Cameron's dud options | David Blanchflower | Comment is free | The Guardian .
David Blanchflower says:
The monetary and fiscal authorities have so far managed to prevent a recession turning into a depression — but it still could, especially if David Cameron and George Osborne have their way.
As he puts it:
[T]he Tory conference, amazingly discussed what [Cameron] called option one — the possibility that the UK should default on its debt. Mr Cameron, you shouldn't even be raising such possibilities. It's exactly what markets want to hear from a potential leader — you have actually even considered defaulting on our debt? Unbelievable.
But as Blanchflower noted:
There was one bit of his speech I thought sounded like quite a good plan, which he dismissed. That was what he called his option two: "We could encourage inflation, which would wipe out the value of the debt, making it easier to pay off." Sounds like a good idea to me, and probably to you.
Yes indeed - and actually, in the long run the only way out of this mess because like it or not property has to be repriced relative to income and that's either going to happen because of incapacitating negative equity for a considerable period or some more acceptable inflation from which the only losers will be those who have enjoyed the greatest inflationary gains (which, I'll tell you now - they will fight to protect with their hearts and sould - Cameron and Osborne at their sides - defenders of unearned capital to the last).
Then there's option 3:
Cameron concluded his speech arguing for his third option — "for me the only option". He went on: "We must pay down this deficit. The longer we leave it, the worse it will be for all of us." Actually, wrong: the longer we leave it, in a recession, the better it will be for all of us.
Precisely. And, of course, Blanchflower is right. The only outcome of option 3 is deep recession.
As Blanchflower says:
I personally would vote for option two and certainly would never even consider discussing option one.
I guess he didn't need to add by then that option 3 is a disaster waiting to happen.
All three of our main political parties back it. This is not going to be fun.
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How about option 4? Switch Council Tax and UBR to a land rental value based tax. This will collect a bit more without most people having to pay much or any more because vacant and under-used land will be become liable for tax. This itself will promote development as owners will need the cashflow to pay the tax bill. In successive years, increase the rate of LVT whilst raising thresholds for Income Tax and National Insurance, to reduce gross labour costs.
Then initiate a substantial infrastructure programme consisting of useful, not prestige, projects. This would probably rule out things like the proposed High Speed Rail line but instead would imply the construction of good local transport infrastructure. Such projects lead to the enhancement of land value, thereby growing the tax base and providing the wherewithall to repay debt in a few years’ time.
And an essential element of optiuon 2 is for all government spending to strengthen the earn/spend cycle. For this, UK workers should be prioritised, spending earnings here, rather than lower wager, repatriated overseas.
This is an essential, in yer face, elephant in room that so-called economists do not want to deal with – but it is a basic essential.
Linda, aren’t you talking about discrimination against foreign workers here. I suspect EU rules prohibit this. And “businessmen” will fight tooth and nail against anything which will restrict the prospect of using low paid foreign labour. I sympathise with your position in a way, but I doubt it can be done any more. That’s globalisation for you…
Well said David Blanchflower – one of the two all-time MPC greats (along with Chris Allsopp). He was the only economist on the committee to see the crisis coming. And he has been talking very good sense these past few years. His New Statesman article last week was excellent too.
Isn’t it too soon to judge Blanchflower? The policies he is advocating might so far have prevented recession turning into depression, but it will be several years before we can be sure that we shall not have a hyperinflation instead. Look at the way the £ has been sliding against the € and other European currencies both since 2007 and over the past four months. That does not indicate confidence.
The hero status accorded to Blanchflower is absurd. The man is a fool. If he’d had his way he would have kept the party going for longer with ludicrously low interest rates and a torrent of liquidity. The idea that we were heading for anything other than years of immense pain and austerity was always a nonsense. Nothing could have prevented it once the stupidly loose monetary policy had been kept going for too long.
But the “stupidly loose monetary policy” was kept going because with higher interest rates the economies outside the West Midlands and London/South East would have gone into recession – I recall this being said in the mid-2000s.
The real stupidity is relying on interest rates as the sole means of economic regulation, because there is no interest rate which is right for the whole of the UK. That in itself is probably because the tax system ignores geographical advantage and disadvantage, which is a major factor in the ability of companies to pay tax – and please bear in mind that the burden of taxes nominally paid by employees actually falls on the employers, ultimately the customers.
Actually, from the point of view of reducing the national debt, maybe a bit of extra inflation (not hyperinflation, obviously) would be a jolly good thing. Certainly we don’t want deflation, which is what Blanchflower realises a lot more than most of the other “experts”.
