The big news of the morning is that the economy hit the election headlines yesterday. It hardly featured in 2017. It has already done so this time.
And as Channel 4 showed last night, in a ‘compare and contrast' film, what is noticeable are the similarities in policy announcements between the Labour Party and Tories. Both are focussing on investment in infrastructure, and in the North. The difference is scale. The Tories are, broadly speaking, offering an additional £20bn a year. Labour want to spend an additional £50bn or so a year over the promise they have already made. Both would require borrowing. Both recognise that the real interest cost is negative. Both recognise there is no choice. Javid suggested the household analogy still applies. And so too did the economic think tanks.
The latter are my focus. I concentrate on comments in the Guardian. They note Ben Zaranko, a research economist at the Institute for Fiscal Studies saying:
Both parties' plans would represent a sharp change in policy, and Labour's plans are especially ambitious. The key challenge for a government seeking to deliver investment on this scale — particularly in a short timeframe — will be finding worthwhile and viable projects in which to invest.
At which point I took a sharp intake of breath. First, that's because the IFS has said in the past that, quite bizarrely, “they don't do macro” and it has to be said that is true: they don't, and it shows. So they are not out there looking for projects. And nor do they understand this issue. But there again, it's also obvious that whatever macro that they do know is deeply conventional, which is apparent from their next comment:
Shortages in the number of suitably skilled construction workers, a dearth of ‘shovel-ready' projects and practical issues relating to delivery will be challenges the next government will need to think carefully about how to overcome.
None of these things is necessarily true, especially with flexible migration policies. Rather, and although it is not said, these are statements of macro faith that the IFS is regurgitating. That is because most practical macroeconomic forecasting is based on what are called ‘general equilibrium' models of the economy. They include some quite extraordinary assumptions, starting with the fact that the economy is in equilibrium at the start of any modelling process and that all available resources are already in gainful use in the economy already, meaning that there is no unemployment because that is what markets guarantee: prices always match supply and demand and so there can be no unemployment because all who want to work are doing so at market determined optimal prices. This logic then feeds back into the macro thinking of those who use such modelling as the basis of their work.
We can see it in the comments of the IFS, which is hard-core neoclassical to the core in its economics. It is assuming that there are no projects to be done, because the market would have already done them if they were viable. And they are assuming there is no spare resource, because, again, the market would have already used them if there were. And so they think that anything that this additional spending might do necessarily squeezes out market activity, which by definition is better than anything the government might be able to do by spending. So, all the government can deliver is debt because else anything worth doing is already in progress. Hence their comments.
This thinking is not only found at the IFS. The Guardian notes James Smith, research director of the Resolution Foundation thinktank, saying:
The economic plans set out by Labour and the Conservative parties today represent a dramatic shift from the narrow debt-driven debate that has dominated the past decade. With the low cost of borrowing, austerity Britain is going to turn into hard-hat Britain whoever wins the next election. This shifts the focus to ensuring that investment delivers real returns, not just higher debt.
So the same theme is found there as well.
The logic, and not the policies, is bankrupt. There is unemployment. There is a Green New Deal to do. And retrofitting double glazing could start any time soon, and is not hard to gear up. Nor is insulation.
And this is what these think tanks completely miss. We are facing the biggest crisis our world has ever faced. The likelihood is that human life on earth is threatened. The scale of response required should put us on a war footing. But the IFS and Resolution Foundation want us to focus on the country's balance sheet instead. It's as if they think we have a choice. A nice, neat, low debt balance sheet or life or the options that they present.
Now I know that is some accountant's choice already. But for the rest of us it's not an option even on the scale of being worthy of consideration. So it's time the think tanks get out from behind their spreadsheets and the models that they clearly do not understand and started looking at the real world. That's a bit of a shock to most economists. But if they claim to think they'd better start checking their assumptions. Right now almost every one that these two think tanks are using appears to be completely wrong. And that discredits all that they have to say.
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Apologies for appearing to seek to hog bandwidth, but my view is that the key point here is that, irrespective of which main party gets to govern, there will be a massive increase in public investment. Obviously, Labour’s approach should be preferred, but the think tanks can chunter all they like. This is now a done deal.
