It was interesting to note two FT Op-Eds this morning calling for the same thing - fiscal stimulus.
Clive Crook did it with regard to the USA:
[Obama] should propose a strong new stimulus, more ambitious than the measures mooted so far. At the same time, with new and equal emphasis, he should call for strong fiscal restraint in the longer term. This means tax increases for the middle class as well as the rich, and cuts to Social Security and Medicare. The president, finally, must spell this out.
That's pure Keynesianism.
Without it he says the Republicans will walk the 2012 election. And the USA will suffer long and hard.
Wolfgang Munchau has much the same to say of Europe:
I would personally go all the way, and advocate a discretionary fiscal stimulus in Germany, the Netherlands and Finland to offset austerity in the south. What matters is the fiscal stance for the eurozone as a whole. There is, as yet, little recognition in the eurozone's cacophonous capitals that an economic downturn poses an existential threat. I would expect therefore that the downturn will hit the eurozone with full force, and without defence. When that happens, the eurozone crisis will turn ugly.
The message is the same: unless Europe agrees, at least in part, to undertake a fiscal stimulus it too is in deep trouble.
And it is very obvious the UK is already in that position.
The universal clamour for austerity is now failing us badly, as some of us predicted it would.
Can we now have the stimulus we need, please? Before it all goes very horribly wrong indeed?
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Richard
You are completely right. Adam Posen and I have been warning this was coming for some considerable time. Sadly this was all entirely predictable as the coalition imposed austerity with no growth plan. It didn’t help that Osborne, Cameron, Clegg and Huhne falsely claimed the UK economy was bankrupt which it wasn’t and never has been that the UK is in any way comparable to Greece which is stuck in monetary union and has been in default for 200 of the past 250 years. The big question is what now?
Danny Blanchflower
Danny
I agree entirely with your comments, and the attribution of blame to Osborne, Cameron, Clegg and Huhne.
What now?
Well I have three suggestions I’ve made before and I’ll make again.
a) we have tax cuts that puts money in people’s hands but we also make darned sure we collect the money owing – mainly but nor entirely by the better off – by tackling the tax gap as I believe I have shown we can. This does three things i) creates a stimulus ii) creates a level playing field between cheats and honest people iii) keeps deficit reduction on track
b) We remand that 25% of all the pension contributions made in the UK (about £80 billion a year at cost of £38 billion in tax reliefs) go to provide capital for investment in new job creating infrastructure and capital investment in the UK – through a national investment bank if need be
c) We do a Green New Deal – spending money into the economy instead of undertaking conventional quantitative easing.
In other words – I think the cash can be found to create a stimulus for the poorest in the UK and the cash can be found to create real investment needed to break the cycle of goalless financial speculation that constitues current saving to which we wrongly attribute the name investment.
Sure it’s simplistic: I know the detail is more complex, but narratives need to be simple, and these are. If they aren’t politicians don’t get them.
Best
Richard
This may be wishful thinking on my part, Richard, but I’m hopeful that the Lib Dem members of the government (with the exception a Danny Alexander, probably) will start getting cold feet over their entrenched position on the economy once the next set of economic data starts to emerge. In addition, with the party conference season due they’ll be picking up clear messages from the grassroots membership that if LibDems are seen to continue with this ‘see no evil, hear no evil’ approach any brownie points they’ve gained over recent months with the electorate (e.g by being seen to stand up to the Tories on the NHS, even though this is mostly guff) will evaporate and they’ll be back where they were earlier this year: i.e. facing oblivion as a political party. They have a choice.
Richard
Thanks for your comments
This is now all about how to get growth. I am a tax cutter and am in favour of cutting a) VAT b) NI especially in favour of the young c) giving tax credits for job creators d) investment incentives especially if job creating
Investing in the infrastructure and Green New deal all seem sensible of course. The time to do it is now. Keeping the narrative simple is important – the public increasingly understands something is deeply wrong with economic policy.
Best
Danny Blanchflower
Danny
I have no problem with those cuts – indeed, we know VAT cuts work as evidence proved it.
I am also working on an idea to give extra tax relief on employment costs; you are on the same wavelength.
But tax cuts are still supply side measures: positive action to stimulate demand is also needed and why I sugest them. I think the time scale for an impact to arise is shorter, VAT cuts excluded, which tend to have immediate effect.
Best
Richard
What both the US and UK need is a Keynesian stimulus via infrastructure investment combined with the collection of all land rent for public benefit. Since good public investment always feeds into land values, this would produce a virtuous circle of increasing land values and increasing revenues. The problem with this for the UK is that it would need to ensure jobs and profits stay in the UK so they can be taxed in the UK – as well as collecting the land rent. However, vested interests (mostly in finance) would ensure that land value taxation will never occur – after all land rent is the major source of the banks’ huge profits.
