It's embarrassing the read the comments from the Treasury seeking to suggest that the IMF's downgrade of UK growth prospects and its suggestion that Osborne's austerity plans are too severe don't amount to a condemnation of the whole of the government's austerity plans because very obviously that is exactly what they are.
It has always been the case in the modern era of active government participation in economies (which has resulted not just in massive economic growth but in increased wellbeing too) that there is only one way out of a depression, and that is for the government to spend.
As Duncan Weldon notes this morning, UK householders are not spending, and he provides this graph to prove it:
At the same time as this is happening business is not investing. It's sitting on a cash pile of more than £700 billion instead. And export markets are pretty much frozen. Put these three facts together and the only way out of recession is then for the government to spend.
And that is what it must do. Of course it must do so wisely. I'd suggest a Green New Deal, as I and colleagues have been since 2008 (before the crash happened, but when we clearly foresaw this crisis). But there is no other way to get the economy going again now.
What is more, such a policy pays. As I showed in 2009, and which remains almost unchanged now, when tax paid and benefits saved are taken into account it is entirely plausible that in many cases providing a person with a new job using government funding in a period when there is mass unemployment is a cost neutral (at worst) exercise but with enormous social and economic benefits, In other words, austerity is entirely counter-productive.
Sometime soon this is going to be appreciated. As Oliver James argues in the Guardian this morning, people are going to stop blaming themselves for the mess we're in, will cease to feel helpless about it and will demand action. If politicians don't then step up to deliver they'll set out to get it anyway because there is only so long that people will suffer imposed oppression before declaring they've had enough.
We are suffering imposed oppression in the UK. The period of tolerance is coming to an end. The only question is when it will end, not if.
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I agree but feel gloomy about the public mood. The scapegoating of those on welfare is now a sort of national sport and a useful spitoon for those that feel disgruntled because rents/mortgages have, in effect, devalued their currency. It is not just a question of any old job but jobs that have a sense of meaning. The green deal could be that very thing but it won’t come from the shower of useless time-servers thatmake up our political class.
“Put these three facts together and the only way out of recession is then for the government to spend.”
Or, to be fair, cut taxes.
The debate we should be having is whether it is better for government to spend (and what on) or whether it is better that taxes be cut (and which ones).
The Tories could still get out of this by simply suspending National Insurance until the economy recovers. But they don’t seem to realise that what we need is economic demand at the base of the economy – which is what encourages businesses to invest.
“The period of tolerance is coming to an end. The only question is when it will end, not if.”
Very true, but the evidence from Greece, Ireland and particularly Spain is that people will take an awful lot more pain and suffering than you can possible imagine.
The consequence of an excessive period of individualisation is that the population has all but forgotten how to collectivise.
The multiplier effect of tax cuts is much lower as much of any tax cut is exported
Then that gives simply gives space to do more of them.
The multiplier is just a consequence of the level of excess savings generated from that mode of injection.
So it’s all down then to whether the excess savings consists of the rich running up their financial wealth, or the indebted running down their loans.
From what I pick up from various people I know and meet I think you’re right. There’s no doubt that the majority of the population bought into the Con/Dem falacy that the economic crash and subsequent depression were the result of Labour overspending (e.g. on welfare) rather than as a result of the banking crash. And, many, many people were well aware that they’d been funding their own lifestyles through credit, and thus the extent of their own indebtedness. Consequently the two situations chimed well with each other, which made it easy for many people to draw the “blame” parallels – between their own behaviour and that of the prervious government – the ConDems needed to legitimate the austerity programme.
But after three years in which many, many people have done their utmost to cut back, or been forced to, with the government apparently leading the charge by doing the same, but with no end to austerity in sight (and increasing evidence of the true extent of its negative and divisive features), its a natural reaction to start to ask what the hell is going on. Even more so when faced with a situation where the average worker hAS lost around £4000 in real terms over the last three years.
What we now need is for Labour to get ahead of the curve on this and start to detail real alternatives (e.g. of which the Green New Deal is one that’s well formulated). Perhaps with Thatcher/the witch dead and buried they’ll finally realise they’re free from the neo-liberal straightjacket which they imposed on themselves from 1997 onwards. One can only hope.
Forgive me Ivan but I believe there’s a crucial bit missing from your argument; dealing with the effect of government propaganda of epic scale.
Whatever Labour does, unless they address the difference between what people have been persuaded, by the government and its media supporters, to believe is true and its comparison with evidence based reality, eg YouGov’s recent poll “41% of the benefit budget goes on unemployment benefits and 27% on benefit fraud”, they will get nowhere.
Nick, I agree, that consideration was missing from my argument, and is an important point. But in defence I’d say that I seem to remember reading something last week (maybe by Polly Toynbee), which noted that these figures have started to decline – at last – as the reality of the benefit caps, cuts and other changes now kick in. It’ll be the end of the year before we can tell whether they’ve moved to any signicant degree.
