Politicians of all hues claim that they understand why people do not trust them, but if they do \u00a0then I see no evidence that the comprehension they claim to have is influencing their behaviour.<\/p>\n
Take the deficit as an example. \u00a0 In 2010 Alistair Darling passed a ludicrous Act declaring that the deficit would be halved during the term of the next Parliament. He might as well have passed an Act declaring that there was \u00a0going to be no rain in April \u00a0during that same Parliament. \u00a0He had \u00a0no control over either outcome, and each \u00a0was equally ludicrous. \u00a0Despite this obvious fact, \u00a0and the fact that this pointless gesture had no impact on Labour's election\u00a0prospects, \u00a0we now find ourselves in a situation where in 10 months time we will be asked to choose between George Osborne and Ed Balls, \u00a0both of whom will be offering us the equally ludicrous prospect that they will balance the government's budget.<\/p>\n
To put this \u00a0promise in context, \u00a0balancing the budget is an extremely rare event. \u00a0It happened in 1988 and 1989 on the back of a property bubble. \u00a0It also happened between 1998 and 2001, \u00a0in \u00a0this case on the back of the dot.com bubble. \u00a0Both bubbles burst and budget surpluses soon disappeared. \u00a0 This lesson is, however, important. Not only does it show that balanced budgets on the part of government can be considered to be more or less aberrational \u00a0behaviour, \u00a0it also shows that they can only happen when the economy has been booming.<\/p>\n
As I have said time and again on this blog, this is not by chance. There is a fundamental economic equation that always holds true which is that governments will always run deficits if consumers and business choose to run surpluses (in other words, they save) and there is an overall trade deficit. \u00a0In these situations a government deficit is not a matter of choice: it arises as a simple matter of fact. \u00a0When everybody else chooses to save them the government has no choice but to borrow. As the creator of currency, and as the lender of last resort, that is the role that the government inevitably gets in this situation.<\/p>\n
This role is not, however, a difficult one. It is only popular narrative that suggest that's the case. There is a simple explanation for this claim. When almost everyone in the economy is being cautious, which is the case at present, then the last thing that they are seeking to do when saving is take significant risk. \u00a0That means that they're looking to save by buying the safest product in town. It so happens that this is government debt. The self balancing nature of the economy is such that this means that if the government has to \u00a0run a deficit then there is, at least, an almost guaranteed market for its debt, and at a modest price because there are ample buyers for it.<\/p>\n
So let's face facts. First of all, \u00a0it is a simple statement of fact that unless any political party has a credible plan for boosting the economy then it cannot claim that it can and balance the government's budget at any time during the course of the next Parliament, or any time thereafter. \u00a0That simply cannot happen. \u00a0Balanced budgets only result from economic growth, whether that be sustainable or not. \u00a0Given that we have grown wary of bubbles, \u00a0this does, in effect, now mean that to win an election and promise a balanced budget a political party has to have a policy for sustainable growth. \u00a0No party has come near offering such a programme \u00a0at present. \u00a0As a consequence I can say with absolute confidence that \u00a0neither George Osborne or Ed Balls will balance the budget during the course of the next Parliament.<\/p>\n
And when we're facing facts let's also make clear that \u00a0no amount of cutting will change this situation. \u00a0In fact, it was simply make it worse. \u00a0If the government tries to cut whilst consumers are in net terms saving (which includes paying off mortgages), business is not investing and we continue to run a trade deficit, then all that the cuts achieve is a reduced rate of economic growth, increased unemployment, lost output and lost future capacity. \u00a0What those cuts cannot change is the overall level of the \u00a0deficit: \u00a0that continues to be set by the level of surplus that households, business, and the trade deficit determine. This is why cuts to date have had so little impact and why recovery has been so slow.<\/p>\n
So, in that case let's face another fact: \u00a0austerity is no way out of this situation. It literally \u00a0cannot work. \u00a0It is an economic \u00a0impossibility that it can.<\/p>\n
There are things that could make a difference. Those will be the subject of another blog.<\/p>\n","protected":false},"excerpt":{"rendered":"