Krugman: balanced budget would be “worst thing for future generations” | Left Foot Forward.
Left Foot Forward picks up on recent Krugman comments:
Last week Left Foot Forward showed how UK business investment was in a state of collapse. The US is suffering the same problem and Nobel prize winner Professor Paul Krugman has written about the necessary policy response on his ‘Conscience of a Liberal’ blog.
Krugman writes:
“Under the kind of conditions we’re now facing, the main determinant of business investment is the state of the economy, as evidenced by the plunge in investment shown in the figure. This, in turn, means that anything that improves the state of the economy, including fiscal stimulus, leads to more investment, and hence raises the economy’s future potential.
“That is, under current conditions deficit spending doesn’t lead to crowding out — it leads to crowding in. In fact, you could argue that the worst thing we can do for future generations is NOT to run sufficiently large deficits right now.”
The target: George Osborne. So let's take another quote about Osborne, from another solid Keynesian, Roberst Skidelsky:
Keynes's crucial distinction between full employment and subnormal employment was totally ignored by George Osborne in his speech "The Conservative Strategy for Recovery" last week. At no point in his speech did Osborne mention that UK output has fallen by 5pc since last October and unemployment has risen by over one million. The gap between what we can produce and what we do produce has grown to more than £70bn. This is because, as a nation, we are spending £70bn too little.Almost all that Osborne said is right and sensible in conditions of full employment; most of it is wrong and wrong-headed when there is heavy and persisting unemployment. Although he understands that we have been in the deepest recession since the war, his strategy for recovery assumes that there is nothing to recover from — except a Labour government!
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Browns unbalanced budgets are a reality now. If you think Keynes would have approved then you have misunderstood Keynes. He at least understood the significance of economic cycles. When the Tories get in they have a chance to mitigate the impact of Brown’s follies, but its going to hurt. Perhaps they will suceed, perhaps they won’t – its a tough challenge. But in practice the timing under Cameron will be the same as it would be under Brown, given that George does not get his chance until after the election.
Alastair
Brown was pure Keynes in his early years – he ran a surplus
He was not post 2003, partly because he feared recession. He got that call wrong. I agree. Not as badly wrong as the Tories did in the 80s mind you when they squandered North Sea cash with abandon to destroy British industry in pursuit of dogma
And not the timing will not be the same. Britain will not be ready for cuts in June next year. Far from it.
Richard
Has Brown has ever run a budget surplus? Did the Tories really destroy British industry? And what on earth is “North Sea cash”? I imagine you are referring to the oil fields in the North Sea? What do you imagine the Tories did with all that oil?
If ignorance and dogma really scares you then I would suggest you don’t look in a mirror.
Alastair
Brown repaid significant government debt for a number of years – sure sign of a surplus
The Tories destroyed whole swathes of British industry, wilfully, and paid for the 3 million plus unemployed they deliberately created using North Sea oil revenues
Both, I thought, undisputed facts
But there again I forget the revisionism of you lot
Richard
you lot? you are making a big assumption there old chap.
which british industry was that then? You are quoting Socialist propaganda – not fact.
don’t know where you get your Brown repaid significant government debt from. I think a more dispasionate review of the statistics reveals a very different picture.
@Richard Murphy
Go on then. Name one British world beating industry that was “destroyed” by the Conservatives (as distinct from inefficient and uncompetitive companies under state control that were bottomless pits filled with tax payers cash at the behest of the unions).
As usual Alex and Alastair you show yourselves capable of hopelessly partisan drivelling
Some of us prefer facts
So candidly, as ever, stop wasting time if you want to continue commenting here because there’s not a rational analyst on earth who could agree with you
Richard
“Brown repaid significant government debt for a number of years – sure sign of a surplus”
Brown only managed to repay debt in years where there were receipts from the auction of wireless telephony spectrum. If the payments from the licensees had been spread over the term of the license, there would have been a deficit in every year since 1997.
“As usual Alex and Alastair you show yourselves capable of hopelessly partisan drivelling”
As opposed to this, which I guess you would not call “partisan drivel”.
“The Tories destroyed whole swathes of British industry, wilfully, and paid for the 3 million plus unemployed they deliberately created using North Sea oil revenues”.
Can you please answer Alex’s question at #7? I think I’ve asked you a similar question before but you haven’t – probably because you can’t.