I also think that there are genuinely competent macroeconomists who do worry about the output gap, the productivity gap and the previous abuse of fiscal policy. It’s just that their message does not serve the interests of the wealthy and powerful. That is changing now.
Also of significance in the Guardian piece to which you link is the commeny by Ed Davey about the two main parties “writing promises on cheques that will bounce”. That should tell people a lot about the Lib Dems.
Yes….
Forgive me if these questions are stupid – I am no economist but I do take an interest in your blog.I understand that finding the money for investment is not a problem, but I wondered if borrowing is really necessary given the government’s ability to create money? If interest rates are negative would it be better to borrow it anyway (or does it make no difference since all money is fundamentally government created)? Also, given that inflation is influenced by the available physical and human resources in the economy, and given the proposed scale of investment, are you entirely content these plans will be non-inflationary? Of course a bit of inflation would be a price worth paying to save the planet, I just wondered if you saw no risk or if you think any conceivable risk is a price worth paying? I noted Mr. Javid’s Thatcherite references, but Labour still talk of taxing the rich to pay for things. It may be good for social equality, but does this indicate a lack of understanding about money creation or is it, do you think, more a statement for public consumption given general ignorance of things MMT?
Technically we do not need to borrow
EU law says we must
QE is an alternative
BUT when £170 billion is saved in pensions and ISAs a year in the UK, why not recycle that money into the GND and relieve any suggestion taxpayers might pay? Doesn’t it make sense for the government to be the place to save when only they can solve the crisis we face?
Thank you Richard. I fear I will now further reveal the extent of my ignorance, (again please forgive I am trying to learn). I thought that savings in an economy were funded by the government deficit (we can’t create money). Is the deficit truly so large or do these savings come from elsewhere? Thanks for your patience.
Savings do overall balance, of course
But the form in which they exist and the consequence of that form cannot be ignored – which is a point where I differ with MMT – and so they need to be directed to social purpose
Why not align goals? There is more to economic policy than money
If the EU can do QE which cancels government debt so can the UK. What’s sauce for the goose etc. J.D Alt makes clear in his two NEP articles on modern reserves based monetary systems the US central bank can manipulate reserves either up or down and this underlies QE. The UK reserves system is no different.
http://neweconomicperspectives.org/2019/10/the-peoples-money-part-1.html#more-11600
http://neweconomicperspectives.org/2019/10/the-peoples-money-part-2.html
Additionally it seems to make sense to widen the choice of safe investments for the British public especially since a Green New Deal has the potential to be marketed like a war bond to help save the country and the planet.
Thank you Richard.
Thankyou for so effectively blowing away the nay sayer ‘think tank’ wonkers subtle propaganda. The Groans headline being crassly dismissive too.
There are of course any number of projects to be undertaken – starting with the ones the pfi/ppp corporations are making profits out of, while under delivering – how is that abandoned Livepool hospital doing btw?
The absurd msm all out attack in a election – when there is supposed to be fair coverage – is obvious and benefits from instant rebuttal . The deployment of state employed ‘trolls’ shows just how much of a stinky stable we now have to clean.
@ DunGroanin
I live about 10 minutes walk from The Royal: The abandoned Liverpool hospital you mentioned. It’s still open, and as tatty as ever, but is being re-built bit by bit with public money now since Carillion collapsed. It’s supposed to be finished by next year, but more like by 3020 at the rate it’s been going. The cladding has also been found out to be the dangerous stuff AKA Grenfell, so god knows what’s happening about that. All in all, I hope that if I ever have an accident needing hospital treatment it happens when I’m over the water in the Wirral so’s I’ll be sent to Arrow Park instead!
The problem with think tanks is that they think too much and don’t act. Their position is static. They can safely be ignored.
MMT theories about the dynamism of investment and tax returns are based in reality. GND is based on the same reality (investment & returns) but this time pension funds benefit rather than banks earning interest from loans.
The problem of positive investment being misrepresented as onerous debt however will not go away in this election timeframe.
When the idiot Javed started spouting his nonsense on the headline news on the BBC tonight, I just wanted to shout Four Trillion pounds of QE! Why does no one in the MSM challenge him?
It is £435 billion in the U.K.
But your question remains a good one