...a blog by Richard Flowers

Monday, September 13, 2010

Day 3542: Economic Literacy Test: Caroline Lucas plays Mini-Me to Bully Balls Dr Evil


I am FED UP of being called "economically illiterate" by people who clearly wouldn't know one end of the economy from the other.

Usually it is the Egregious Ed, Mr Bully Balls who was, don't forget, special advisor to the Chancellor who outspent the government's income for seven years running while letting the banking sector play chicken with a housing bubble.

This time, though, it was the Sickly Green MP Radio Caroline Lucas, repeating the same deluded, deceitful and frankly DANGEROUS dribble on the World this Weekend.


The principle cause, the thing that turned the Wall Street Crash into the Great Depression was the decision by the American government that rescuing banks that had gone bankrupt gambling on the stock market would only encourage them to do it again: so called MORAL HAZARD. So they let those banks go BUST. That wiped out the savings of huge numbers of Americans, businesses, particularly FARMS, as well as individuals, and the American economy IMPLODED.

The effect on Great Britain was twofold: firstly, with the American banks gone, our supply of credit dried up and there was a credit crunch. Secondly, with the American economy gone, our exports dried up too.

British exports were ALREADY in trouble. For starters, during World War part one a lot of our export markets got pinched while we were busy. But then Mr Winston Churchill (remember him? Oh yes) had attached the pound to the Gold Standard at too high an exchange rate making our exports more expensive and so uncompetitive. And then the Unions (remember THEM?) went and called a GENERAL STRIKE which made our exports less reliable as well as even more expensive.

So by the end of the 1920's the economy was a bit TOTTERY anyway, and the American collapse knocked us over like a domino.

Add to that the fact that countries all over the world responded to the crisis in the WORST POSSIBLE WAY™ by throwing up protectionist trade barriers.

So suddenly Great Britain stopped making money.

THIS is where the spending cuts happened. In those pre-Keynesian days the government tried to balance the budget EVERY YEAR, rather than over the course of the economic cycle (if you are a Keynesian) or NEVER (if you are Mr Frown or his Sith apprentice Bully Balls or in this case Radio Caroline).

So the then Chancellor, Mr Philip Mount Snowden cut public sector pay by 10% AND (note this) raised income tax from 22½% to 25%.

This is GENUINELY a case of a government that is "taking money out of the economy". Taxation TAKES money from the economy. Government spending puts it back. In a "balanced" budget you put back as much as you take out. If you INCREASE tax and DECREASE spending the Government is literally REMOVING MONEY from the productive part of the economy.

If there is LESS money in the economy then FEWER people can buy things and this SLOWS the economy further.

The NORTH was hit much the hardest by the collapse in exports, because it was so heavily, too heavily invested in HEAVY industry: mining, shipbuilding, steel-working. In the South, more-flexible light industry sprang up: making things like washing machines and even cars leading to economic growth and recovery in those areas. This was the beginning of the North South DIVIDE as formerly-prosperous parts of the North remained stuffed (at least until rearmament came along and the Government suddenly needed a lot of steel and coal and ships).

Rearmament, incidentally, when the Government said: "forget balancing the budget; we need to buy stuff", is ironically one of the inspirations for KEYNESIAN economics, because that Government spending kick-started the economy.

Now there are some SIMILARITIES to today's situation and some GLARING DIFFERENCES.

We HAVE recently had a big crash on the bursting of an economic bubble; we HAVE been overly reliant on foreign credit (then American, today Chinese); we have seen Government income fall and expenditure rise; and we HAVE seen a MASSIVELY SPLIT Labour Party supplanted by a Coalition of Liberals and Conservatories who have to clean up the MESS.

HOWEVER, this time we SAVED the Banks (however ODIOUS they may have been before and indeed since) so we still HAVE an economy; this time our exchange rate is NOT chained to an absurdly macho level (yes, we were all wrong about that one); this time thanks to the European Union we DON'T see trade barriers flying up between us and our major customers; but equally this time the Government was ALREADY in a lot of debt because of years of uncontrolled overspending and manufacturing was already on its knees from decades of neglect by Governments of BOTH other parties; not to mention the TITANIC (in every sense) over-reliance on the financial sector to keep us afloat: something of a case of Mr Frown placing all our eggs in one ROULETTE WHEEL.

So once again I have to say it's just not as simple as saying "cuts=bad=great depression".

The DANGER of the economy tipping back into recession because of Government making deflationary spending cuts has to be weighed against the OPPOSITE DANGER of the markets losing confidence in British creditworthiness which would see interest rates shoot up, bank lending squeezed even tighter and a whole lot of people laid off when the money just plain RUNS OUT, causing an EVEN WORSE recession.