Peter et al
I see no obligation on me to justify acknowledged facts of economic history
You may like wasting your time – I don’t
Richard
Peter/Alex
As I have already explained on this site, I remember reading day after day of the fire sale of capital equipment newly purchased by perfectly efficient manufacturing companies, to eager foreign buyers in the early eighties, as the Tories pursued their reckless sado-monetarist policies. This was mainly the effect of maintaining the high interest rates which the monetarist geeks demanded, leading to a ruinous exchange rate.
As Richard says, it was the proceeds of North Sea oil (and privatisations, or ‘selling off the family silver’, as McMillan put it) which funded the Tories’ policies.
I was there and studying economics at the time and I know what I witnessed. My family experienced long periods of unemployment from which my late husband never recovered, having never been out of work before.
In later years documents revealed that the Tories deliberately engineered mass unemployment to tame the unions who defend workers’ rights (you know the workers who actually create wealth). A price worth paying, except of course, those who paid the price got zilch.
I’m afraid the neo-con fairy tales you’ve grown up with are being thoroughly trashed. Marx’s economic analysis has been proved pretty sound considering the time lapse.
@Carol Wilcox
Carol, Thanks for your patronising comments about my age, implicit in growing up under the neo-cons, but actually I have been heavily involved in industrial finance since the 1980’s, so I am quite familiar with most of the larger industrial investments that have been made in the UK since then. There was a lot of pain when companies over exposed themselves, but with the exception of Courtaulds, who had moved most of their textile production to Asia, I can’t think of any private sector manufacturer that went to the wall.
Under Thatcher there was a considerable amount of inward investment by Nissan, Toyota, Honda, Panasonic and their suppliers, NEC, ABB, Siemens, Kymmene, not to mention investment in gas production and infrastructure and the development of cleaner, more efficient (less-CO2 producing) gas fired power stations.
That is not to say that there weren’t plenty of state owned industries that went to the wall, but to say that they were paid for by North Sea Oil revenues is nonsense. The major effect of North Sea Oil was to provide employment and export earnings. The revenues from crude oil and gas production have always been far less than the revenues from fuel duty, VAT on fuel and vehicle licensing.
I don’t have the figures for North Sea Revenues for every year, but here by way of example are the figures for 1980: Royalties £0.520 bn, Petroleum Revenue Tax £0.730bn, Corporation Tax £0.140bn, Total £1.390bn.
Even allowing for the effects of inflation that £1.39bn of North Sea Revenue pales by comparison with today’s budget deficits of £175-225bn. Something has gone badly wrong with the economy and in view of the fact that we have had a Labour executive for the last 12 years it is hard to place the blame anywhere else.
There are some very bad cases of selective memories on this blog. In 1980-81 huge swathes of British (private sector) industry went to the wall, crippled by high interest rates imposed by the Tories in the name of monetarism – a macroeconomic approach which has since been totally discredited. It was the worst post-war recession (until the current one, of course).
This was widely recognised at the time. In his 1981 conference speech, for example, the head of the CBI absolutely savaged the Thatcher government.
And yes, Carol is absolutely right – mass unemployment was engineered to destroy the unions. Nicholas Ridley – industry secretary at the time, I think – said something like “the high level of unemployment is evidence of the progress we are making”. A deliberate and vindictive policy of class warfare.
I hope the Conservatives won’t be quite so insane this time if they get into power but I am very nervous I will be proved wrong.
I’d like to remind Alex that it was Tony Benn as energy minister who imposed the tax on N Sea oil – the Tories would have left it all the proceeds from our common wealth of natural resources to the free market. Also perhaps he can explain how ‘the major effect of North Sea Oil was to provide employment and export earnings’ squares with the 4m unemployment rate which we experienced under the Tories, which only started to decline after we were thrown out of the ERM, forcing a policy change.
The oodles of revenue which the Tories squandered on (much reduced rates of) unemployment benefits could have been spent on renewing our infrastructure which would have created jobs. The Labour govt rightly saw this as their first task when they got into office. They emphatically DID make hay while the sun shone. And we need more of this investment now whilst unemployment is climbing – you cannot crowd out private investment during a recession.
Next year the Tories won’t need to engineer unemployment to curb the unions – they are already feeble – all they have to do is nothing.
That would be the high rates of interest required to bring down the double digit inflation inherited from the previous Labour government.
