I note that Philippe Aghion, who is an adviser to new French President Francoise Hollande is arguing in the FT this morning that:
France's future depends on delivering all three of growth, social inclusiveness and budgetary discipline. No one element can be achieved without the other two. Without a belief among the French that burdens are shared, it is hard to elicit the necessary sacrifices to achieve budgetary discipline. In turn, fiscal discipline should allow the government to conduct more expansive fiscal policies to boost growth if demand is depressed. Fiscal reform and spending cuts will also allow France to fund investments that support growth.
I am not sure that I agree. The difficulty with economists like Aghion is that they really don't get accounting - and for all its deficiencies accounting also has some important insights to offer.
I've argued before that in macro-economics there are just four drives of growth. They are increases in consumer spending, exports, business investment and government spending. Hollande cannot expect any increase in the first three right now so growth has to come from the government. Let's not beat around the bush: this is the only way out of the recessionary environment we're in now.
But, and I make the point very strongly, to treat all government spending as equal would be a big mistake. It is not. There is a very big difference between the revenue and capital cycles and it is vital that people beging to talk about it.
There is not a shadow of doubt we need new investment in our economy. We need social housing, new generation capacity, a water grid, flood protection, improved railways, innovation in low carbon impact road vehicles and more. No one but the government is going to lead those processes. and there is money to do it. There is £2.2 trillion in pension funds in total. There are about £80 billion of pension contributions a year. Requiring just one quarter of all new pension contributions go into new infrastructure investment - in exchange for a guaranteed and proper return, maybe with an upside if something went especially well, is a wholly reasonable condition of giving pension tax relief. And green quantitative easing could provide the £20 billion capital for a national investment bank needed in the UK - which is being denied to it at present.
So long as these funds were invested witha view to returns then they're not part of the revenue cycle and should not be considered part of the deficit or government borrowing. It is ludicrous that such stupid accounting definition are destroying real lives and constraining rela growth - precisely because the government is slashing investment now to try to balance books to meet these accounting rules, and is destroying lives in the process. No business is constrained by such stupidity. When they invest the profit and loss account is not punished - the asset is put on the balance sheet and the behaviour is applauded. That should be true for government too.
Until we realise this we won't get out of our current mess - whatever happens to the Euro.
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I was just perusing treaury tables.
An interesting line as “net public service pensions”
http://tinypic.com/r/250oygl/6
URL of the original?
Richard
http://www.hm-treasury.gov.uk/d/natstats_statistical_bulletin_april2012.pdf
“I’ve argued before that in macro-economics there are just four drives of growth. They are increases in consumer spending, exports, business investment and government spending.”
That is not entirely correct as it is net exports that matters. Encouraging people to buy locally produced goods can improve growth without increasing consumption. Similarily cutting govt spending that is going into imports has no impact on GDP growth (so not replacing PC etc).
Can’t argue with your desire to see borrowing going into capital projects, especially if it can be structured as the pension funds investing directly in a project with an implicit govt guarantee. My only concern is that you end up with ‘pork barrel’ type projects aimed to boost regional employment but with little long-term benefit to the economy. Similarly the current £5,000 subsidy for electric vehicles does little real good, and is merely a subsidy to peoples environmental egos. The actual emmission of these vehicles is not much less than an equivalent modern internal combustion car. Rather spend the subsidy money on insulating home. The electric vehicle industry will develop without the subsidy anyway.
Agreed – to be technically correct!
I don’t agree re electric vehicles – no evidence to support business taking the risk
I agree with Richard regarding electric vehicles; most of the advanced technology industry is a direct result of US government spending through NASA R&D. Unfortunately low-carbon technology has no military use so does not attract the level of investment that it deserves (although if we reduce our energy consumption we increase our energy security as we are less reliant on imports).
Every motor manufacturer in the world is working on electric vehicles whether we have a subsidy on them or not. The best example of a company going about it the right way is Tesla in the US, develops pure electric vehicles aimed at the upper end of the market where the extra cost is immaterial, then will come down the market as the costs of the components fall. I am not anti EVs but just think the subsidy could be better spent elsewhere
As for NASA R&D, that has been true in the past but more and more now being done by private companies, look at Space X which will be launching the first private mission to the ISS soon (and which strangely enough was started by the same guy as Tesla!)
Interesting idea, after all the IMF loans and the Irish loan stay as a neutral balance sheet entry, as does the Bank loans to RBS etc. Probably because there is a measurable return and the asset has a tradable value beyond the public or social good.
The capital investment you describe of course has no measurable return beyond some vague percentage improvement in the wider economy and you have no intention of selling it. So you can’t really blame the markets for seeing it more as a gift that falls under expenditure.
Of course if you were not so ideologically opposed to private business receiving the State’s money you could take the pension money and invest in a joint venture with private industry to build bridges etc. Say five years interest free for 50% of the shares in a private company then the State gets a good return and/or could sell the shares.
As there is an exit point and the future return this would be an asset so fall on the balance sheet. If you really want growth then this is the way to put investment outside of expenditure, will your aversion to the private sector profit stop you using it?
Hang on. There’s no return in social housing?
Or in funds that rent infrastructure to gov’t dept’s at say 4.5% instead of 16% PFI?