Frankly, it is seeing both sides of the DANGER that meant the Liberal Democrats had to change their minds about the urgency of the cuts. And anyone who's saying they've got a plan for the economy WITHOUT saying they've at least considered the other threat is deceiving you.

And speaking of things I have to keep repeating, Hard Labour (and Sickly Greens) are STILL calling the Coalition Cuts "taking money out of the economy". This is, to coin a phrase, economically illiterate.

For the last nine years, and for all of the next five (heaven help us) the Government has spent and will spend MORE than it takes out of the economy in tax.

i.e. the Government is putting money IN to the economy.

It has been possible to do this by running up a rather large tab… to the extent that we are in debt for getting on for a TRILLION POUNDS that is a MILLION times a MILLION pounds or twenty grand for every man, woman, child and fluffy elephant in the country.

That is in a word Radio Caroline might understand UNSUSTAINABLE.

The Coalition policy is NOT to "take money out" of the economy but to "put in LESS", eventually to STOP because it ISN'T OUR MONEY.

"Ah ha!" says Radio Caroline, "you're making the mistake of thinking of the country's economy like your household economy where if your income goes down you have to control your spending, but it doesn't work like that."

No, Caroline it REALLY REALLY does work like that.

In an emergency, you can borrow money to cover a gap between your incomings and your outgoings. Maybe there's been a personal crisis, maybe the tumble drier exploded, whatever. You talk to the bank and agree a bridging loan.

Government debt is just a really, really BIG bridging loan.

The "bank" in this case is the world money markets. And just like you might have to negotiate with the bank in order to get the money you need, and just as the bank might give you certain conditions, then likewise the Government has to "negotiate" with the markets, sometimes literally, sometimes by taking action that convinces the markets that the UK's finances are sound and that the investment is both worthwhile and safe.

And just like a bank, eventually, the money has to be PAID BACK.

Radio Caroline's solution is to dump our problems on future generations. Which just shows up the Sickly Green's promises of a sustainable future.

We've been borrowing for years and years and years; we just can't carry on like that.

"Ah ha!" will say Mr Balls, "but Mr Milton Keynes tells us that it is OKAY to borrow. When you are in a hole… KEEP DIGGING!"

Except this is only HALF of what Mr Keynes tells us. The OTHER half is PAY OFF THE DEBT in the GOOD TIMES. Which is exactly what we DIDN'T do for the period of the BOOM YEARS between the collapse and the credit crunch.

In the late 1930s the British Government COULD borrow money to spend on British industry precisely BECAUSE it had been running PAINFUL balanced budgets up to then; in 2010 we CAN'T because we HAVEN'T.

If you just KEEP borrowing money to prop up your Government spending you end up with a completely different economic model and it is called WEIMAR GERMANY.

The value of your currency collapses; your interest rates spiral out of control; and EVERYONE gets very, very poor very, very quickly.

And yes, that ended up with a nasty bully in charge as well, so you can perhaps see the attraction for Mr Balls.

And another thing!

If one more person repeats this nonsense I swear I will SPIT!
"If you make public sector workers redundant then they stop contributing tax to the Government's coffers"

It is NOT POSSIBLE for a public sector employee, no matter how lovely and worthwhile and socially valuable, to make a net contribution to the Treasury. Not even if you count all the VAT and airport tax and Stamp Duty that they might pay

Think about it: the VERY MOST that someone could possibly pay in tax is ALL of their earnings and if all their earnings come from the Government in the first place then the VERY BEST that the Treasury could ever do is BREAK EVEN.

And in practice you must have a bit of pay left after the tax or what do you buy your sticky buns with?

In pure CASH terms the Government is always ALWAYS better off NOT paying someone than paying them.

That does NOT mean that the Government SHOULDN'T employ people. Obviously there is a HUGE BENEFIT to be had in having teachers and doctors and policemen and poets laureate (er). And often – though not always – economies of scale mean that the Government can do this more efficiently than the private sector. Can but not necessarily does.

But suggesting that the Government will somehow be worse off if it employs fewer people is STUPID SOPHISTRY.

It's a CON: if you pay me twenty quid I'll give you a tenner back; so now if you don't pay me you'll not get that tenner – you'll be ten quid out of pocket! If you believe that then I'll have ten pounds please.

1 comment:

Jane said...

First of all -- a big thank-you. I think I understand economics, and then realise every so often that I need it explained to me again. So thanks from an economic illiterate.

Can you explain what you mean by balancing the budget over an economic cycle? How do you know how long the cycle will last in order to do that? My understanding is that the coalition is aiming to do it in 5 years and Keynsians such as Stiglitz and President Obama, and the Liberal Democrats before the election, are worried that is too fast and would prefer two parliamentary terms - i.e. ten years.