As I recall the figure eventually peaked at around 20%. Any firm that buys equipment without factoring in a “real” cost of debt (i.e. at a margin to the inflation rate) has got its sums wrong. As it happened inflation was brought under control with a bank rate several percentage points below the rate of inflation.
Socialists have selective memories when it comes to Maggie. But they forget that she won 3 general elections in a row, which kind of suggests that the public did get her. Did she really decimate british industry, or did she make Britain competitive again? Interesting that to win an election Blair realised he had to win the position that Maggie had made her own. Something that I think Brown never understood.
Alastair, do you really think we’ve forgotten that Thatcher won 3 elections? I have no idea what you mean by ‘selective memories’. There was absolutely nothing good to remember. It’s only economists/policy-makers who have no morality who would advocate throwing millions on the dole (whilst cutting that dole money!) in order to fix the economy. Adam Smith was a moral philosopher, as were in effect Karl Marx and Henry George. I don’t recall hearing the epithet ‘moral’ applied to any of Thatcher’s heroes. I mean she was all cuddly with Pinochet.
Carol
Well said
There is no morality in the likes of Alastair
He assumes life is probabilistic, rational, calculable. So there is no room for morality in his world
He’s wrong of course. Life is actually about incalculable risk – in the face of which morality is the only guide
but he, as I say, has assumed that away
Sad really
Richard
We were sold a lie, alastair. The lower earners, the majority, were beaten up, they naturally bought the individualistic clarion call. It was a populist device to underpin an untried ideology, so flawed that no one else had had the gumption to pursue it so blindly.
My school life was wrecked by the idiocy of a fundamentalist. I was one of the lucky ones, privileged by chance. Just down the road, my friends’ families disintegrated under the stress.
It was no problem to understand that if my peers were suffering in an area of middle class suburbia, then the vast swathes of the industrial heartland must have instantly been traumatised at a very deep and irrepairable level.
To ignore the sheer brutality of the exercise is dishonest. Human beings are not a resource to be made expendable. I thought we had learned those lessons from the Somme.
The narrow aspect of the argument proposed by this ideology renders it unusable. The lies spread about the humanitarian movements through history, labelled with whatever cultural bogeyman of the time, the manipulation of human need to further spurious theory has been a gross deviation.
It hasn’t taken long for the edifice to crumble. Mighty feats on the backs of slaves may impress the now, but at no stage is the equal and opposite reaction measured. when that is exposed – environmental ‘accident’, bankers generally – the innocent get taken down first.
Learning is a slow old process. Tick after tock.
“…acknowledged facts of economic history”
This country was reduced to a bread basket by the then Labour government in 1979 – the sick man of Europe. No reasonable person could say that in 1997. This is what Alistair means by “selective memories”.
Anyone who seriously argues that our economy was stronger in 1979 than in 1997 is a deluded fool.
Thatcher won 3 general elections in a row with a steadily declining share of the vote each time (as indeed, did Blair…) If it hadn’t been for the Labour-SDP split and the Falklands War she would probably have been out on her ear in 1983/84 and would be remembered as another one term Tory like Ted Heath. I have a feeling Dave Cameron might go the same way if he does manage to secure an overall majority next year.
Howard – strange then that after she departed the boring man of politics (whatever Edwina Curry might say!) managed to win a fourth election for those nasty tories. What excuse do you have for that I wonder?
Major was seen as a “safe pair of hands” in 1992 in uncertain economic times – very similar to why Merkel managed to hold onto power in Germany last week. It was only the “Black Wednesday” debacle of September 1992 that woke people up to the fact that the Conservatives were not a “safe pair of hands at all…”
I must say I’m really enjoying the way right-wing commentators on this blog are so good at regurgitating stuff they’ve read in the Daily Express and the Mail over the years. Carry on, guys – you’re cracking me up.
how strange Howard – never read the daily express or the Mail in my life! Have you?
I’m going to say something controversial but true about politics.
It isn’t really about issues. It’s about personalities and appearance.
Michael Foot, Neil Kinnock, William Hague (rather unfortunately and possibly unjustly), Iain Duncan Smith and Gordon Brown were/are all figures of fun. They were all unelectable. Policies had nothing to do with it: they all clearly lacked leadership qualities. I think George Osbourne also belongs in that list.
Cameron will walk the next election. He looks the part, and that will carry the vote amongst the majority, who don’t care about policies but want to feel the PM is competent, strong and a leader. Brown is a failure because he doesn’t appear to have instincts or the stomach to lead from the front. When the going gets tough, he goes missing.
