I spoke at the TUC this week.
So did Mervyn King. He got more press! No surprise there then.
But apart from endorsing arguments for tackling the tax gap, was what King said right? Martin Wolf does not think so in the FT today:
What is the core of Mr King’s argument? It is that “market reaction to rising sovereign debt can turn quickly from benign to malign ... It is not sensible to risk a damaging rise in long-term interest rates that would make investment and the cost of mortgages more expensive. The current plan is to reduce the deficit steadily over five years — a more gradual fiscal tightening than in some other countries. As a result of a failure to put such a plan in place sooner, some euro-area countries have found — to their cost — a much more rapid adjustment being forced upon them.”
I have argued before that the UK is in a very different position from, say, Greece: it has a far lower ratio of debt to gross domestic product; it borrows in its own currency; it has the means to promote its own recovery, which is vital for managing public debt; it has a modest current account deficit; it has a history of managing its public debt well; and current indebtedness is lower, relative to GDP, than the average of the past three centuries. Markets have also been remarkably relaxed about funding these deficits: interest rates on index-linked gilts have been 1 per cent, or less, for more than a year; the yield on 10-year gilts has remained below pre-crisis levels and is now close to 3 per cent; and spreads over German bunds have been 1 percentage point, or less, throughout the crisis.
As others — Paul Krugman, Larry Elliott and many more — argue — King’s argument is we must be in fear of markets and yet those markets persistently show we have nothing to be afraid of.
So why are we living in fear of a threat that does not exist?
The threat to markets in this country is not from government debt — it’s from recession — recession caused by government cuts.
King was wrong before the crash.
He’s wrong now.
He and Osborne are fighting phantoms. That’s not the basis for an economic policy.
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Interestingly enough, before the General Election Nick Clegg was saying exactly what Krugman, Elliott et al were warning – that we shouldn’t be driven by a fear of markets.
This is what he told voters at a Q&A in Yorkshire.
“I would say this, look, the decision on how we govern this country and how people vote shouldn’t be driven by fear of what the markets might do. Let’s say there was a Conservative government, right? Let’s say a Conservative government announced in that sort of macho way, ‘We’re going slash public spending by a third, we’re going to slash this, we’ll slash this, we’re going to do it tomorrow’, because it has to take early tough action. Just imagine the reaction of my constituents in South West Sheffield. I, I represent a constituency that has more people working in public services as a proportion of the workforce than any other constituency in the country, lots of people work in the universities, the hospitals and so on. They have no Conservative councillors, they have no Conservative MPs, there are no Conservative MPs or Conservative councillors as far as the eye can see in South Yorkshire. People like that are going to say, ‘Well who are these people telling us that they are going to suddenly take our jobs away, who are these people who are suddenly they’re saying they’re going to threaten my local – what mandate do they have? I didn’t vote for them. No one around here votes for them.’ And I just, you know I think if we want to go the direction of Greece, where you get read social and industrial unrest, that’s the guaranteed way of doing it, thinking that the old tub-thumping way of conducting politics is the way that you bring people along with you.”
Nick Clegg, Yorkshire Post, Question Time event, 19 March 2010
[…] just mentioned I spoke at the TUC this week — twice, […]
@Matt
Excellent find! From the sounds of things Nick Clegg had better start finding a safe Tory seat somewhere in the Home Counties for the next general election, because he sure as hell ain’t gonna get voted back in in Sheffield Hallam if that’s the constituency profile. 🙂
[…] as Martin Wolf, Paul Krugman and many others have argued, that was just plain daft: there never was any such risk, […]
[…] as Martin Wolf, Paul Krugman and many others have argued, that was just plain daft: there never was any such risk, […]