This does beg a question. What level of household saving is, in general, optimum? I accept that at the moment we are in difficult times as most people are hugely indebted and are paying down historically unprecedented levels of personal debt. It’s just I get the feeling from a lot of your views that you do not regard saving as a positive thing per se, that it is in effect excess wealth locked up that could be used for more socially useful purposes and that people shouldn’t save for retirement as the state should provide enough pension for them. Is that broadly correct?
My problem is that saving is usually unproductive. If there was a link between saving and investment I would be more relaxed
But there is none
There was an interesting/puzzling article in the FT a couple of days ago about accumulated wealth in Germany and the rest of the Eurozone – but it did not cover the UK at all. The following letter in today’s FT, I think, gives a bit of the explanation, but also applies in spades to the UK. Also of relevance is the fact that the Chinese (and presumably the other BRICS) have a very high savings rate because of the need to fund their own healthcare, etc. This constrains the internal market which they now need to boost.
Wolfgang Münchau’s attempt to link European Central Bank data on net wealth in Europe with the euro debate is ingenious (“The riddle of the single currency with many values”, April 15), but he overlooks the main explanation of the unexpected ECB findings.
The main explanation is that, while real assets plus financial assets — the definition of private wealth used by the ECB — are useful in so far as they can be turned into cash when needed, what the average (median) person or household generally needs is a regular flow of income before, during and after working life.
This normally requires universal access to quality education and training to maximise earnings potential, and collective social security systems to provide support when things go wrong, or when work is no longer an option.
In a country such as Germany, where support for education and social security is strong and largely politically assured, there is less pressure to accumulate private wealth to cover such eventualities, hence the low recorded figures. Conversely, in countries where the concept of society is less developed or has been set aside in practice, it becomes a necessity, with the first choice private portfolio option being property — roof over one’s head, inflation hedge, legal security and so on. Unfortunately the latter approach is unproductive, starving the economies concerned of resources needed for investments in human and capital resources, infrastructure, research and development, and so on.
This is the real explanation of why the country with the lowest level of private wealth in Europe, as measured, so successfully outperforms most others in terms of real living standards.
John Morley, Tervuren, Belgium
Thanks Carol, very interesting.
That accords with my belief, which is that the UK has managed to divide itself into two main communities: those who do not earn large salaries and who do not save, partly because they don’t earn enough but also because they believe anything they do save will be means tested against and reduce their benefits later in life; and those who earn and save, because they believe they need to have private education, healthcare and pension provision because what the government provides is those areas is often second rate.
Of course it is also relevant that in Germany in particular there is much less borrowing – credit cards are much less used than in the UK, and so although they have lower savings, they also have lower personal debt. But that is perhaps also the product of a society that values education and incremental progress above the sort of crazy get rich quick celebrity culture that seems to have taken over the UK.
What first drew my attention to the original article was the relationship between wealth and house prices – actually land values. What keeps German land values so low? Is it just because home-ownership is not so much of a mania there? Yet someone has to own the houses which are rented. Another reason is probably because it is much harder to get a mortgage in Germany and I understand that they do have a form of land tax. It is a fact that when the best wealth tax we ever had – domestic rates – was abolished, property prices here started to take off and have been in effect over-valued ever since.
It’s complicated, but important because Germany seems to have got so many things right. But I’m sure things are not totally rosy. For one thing, there is no minimum wage and although strong unions keep wages high in many sectors, those with no union backing can get meager rewards.
Anti-prosperity might make a more useful descriptive term than austerity.
Roger and Carol, thank you both for your posts. I’m no expert, and have hardly visited Germany (to my regret) but what you say very much chimes with my own observations. I’ve thought for years now that if Britain was more like Germany we’d be a damn sight better off overall as a society and economy.
As Thatcher’s funeral shows, we are a divided society, with a ‘win at all costs’ electoral system and an economy that benefits the financial asset holder class but precious few others.
“At the same time as this is happening business is not investing. It’s sitting on a cash pile of more than £700 billion instead.” I suspect a similar thing is happening in the U.S. as well. And yet, according to Tax-news.com, US Corporates received USD181bn in tax breaks (http://www.tax-news.com/news/US_Corporates_Receive_USD181bn_In_Tax_Breaks____60467.html). This madness must end.
Yes this is ridiculous. I didn’t think socialism was a luxury item to be enjoyed by corporates and the extremely wealthy!
My worry is that the US is on the road to being a totalitarian state, where the dictator(s)are faceless corporations.
Given that it is suppose to be “the land of the free”, this would be tragic irony..
There is only one way to get Britain out of the deep hole it’s in with the economy today. Money must be invested in jobs. People in work spend their money and this, in turn,will kick-start the economy hard where it’s needed. With no money circulating things are only going to get worse, and they will do if something positive isn’t done and soon.