No return? What planet are you on?
Your claim is absurd
You do need a mechanism to ensure that the additional capital spending goes into projects that are likely to produce a worthwhile return – otherwise accounting tells us that the expenditure will need to be written off to profit and loss sooner rather than later. Given the way that traditional banking has been defiled in this country in recent times, and also the management of much public spending in recent times – I would not be absolutely sure as to how effective a NIB might be. Perhaps a little more serious thinking is required as to how the capital spending is required if this idea is to gain wider public acceptance.
I agree – but that’s really not beyond the wit of such a scheme
It is however likely to be one of the main points of attack by the right – so it should be addressed.
Limited recourse loans, which is the way PFI is supposed to work. The trouble is that the pesky lenders insist that the idea is too risky and needs to be covered by an implicit government guarantee, and the government concedes the point but accounts for it as though they haven’t.
Sandra, it doesn’t just mean squeezing banks, it means writing off people’s savings & investments, which are the “other side” of debt. Steve Keen recognises this – his Debt Jubilee proposal suggests using central bank created money to compensate savers.
The only way to get growth without more debt would be through green quantitative easing, preferably debt free money provided to the government by the bank of England. Professor Werner has stated in one of his lunchtime talks that the banks are not lending to business, but mainly to house mortgages on which they create debt bubbles. He states that they should have the privilege of creating money removed from them for this. I agree with him.
http://www.youtube.com/watch?v=LQOeVnGqtuY&feature=related
Also:
http://www.youtube.com/watch?v=O0wA6SbsHg8
Michael Hudson says that people are so much in debt however, that boosts to output would not be enough because they do not have enough money left over to spend on goods. He says in this article that people are spending up to 80% of their income in debt servicing.
He believes that debt bubbles prevent growth therefore, and should be written off. I think he makes good sense. On a national level it seems to make sense because the debt levels of some countries in Europe are greater than their GDP, which surely means they will never pay the debt. This means squeezing the banks, but I do not think that would upset anyone!
http://michael-hudson.com/2012/05/paul-krugmans-economic-blinders/
Sandra I agree with your points.
However, I would point out that Debt ratios of more than 100% than GDP are payable over time. Britain’s was over 200% in the 1950s (due to the war) and came down to about 40% plus by the early 21st century.
Southampton Univ.(your link to Professor Werner) I think, made a submission to the Vickers commission on banking advocating full reserve banking.
I see your point and have looked at the graph of the uk national debt since then. There was a steep drop in the post war era – but at this time we had high industrial output and very high taxes for the rich compared to today. Now we have relatively low taxes for the rich, and growth built on asset bubbles.
With a green economy where we need to be more careful with the earths resources, we may need to balance the books with less growth, which may mean have a less expensive monetary system, as debt servicing may become harder.
Ian,
Strictly, what they advocate is full reserve banking for current accounts and 100% reserve banking for time deposit accounts – and the removal of “instant access” deposit accounts. IIRC the Vickers committee turned down their proposal on the grounds that 1) anyone can create a full reserve bank if they want to 2) the existing FSCS plus proposed increased capital requirements applied to retail banks would protect current accounts anyway so there is no need for segregation 3) limiting bank lending to available funds only would cause a serious restriction of credit particularly to higher-risk enterprises.
Sandra, it doesn’t just mean squeezing banks, it means writing off people’s savings & investments, which are the “other side” of debt. Steve Keen recognises this — his Debt Jubilee proposal suggests using central bank created money to compensate savers.
These comments are appearing on the wrong thread.
With regard to my last post, the Richard Werner interview regarding bank privileges to create the money supply are here: (Where he suggests that if banks do not create credit for productive purposes, we should consider removing those privileges).
http://www.youtube.com/watch?v=DzNQlR5dtPo&feature=relmfu
This is crucial to growth, because if we let banks create asset bubbles, this will lead to another crisis. If we create debt free money or at least make the banks lend for productive purposes, we will have growth.
There is another side to the equation which Werner rarely raises but Hudson does. The asset bubble with the most destructive consequences is the landed property bubble. Stocks and shares and bullion are not part of the real economy; land is. And it is the land element, not the bricks and mortar which is the source of the bubbling. The speculative bubble makes homes unaffordable – even though house prices have slumped considerably they are still unaffordable for those not already on the property ladder. Shops lie empty, but the owners wouldn’t dream of reducing the rent. Why would they when they are excused business rates if they keep it out of use? When they introduced empty property rates for higher rated premises, those premises were quickly sold or let.
There is a simple solution, which Hudson does promote: the collection of all land rent for public benefit (land value taxation). The necessary money reform which Werner advocates combined with LVT would ensure that we would have another serious boom/bust cycle – a great moderation without a subterranean debt build-up.
An empty property tax – I suggested five times the usual level of rates / council tax after 12 months empty – would encourage re-entry to the market!
Perhaps we also need a Deputy PM who can distinguish between the deficit and debt.
“We have a moral duty to the next generation to wipe the slate clean for them of debt. We have set out a plan — it lasts about six or seven years — to wipe the slate clean to rid people of the deadweight of debt that has been built up over time.”
Clott in his tractor factory speech last week.