I’m in full agreement with much of this, however, there is one thing I take issue with:
“cuts to Social Security and Medicare.”
If I’ve understood the article correctly, why on earth should there be cuts to US Medicare and Social Security? Particularly as these programs largely pay for themselves in the States?
Pay down the deficit by all means, but with profits resulting from a fiscal stimulus, NOT cutting back on programs many poor people rely on!
As well as housing and infrastructure, I believe both the US and Britain must get back to some form of home grown manufacturing base, particularly in green energy such as wind and wave farms, geo-thermal and solar panels. There’s also no good reason we can’t produce our own electronic goods either.
The sooner we move the pendulum back from financialisation back towards making real things again, the better.
Bonjour,
It’s true, a stimulus is ‘Pure Keynsian’, mais some of us here in France are wondering, why tax people 50%, and then spend it on stimulus? That’s money en circle non?
Let’s just give up the facade that we need economie to grow every year for us to be ‘healthy’, or for the country’s people to live well.
non?
You seem to ignore the impact and importance of redistribution
If we have industry and workers paying tax, much of the stimulus, as long as measures to regulate speculation and proper capital controls to stop the outflow of investment capital are put in place, pays for itself. We are in a much better position of paying our debts. As witnessed in Ireland, Greece and Spain, austerity measures and cutbacks simply make a debt situation worse, not better!
We do need to reverse the trend of financialisation and start making things again, though, in order to achieve this.
Danny
A ‘spending on infrastructure stimulus’ sounds good, but our infrastructure spending is always liberalised i.e. spent with overseas firms, often, one way or another, involving their own workers.
I know its very facile to dismiss this as ‘racist talk’ (as it is, endlessly, on this site) while proposals for Keynesian stimulus measures keep coming without any reference to this point.
But we do need to recognise how the unswerving devotion of UK governments to being the most liberalised country in the universe effectively cuts out the possibility of any such stimulus measures having any useful effect.
I’d appreciate your views.
And as you’re well aware, I disagree with your naive view of the multiplier – and so do plenty of other left wing economists not in the Green New Deal group
But you dont explain why it is ‘naive’, even though you have repeatedly demanded evidence from me.
I point to the Irish example.
The blame for the crashed ‘stimulus’ there of house building (okay – private sector – until it goes bad) is always put on bank lending. The other factor in that bubble is rarely mentioned. The building boom was based not just in profligate lending but also in the availability of cheap Eastern European labour. The profit potential between those 2 was the big driver.
In 2008, one third of all remittances going into Poland were from tiny Ireland. That is not a negligible factor.
Now – look at Ireland – while Poland is doing fine.
Even without quantitative data, it is obvious that proper wages spent within the country would have better benefitted the Irish economy and better kept the ‘housing boom’ within the realms of reality.
How hard would it be to effectively clamp down on tax avoidance / evasion? Big Business may not like it, but surely if you live here and work here, you should pay taxes here, regardless of where your and your employer’s bank accounts are located!
@Stevo: My understanding of the US situation is limited, but apparently under normal circumstances, cuts to Social Security and Medicare would be political suicide. I remember reading an article citing a survey claiming 96% of conservative Republicans support current levels of spending on those. It only appears to be Big Business and the Tea Party that think spending on those should be vastly reduced. Plus their media sympathisers (mentioning none in particular…)
I have dealt with this issue in a number of reports – see the blog
Latest is for PCS on tax havens (just google those words)
Also see The Great Tax Parachute linked on right of blog
“@Stevo: My understanding of the US situation is limited, but apparently under normal circumstances, cuts to Social Security and Medicare would be political suicide.”
Well, as I understand it, due to Obama’s pathetic wrangling with the Tea Party over the debt ceiling, as part of the deal for raising the debt ceiling, (as if the US could really totally default!!) I believe the prospect of cuts to Medicare and Social Security, programs that, in the US, largely pay for themselves, are a very real possibility.
Due to these ridiculous wranglings, the Tea Party zealots now know that, whenever the debt ceiling comes up for renewal, they can blackmail Obama for as many concessions as they can get.
All he had to really do was to call their bluff and put the onus on them for deliberately ruining the economy and they would probably have folded. Who wants to go down as the party who caused the US to deliberately default? Instead, he conceded to them at every turn.
It’s about time this pathetic president grew a spine!!