A letter has been published in the Guardian tonight signed by 77 economists that says George Osborne's plan to legislate for budget surpluses makes no sense. I reproduce it below as I'm one of the signatories.
There's also a Guardian comment article.
And if you see some overlap between the letter and this blog that's not chance: one is based on the other.
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The chancellor's plans, announced in his Mansion House speech, for “permanent budget surpluses” are nothing more than an attempt to outmanoeuvre his opponents (Report, 10 June). They have no basis in economics. Osborne's proposals are not fit for the complexity of a modern 21st-century economy and, as such, they risk a liquidity crisis that could also trigger banking problems, a fall in GDP, a crash, or all three.
Economies rely on the principle of sectoral balancing, which states that sectors of the economy borrow and lend from and to each other, and their surpluses and debts must arithmetically balance out in monetary terms, because every debit has a corresponding credit. In other words, if one sector of the economy lends to another, it must be in debt by the same amount as the borrower is in credit. The economy is always in balance as a result, if just not at the right place. The government's budget position is not independent of the rest of the economy, and if it chooses to try to inflexibly run surpluses, and therefore no longer borrow, the knock-on effect to the rest of the economy will be significant. Households, consumers and businesses may have to borrow more overall, and the risk of a personal debt crisis to rival 2008 could be very real indeed.
These plans tie the government's hands, meaning it won't be able to respond appropriately to constantly evolving economic circumstances, good or bad. The plan actually takes away one of the central purposes of modern government: to deliver a stable economy in which all can prosper. It is irresponsible for the chancellor to take such risky experiments with the economy to score political points. This policy requires an urgent rethink.
Dr Ha-Joon Chang University of Cambridge
Thomas Piketty Paris School of Economics
David Blanchflower Bruce V Rauner professor of economics at Dartmouth College and ex-monetary policy committee
Prof Mariana Mazzucato RM Phillips professor in the economics of innovation, University of Sussex
Jared Bernstein Former chief economist and economic adviser to vice-president Joe Biden
Prof Simon Wren-Lewis University of Oxford
Prof Victoria Chick University College London
Prof Ozlem Onaran Department of international business and economics, University of Greenwich
Prof Engelbert Stockhammer Professor of economics, University of Kingston
Howard Reed Director, Landman Economics
Richard Murphy Tax Research UK
Stewart Lansley Visiting fellow, Bristol University Townsend Centre for International Poverty Research
Prof Andrew Cumbers Professor of political economy, Adam Smith Business School, University of Glasgow
Prof Malcolm Sawyer, Emeritus professor of economics, Leeds University Business School
Prof George Irvin Professorial research fellow, Soas, University of London
Prof John Weeks Emeritus professor, Soas, University of London
Prof Prem Sikka, Professor of accounting, University of Essex
Prof Christine Cooper Accounting and finance, Strathclyde Business School
Prof Diane Elson, Emeritus professor, University of Essex and chair of UK Women's Budget Group
Professor Jonathan Michie University of Oxford
Prof Robert McMaster Professor of political economy, Adam Smith Business School, University of Glasgow
Dr Jo Michell Senior lecturer in economics, University of the West of England, Bristol
Prof Sheila Dow Emeritus professor of economics, University of Stirling
Prof John Grahl Professor of European integration, University of Middlesex
Prof Jan Toporowski Professor of economics, Soas, University of London
Prof Philip Arestis University of Cambridge
Prof Giuseppe Fontana Professor of monetary economics, Leeds University Business School
Prof David Spencer Professor of economics and political economy, Leeds University Business School
Prof Alfredo Saad Filho Professor of political economy, Soas, University of London
Prof Mary Mellor Professor emeritus, Northumbria University
Dr Craig Berry Deputy director, Sheffield Political Economy Research Institute (speri)
Prof David Newbery Emeritus professor of Economics, Cambridge University
Prof Hugh Willmott Cass Business School
Prof Steve Keen Professor of economics, Kingston University
Dr Henning Meyer Research associate, Public Policy Group, London School of Economics
Prof John Van Reenen Professor of economics, London School of Economics
Prof Ismail Ertürk Senior lecturer in banking, University of Manchester
Prof Susan Himmelweit Emeritus professor of economics, Open University
Prof Valpy FitzGerald Emeritus professor of international development finance, University of Oxford
Prof Simon Mohun, Emeritus professor of political economy, Queen Mary, University of London
Stewart Wallis, Executive director, New Economics Foundation