“a bit of extra inflation (not hyperinflation, obviously) would be a jolly good thing.”
In that situation, who actually ends up paying the debt? It has not disappeared. 😈
Peter
Of course Blanchflower is a fool. It’s a foolish man who calls things right. It’s a foolish man who wants to protect jobs. It’s a foolish man who wants to save business. It’s a foolish man who wants to minimise government cost when defeating recession. It’s a foolish man who wants to save the banking system.
Of course if you say these things he’s foolish.
But it’s an idiot who does say such things.
Richard
“In that situation, who actually ends up paying the debt? It has not disappeared.”
The real value of the debt has shrunk. So it does disappear – partially. Conversely, deflation makes existing debts larger in real terms.
Although I am firmly in the LVT camp, I do not think it is a panacea and will not by itself get us out of the current mess, although it will prevent a repeat of the boom/bust cycle. I agree that a good dose of inflation would be useful in soaking up the debt.
Adding to last comment. A full annual land value tax would prevent that inflation from feeding into land/property prices.
“The real value of the debt has shrunk. So it does disappear – partially.”
So you mean that the creditors do not get back what they lent.
Isn’t that called fraud?
And isn’t the fraud actually perpetrated on all holders of sterling balances?
And isn’t that one reason why people are reluctant to hold sterling balances?
And isn’t that why sterling has been dropping like a stone recently?
And isn’t that going to feed through into higher prices in a few months time?
And isn’t that, in effect, reducing people’s wages?
And isn’t it a fact that people do not just sit back and accept pay cuts?
And isn’t it going to lead to industrial unrest?
Henry
Please get real. I let you on here a lot – but can you please at least write some sense?
Currency stability is an impossibility. Risk and even uncertainty are facts. Inflation is not fraud: its just what happens when one quality of economic management is chosen over another for priority. That has to be done since a value free economics is a) not possible b) undesirable and c) assumes a perfect starting point and we have not got one.
And since right now the only risk to sterling is deflation your analysis is also hopelessly wrong.
So shall we stick to the real world, real decisions, and the need for real change – one of which is that land is over valued relative to wages and to get it right you have either to devalue banks and break banks, again, or inflate wages.
Tax alone will not do it – so don’t say it will because it’s pure fantasy if you do.
Now, what’s your choice?
Richard
Richard, you have just put your finger right on the problem – land is over-valued relative to wages. So the price of land needs to come down. As we know, the nature of the land market is that prices do not tend to fall to market-clearing levels. So what would bring the price of land down? Welcome to the LVT camp!
Of course currencies fluctuate relative to each other and in terms of the goods and services that they can purchase. But when they are deliberately devalued as a means of paying off debt, the process is essentially a fraud on those who hold balances in the devalued currency. As I noticed when going through my bank statements for the past few months.
Henry
LVT won’t deliver a) because no one has shown it can b) because no one will try it at sufficient rate c) they shouldn’t try it at that rate – because then the abuse in the rest of the economy will be enormous. Tax is not a one club game of golf.
Now answer in the real world we actually live in – and please drop the claim of fraud – that’s absurd. As absurd as imposing a tax to achieve the same result – which by your defitnion would also be fraud.
Richard
If the patient refuses to take the medicine they must take the consquences instead. Tax is not a game of golf. The economy works more like a game of Monopoly.
But, games apart, we already have a crude sort of LVT in the shape of existing property taxes. It would result in no great upheaval to change to assessment on annual rental values, and levy the charge proportional to those values. This would raise useful extra revenue whilst leaving most people paying about the same as now, and even that would help to check prices because landowners would have to price competitively in order to generate the cash flow out of which to pay the tax.
But if you really believe that the opposition is so strong and the politicians are so gutless as to initiate this reform, then there is much avoidable pain ahead. I fear you are right in your judgement that the right medicine will be refused.
But it is not only in matters of taxation that Britain refuses to accept its situation – the nation seems unable to get to terms with the idea that it is no longer an imperial power of the greatest importance in the world.
Henry
Please answer my questions in #15
Richard
My choice would be for currency stability. Depreciation of the currency would probably not be necessary if there was the shift in taxation I referred to in #16, since, as you argue, land is too expensive and its price needs to fall.
But no such sensible policies are likely to prevail. The standard of public debate suggests that it is going to be unable to get itself out of this situation which shows signs that it will slide out of control. Deflation is a problem only in so far as land prices are sticky downwards, but a government that refuses to legislate against upwards-only rent revision clauses in leases must be lacking in competence and/or honesty, and we can be sure that any other possible government will be no better.
So what’s my choice? To leave the country if possible since things can only get much worse.