Charles Adams has a piece on Progressive Pulse that I strongly recommend. This is on the quantity of money in the UK economy and the fact that despite QE this has flatlined since 2010, as this chart that he has shared shows:
Charles’ piece is worth reading in full. It builds on discussion here recently on the quantity of money in the economy. What I really like though is his analysis of why this policy has failed:
In the UK, the government had hoped that by reducing corporation taxes they would encourage companies to borrow, to invest, to raise productivity and grow the economy, but it did not happen. At the same time they were trying to reduce government spending. The Oxford economist Simon Wren Lewis calls this, “the most damaging UK macroeconomic policy mistake in my lifetime”. The problem is that if households are paying down debt and governments are reducing spending then comsumers have less surplus money and there is a lack of demand. If there is no demand, companies have no incentive to invest and the virtuous circle of rising production, rising wages and rising demand cannot begin. Also, by lowering corporation taxes, companies can increase profit without trying. If you look at the graph in Follow the money you can see that only corporations are sitting on a surplus. Households are back in the red which cannot last long.
Keynes’ ‘paradox of thrift’ – that saving can work for individuals in isolation but not when everyone does it – is writ large over both this outcome, which is a tale of failure and the policy prescription that so clearly resulted in that tale. In July 2008 my Green New Deal colleagues and I said that the downturn we were then predicting required that the government spend to counter the private inclination to save in a time of crisis. It required, in other words, big thinkers who understood macroeconomics and the need to act counter-culturally when faced with the household model of economic management to step up and do what was required for the country as a whole – which was to mop up the savings glut and use it for constructive purposes by issuing bonds to finance the radical and sustainable change in our economy that was so obviously needed then and still is now.
That vision failed then.
And we got small-brained politicians in charge instead.
But the precription remains the same. Those with wealth – whether wealthy individuals, or larger companies in the corporate sector or from overseas – are still saving enormously in the UK even whilst many others are dependent on credit to survive. And the savings glut of the wealthy still needs to be tackled by higher tax, by proactive government investment and by giving business reason to use its funds for social purpose. But still we’re not hearing a word of that from this government.
Labour needs to say this time and again, as do all other opposition parties, whatever they said in the past
And unless talk of a new centre party is of one built on the rejection of austerity and the logic of managing the economy as a household then such talk is not just a waste of time but is positively harmful.
There is one issue that needs to be embraced now right across the political spectrum. It is that government is a key player in the economy. It’s not just a backstop in time of crisis – which is what QE did and which stopped M4 falling in Charles’ chart. It’s actually central to making the economy work again.
This is the antithesis of the economy logic of Charlottesville and Chicago but the logic of the far right and it’s think tanks, such as the Institute of Economic Affairs and the Adam Smith Insititute is now very obviously bankrupt. It’s time to move on, to accept the role of government and to build a new mixed economy, including strong, well regulated and transparent markets.