Prof Klaus Nielsen, Professor of institutional economics, Birkbeck, University of London
Prof Pritam Singh Professor of economics, Oxford Brookes University
Dr Andrew Mearman Associate professor in economics, UWE Bristol
Prof Matthew Watson Professor of political economy, University of Warwick
Prof Grazia Ietto-Gillies Emeritus professor of applied economics, London South Bank University
Dr Mary V Wrenn Joan Robinson research fellow in heterodox economics, Girton College, University of Cambridge
Geoffrey Hodgson Research professor, University of Hertfordshire
Dr Daniela Gabor Associate professor, UWE Bristol
Prof Bruce Cronin Director, Centre for Business Network Analysis, University of Greenwich
Dr Annina Kaltenbrunner Lecturer in the economics of globalisation & the international economy, Leeds University Business School
Prof Gary Dymski Professor of applied economics, Leeds University Business School
Michael Burke Economist
Dr Russell Smith Senior lecturer in economics, Cardiff School of Management
Prof Philip B. Whyman Professor of economics, University of Central Lancashire
Prof Tony Thirlwall Professor of applied economics, University of Kent
Michael Kitson Cambridge Judge Business School, University of Cambridge
Dr Abigail McKnight Senior research fellow, Centre for Analysis of Social Exclusion, London School of Economics
Dr Ken Coutts Assistant director of Research, faculty of economics, University of Cambridge
Prof Robert H Wade London School of Economics
Dr Kalim Siddiqui Department of strategy, marketing and economics, University of Huddersfield
Prof Stuart Holland University of Coimbra
Dr Alberto Paloni Adam Smith Business School, University of Glasgow
Ewa Karwowski Lecturer in economics, Kingston University
Professor Marcus Miller University of Warwick
Dr Gary Slater Leeds University Business School
Professor David Bailey Aston Business School
Dr David Harvie Senior lecturer in finance and political economy, University of Leicester
Barbara Harriss-White Emeritus professor and senior research fellow, area studies, Oxford University
Dr Bruce Philp Head of department, strategy, marketing and economics, Birmingham City Business School
Roberto Veneziani School of economics and finance, Queen Mary, University of London
Dr Julian Wells Principal lecturer in economics, Kingston University, London
Dr Neil Lancastle Department of accounting and finance, De Montfort University
Mimoza Shabani Lecturer in financial economics, University of East London
Dr Ashley L Carreras Principal lecturer in economics and decision analysis, faculty of business and law, De Montfort University
Prof Michael Lipton Research professor of economics, Sussex University
Dr Graham Gudgin Research associate, Centre for Business Research, University of Cambridge and senior economic advisor, Oxford Economics
Prof Geraint Johnes Professor of economics, Lancaster University Management School
Andrew Simms Fellow, New Economics Foundation
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From the letter:
”These plans tie the government’s hands, meaning it won’t be able to respond appropriately to constantly evolving economic circumstances, good or bad. The plan actually takes away one of the central purposes of modern government: to deliver a stable economy in which all can prosper.”
Cameron and Osborne know this, they aren’t stupid.
This is what they want to happen because they believe their so-called free market ideology that the state should have little or no influence in the market place. This is the end game of their ”long term economic plan”
And it is terrifying.
It took 77 economists to state the bleedin’ obvious? 🙂
Seriously though, it has always been junk economics that you can somehow maintain surpluses on a system that runs on debt.
If we have gained surpluses, they have only ever been short lived as the costs of running the country will always be higher than what the country gains through taxation.
If the government did not run deficits, then the costs of running things would be passed down to taxpayers and businesses, probably meaning taxation would have to rise exhorbitantly in order for the government not to go bust.
Also, if the government refused to run a deficit, billions of pounds would simply be lost to the economy. How do they propose to make up that money if no deficits are run?
Governments are not the only agents in the economy. Households and businesses borrow in good times, save in bad times. Governments are balancing agents who can do the opposite. If borrowing was the key to economic growth Greece would be an economic success and Norway a disaster. Taxation ought to balance to government spending over the cycle – anything else is delusionary.
Please read my explanation on this issue: whether or not the equation balances is beyond the government’s control
Why not accept fact?
Even as an target over the economic cycle, it does not make sense to aim to make taxation equal spending. It makes sense to aim for the public-debt-to-GDP ratio being unchanged over the cycle, or perhaps for it to fall slowly. But that can be achieved with total spending higher than total taxation, due to the effects of economic growth.