The real issue for Labour is whether the like of the Milibands want to be leader, or whether they are haunted by William Hague, who ruined his career by getting the job too early. I suspect Labour are already writing off the 2014 election.
There is a narrative growing up about Labour: that they spend all of the money ineffectively and leave the country facing bankruptcy. It took 20 years and Tony Blair to shift that perception last time.
Many apologies Alastair – in that case the malaise is more widespread than I first thought… 🙂
This isn’t about selective memories, 1978/79 is back and playing itself out today. The IMF has just issued a report to the effect that the UK has a 15% funding gap in funding required by the combined public and private sectors
(http://www.ft.com/cms/s/0/7f685bca-ae04-11de-87e7-00144feabdc0.html?catid=86).
Given that the budget deficit is also 15% of GDP, 100% of the funding gap – the difference between cash required to be borrowed and cash available for lending – falls on the government side. Since there isn’t enough cash in the UK to meet the government needs, the government has 3 options:
1. more quantitative easing, in which case expect the value of sterling to drop further, making imports and the cost of living more expensive for all,
2. drastically less spending by government and the private sector, but mostly current spending by government because that is where the biggest shortfall and hence most of the funding gap arises, which will hit the public sector worst immediately but damage the prospects of UK business through lack of investment and will keep unemployment high; or
3. much higher interest rates to attract foreign lenders to put their money into sterling, in which case businesses and homeowners get it in the neck and few new jobs will be created.
So this just takes us back to the late ’70s and it will no doubt once again be he responsablity of the Conservatives to clean up the mess left by Labour with a combination of budget savings tax increases and higher interest rates.
Alex
As ever your grasp of economics is astonishingly weak
The answer to this conundrum is easy: the government creates the cash either itself or by simply requiring that banks lend it to it at very low interest rates: 1% or so – which given they will create it out of thin air will still be an acceptable rate of return. This was of course done in the 1940s onwards
The borrowing is used to fund a green new deal – an investment programme – as that is what we need. We do not need a consumer stimulus
The multiplier will more than pay for the cost – as I have shown
The assets created could be bundled up in bonds – and if bought by pension funds (who are short of good quality bonds right now) bought them they could underpin pension returns for thirty years or more
So we stimulate the economy, solve unemployment, create the new infrastructure we badly need, create real assets to underpin the pension contract and at no cost since the economy is far from full employment.
And please don’t mention inflation – there is no risk of it when we face mass unemployment, falling property prices, failing companies and the disaster of deflation
Nor is there a risk to sterling – not least because an investment stimulus is better for the exchange rate than a consumer stimulus where the multiplier is abroad and because right now the alternative you mention of high interest rates – will have significant harm on any real recovery of the Uk economy. The low rate policy I suggest will attract real funds for real products – so much more useful
Richard
I suppose the other thing about Maggie is that the Socialists still harp on about her. Maggie did this, Maggie did that, all her fault, etc etc etc. You might well wonder who has been in power all those years since 1997. Wonder if they will be talking about Cameron like this in 2027?
“And please don’t mention inflation – there is no risk of it when we face mass unemployment, falling property prices, failing companies and the disaster of deflation”
Of course there will be inflation. We import far more than we export and foreigners aren’t going to drop their prices for commodities just because the value of sterling will have gone through the floor. Pensioners whose main expenses are food and heating will as ever be hurt more than most by quantitative easing, which is probably why surprisingly few of them vote Labour.
Your idea of some sort of investment driven stimulus has been shown not to work. That is what has been happening since 2003 and the private sector is still falling like a stone. Figure it out: in round numbers, government spending is 50% of GDP and is 5% higher than last year, yet total GDP is down 5%, it follows than private sector activity, the other 50% of the economy is down by about 15%, because (5%-15%)/2=-5%.
Alex
Shown? How long is your historical perspective. Did it begin last Tuesday?
Your grasp of numbers also lacks somewhat
I think you’d better go and fantasise elsewhere if you can’t do better than this
Try facts sometime – they help
Maybe that’s why you guys ignore them
Richard
@Richard Murphy
The answer to this conundrum is easy: the government creates the cash either itself or by simply requiring that banks lend it to it at very low interest rates: 1% or so – which given they will create it out of thin air will still be an acceptable rate of return. This was of course done in the 1940s onwards
If only life were that simple 🙄