benefits come through in the next two years, exports will be held back by the Eurozone crisis, investment is stagnating and government spending generally is falling.
Where will growth come from?
I’m expecting a zero – but maybe the Olympics will mean otherwise – they’r bound to have a negative impact
And you’re right – cuts will just keep on coming
I fear that this govt is driving the economy onto the rocks and as Nadine has stated about the price if milk, the two posh boys could not care less. What we are experiencing is the unwinding of the neoliberal paradigm which has basically brought the West to its knees and for which there appears to be no replacement. Our politicians seem to have been left stranded in the mire of this destructive (in the sense that the majority has not benefited) economic model.
Stiglitz a former Chief economist at the World Bank has an excellent article in a recent edition of the European magazine – Politics Is at the Root of the Problem – http://theeuropean-magazine.com/633-stiglitz-joseph/634-austerity-and-a-new-recession – in which he states ‘The diagnosis is that politics is at the root of the problem:that is where the rules of the game are made, that is where we decide on policies that favor the rich and that have allowed the financial sector to amass vast economic and political power’. Of course his comments were made in the context of US politics but frankly what we are now seeing from the revelations from the Leveson Enquiry the same can be said of our politics. Miliband has to up his game and declare that this corrupt style of politics must stop.
I couldn’t agree more Richard… I’d only add that even if the UK had grown by (say) 0.1% or 0.2% this quarter, Osborne would still be wrong, as we’d have flatlined since autumn 2010. The ‘double dip’ is a good phrase for the media to get its teeth into but it’s overall performance over the medium-to-long term that matters. And the UK’s medium term economic outlook under this govt is abysmal.
The law of ‘unforeseen consequences’ – some suspect actually very much foreseen by those in whom we vest power – from decades of free market economics has left a huge knot of Gordian proportions for us to unpick; it needs cutting with the anger of the people.
[…] We don’t, as a result, need corporation tax cuts for big business right now: we need them to pay more tax now so that investment can take place to fund demand for their products. Â That gets the business cycle going again. (1) […]
Interesting to see this in motion from across the pond. We’re having this discussion in the US right now (actually, it’s more like two children arguing over who gets to play with the toy fire truck next) and one side is absolutely convinced that if we hacked government spending off at the knees, businesses would be falling over themselves in a rush to fill the void.
It’s a leap of faith I’d rather not see us take, especially when other countries are doing the same thing and it isn’t working.
I notice that no-one is asking the question “Why?” Why is Osborne doing it? Are we to assume he is a total moron, when most people with common sense can see that what he’s doing makes no sense. Why continue doing something that clearly doesn’t work? Isn’t that the definition of insanity?
I guess it’s possible that Cameroon and his hoons are ‘insane’. But personally I doubt it. In Australia, we have the Labor party in office and they too are obsessed with balancing the budget and getting back into surplus. So this leads us to another question. Have the political systems of most of the market-based democracies been sewn up, effectively out-manoeuvred by the corporations? Has our system of government become in effect like the Roman Republic of the ancient world – a democracy in appearance but an oligarchy or plutocracy in practice?
Read the Courageous State!
OK 🙂
“I suspect that during the course of this year we will come out of recession, but only just”
I am glad to see you are sensibly hedging your bets RM. I think you know as well I as I do that the Economic Cycle, short of a Euro crisis is most likely to turn more favourably in 2013 or 2014.That’s why all the left wing posturing, and come to that right wing posturing is a myth. Why do you think David Cameron was prepared to accept any deal going with the Lib Dems? He knew the cycle would turn, maybe later now than sooner, but it will.
Governments only have a limited amount of influence, the big influencers are not even in conventional politics, polticians like to think they are in charge, but they are not.
How wrong you are
There is no guarantee of an upturn
As Keynes showed, markets can settle on an euilibrium at far below full employment and optimal levels of economic activity
Governments can change that
If we don’t have a government willing to do that then we’ll end up with long termn recession.
“Why do you think David Cameron was prepared to accept any deal going with the Lib Dems? He knew the cycle would turn, maybe later now than sooner, but it will.”
I’m sure you are right about what Cameron thought he knew. This just shows how the neoclassical economics mob, which both Tories and NuLab are in thrall to, haven’t got a clue about what is happening.
“In addition, business itself has £750 billion of cash on its balance sheets right now”
The idea that businesses have all this cash sitting doing nothing is a total fallacy. That ‘cash’ is not cash but actually the funding back loans to other parts of the economy, of which some is probably already funding the governments borrowing. And in fact a large portion of the cash is sitting overseas, having being generated through investment outside of the UK, where firms have continued to invest. The other issue of course is that many companies seen as UK-listed/domiciled, are not actually a UK company and have little in operations here, so looking at their cash holdings is meaningless.
I do agree with you on the green spending idea nas long as it is properly thought through, so I would rather see money spent insulating homes than subsidising electric vehicle with £5k, which just subsidises some rich person stoking their ego,
Sorry – that’s wrong
This is the cash held by the non-financial sector according to E & Y
And since loans do not require deposits the causality of your argument is utterly flawed anyway
Richard, if you remember several people including me queried the E&Y number on your LibCon post, because it doesn’t tally with BoE figures for non-financial sterling M4 – they are about £251k as I recall, which is a massive difference. We never did identify the source of the difference, but to me it seems likely that it is likely to be cash balances of overseas operations by multinationals. If so then it can’t really be regarded as cash that could or should be invested in the UK. However, even £251k is still a lot of cash that could be directly used for business expansion rather than stashed away in bank deposit accounts or invested in gilts.
I have to agree £750 is enormous – but often cited
It’s a case where i could be easily persuaded it was lower
As you say though – even £251bn is enormous
Martin Wolf suggests £60bn arose in one year
Sorry, that should be £251bn, of course!
“And since loans do not require deposits the causality of your argument is utterly flawed anyway”
Strange then that every bank in existence has funding sources (deposits + term funding) that exceed loans. It is a total fallacy that banks don’t need funding to lend money. A bank can momentarily create deposits when making a loan, but has to replace those deposits with other funding before that loan can actually be used. And the vast majority of lending in the UK happens without any deposits being created, such as mortgage lending where the loan goes to the solicitor.
If I have £10bn on deposit at Barclays and decide I want it back, in a wrold of just loans and deposits, Barlays would have to call in £10bn of loans (or borrow it from someone else), it can’t magically create the moeny to pay me back. Or if I wanted to borrow £10bn to pay to a business from you who bank at RBS, they would need to raise the funding before they can make the loan to me.
The economist at Citigrouip looked at the cash holdings of UK companies and found the majority was held overseas which is what acount for the difference between the 750bn and 251bn.
You really don’t understand money, do you?
Some sensible words from Vicky Pryce, the former joint head of the Government Economic Service.
“Ms Pryce said the Government should focus on smaller, deliverable projects like homes, schools and local roads than flagship ones such as HS2. The CBI wants road tolling to lever in private finance, but Ms Pryce claimed it would be cheaper over the longer term to raise the finance by borrowing at ultra-low rates”. Someone talking sense finally?
http://www.telegraph.co.uk/finance/economics/9229697/UK-double-dip-recession-fuels-argument-for-more-QE-says-MPCs-Martin-Weale.html