Wealth distribution is the main factor in debt accumulation. The uk average wage is no way near enough to sustain a modest living. Therefore debt is accumulated for day to day living. If we could redistribute wealth through a progressive framework enforced by a progressive government the systemic race to the bottom we are currently experiencing could be transformed. The market will never create human optimum state of being for all
Well done Richard,
Great credit to your blog is due.
pretty much the same economists who wrote to the Observer saying growth was impossible unless Osborne adopted a Plan B in 2011, since when the UK has been the fastest growing economy in the developed world
http://www.theguardian.com/theobserver/2011/oct/30/observer-letters-economists-george-osborne
I don’t see much of a correlation between the size of the state in a country’s economy and its economic success. Not over-spending in normal times so as to have scope to spend in a crisis is entirely sensible. Canada, Sweden, Australia etc. etc. Did any of this list write to a newspaper to protest that Brown was spending beyond the UK’s sustainable tax base in the midst of a consumer debt-fuelled boom? Mm…thought not.
Respectfully, the UK has had the slowest recovery from a recession ever and income per head has still not recovered for the vast majority
Why not get facts right?
Ken B
Not big on simple arithmetic, are you ?
If you reduce the economy enough then any increase, no matter how derisory in real terms, will score highly as a %age.
You might have remembered that the UK economy shrank considerably & then didn’t grow at all until 2014. Obviously, its growth is then going to outstrip in %age terms, the economies that grew throughout.
“I don’t see much of a correlation between the size of the state in a country’s economy and its economic success. ”
To a degree I’d agree. India is successful, as is Switzerland, in their very different fields. There certainly comes a point, though, where the lack of sufficient state leads to collapse. I used to travel widely in Latin America & the remarkable disparity in wealth & absence of an form of Govt lead to a very inefficient, bordering on insane, use of resources.
The highly wealthy were, essentially, trapped in their shopping “Zona Rosa”, protected by the security guards they employed at vast expense (who became almost private armies) , but exiled in their own country, whilst the poor roamed free but had no means of exchange to inter-act with society since they had, literally, no pesos
Hi Richard – ta for the post as I hadn’t noticed the 77’s letter to the Guardian
as far as I understand the current state of economics what is slightly ironic about 77 economists declaring that Osborne’s plans have “no basis in economics”…
…is that the very economic thinking they come from largely failed to see the crash coming and has largely not altered its thinking afterwards. If economics is a science then their hypothesis to explain reality hasn’t been proven and they are not demonstrating the ability to test new hypothesis. Of course they may well be right in their views of Osborne’s plans. But their track record on predicting economics isn’t great.
Steve Keen’s debunking argument – it seems to me – fairly comprehensively debunks current economic thinking …
just saying
And Steve Keen signed the letter, please note
fair point
“Not over-spending in normal times so as to have scope to spend in a crisis is entirely sensible. Canada, Sweden, Australia etc. etc. ”
Possibly true but its hard to know because Canada, Sweden & Auustralia’s banks didn’t fall over so its hard to know what effect it would’ve had on their economies had they done so.
I don’t agree that Osborne’s plans make “no sense”, they make perfect sense if you understand their purpose as political rather than economic.
Osborne is certainly not the only minister in today’s cabinet who views the 1946 Beveridge welfare state as a colossal mistake. Recently, Mark Field MP was saying that the problem with UK benefits was not so much their amounts but that they were non-contributory. In other words, if you leave the care system at 18, having not worked, you get nothing. You can join the army, or just hope you’re very good at football, boxing or rapping…or you can starve on the streets.
Conservative policies are all ideological to keep the power with the few at the top, than what’s best for most people or the economy. Why else would they have done the worst thing imaginable for the economy in a recession by increasing VAT to make everything more expensive to slow down spending, as well as other tax that affects the poor the most like bedroom tax and making disabled people pay council tax from the minimum amount they can live on. Then do nothing with the extra tax except give millionaires tax cuts, while saying there have to be cuts to vital services?
It’s like when the Conservatives were in power before in the 80s, when they stole and sold off everything public owned, then added tax that affects the poor the most like constant VAT increases, the first government to add tax to household bills after they privatised the energy companies, and the Poll Tax where an 18 year old in a bed sit had to pay the same as a lord in a manor.
Then by the late 80s after not spending the money on anything anybody wanted, such as more social housing or the NHS because waiting lists were the longest ever, they said they were broke, giving them an excuse to not put money into what services were left, making them the worst in Europe, still blaming Labour for what the Tories do after 10 years. It was also the Conservatives who turned us into a banking nation with nothing else to fall back on, where people’s credit rating was the most important thing in their life, which all crashes every few years when nobody can pay back the debt they’re encouraged to have. If Labour had put too many controls with all the Tories left us with, the Tories would have been the first to make a fuss, accusing Labour of being too controlling.