Friday, October 30, 2009

The UK: Individual Liability for Government Debt

My original plan for this post was to highlight the disconnect between the stock market and the underlying state of the UK economy. However, there may be the start of a panic in stock markets, so it may be that the disconnect is starting to correct itself (see here for the UK and here for the US). As such, I will devote this post to a more general discussion of the current state of the UK economy, and the relationship between government debt and you as an individual.

Before starting, it is worthwhile providing some context on the UK economy. UK GDP sunk again in the third quarter, and the following are some of the reactions of analysts to the news:

James Knightley, ING

"UK 3Q09 GDP is awful with no positive news within the report ... More worryingly from sterling's perspective is the fact that the UK may be the only major economy to have contracted in 3Q09."

Brian Hilliard, chief economist at Societe Generale

"Very disappointing, the surprise comes in services where the business surveys seem to have been a little over optimistic. So we are significantly lagging the euro zone in terms of exiting the recession."

Unlike these analysts, I would not have been encouraged even if there had been 'growth' in GDP, as I do not believe that 'growth' derived from government debt accumulation is 'growth'. It is simply the foregoing of future wealth. I have written on this subject many times, and you may wish to read my most recent post on the subject (in relation to the US, but the principles are applicable to the UK). The key point is that GDP measures flatter the underlying state of the economy, as government debt accumulation drives GDP upwards.

As for more general indicators, over the last 12 months we have had a $bn 130 trade deficit, industrial production is down 11 percent on a year ago, and the official unemployment rate is just under 8% (from the economic and financial indicators in the Economist print edition). For the last indicator, I think that most people now recognise that the official measure is a fiction, and real unemployment is actually much higher.

Although there has been a brief uptick in sterling, the general trend appears to be relentlessly down:
But given the extent of the pound's rebound this week and lack of any major UK economic data or event on Friday, some analysts say the pound may give back some of those gains as attention turns to the Bank of England's policy meeting next week.

[and] "We have little doubt that the long-term fundamentally based sterling outlook has remained convincingly bearish, but there is a window where sterling could develop a `dead cat bounce'"
At present, the only significant increase in output comes from the Bank of England's printing presses (not literally, as they no longer physically print the money), and this may well be about to accelerate:

The Bank announced yesterday that it had reached its current £175 billion limit in asset purchases under its scheme of QE [quantitative easing, or QE - a euphemism for printing money], but the majority of City economists expect that it will seek permission from the Treasury to extend this limit next week.

Two thirds of the 62 economists surveyed by Reuters this week said that they expected QE to be extended by at least £25 billion, with many forecasting a £50 billion increase.

Yesterday’s money supply figures came after dire gross domestic product (GDP) figures last week, which showed that the economy was still in recession in the third quarter, contrary to economists’ expectations.

Regular readers will know that this printed money is being used to purchase UK government debt, and that it is therefore supporting the government's expenditure. It must be remembered that this printed money does not represent any kind of real growth in the UK economy, and simply (temporarily) hides the underlying state of the economy. I highlight this point because of the complete irresponsibility of government borrowing is being supported by the Bank of England (more of that later).

So what is the state of the government debt in the UK. The first problem is the matter of how to calculate debt. In a recent post on Conservative policy, I was encouraged to have identified that they are going to include Private Finance Initiatives (commonly known as PFIs) in the national accounts, a these have been used to hide government liabilities:
The Financial Reporting Advisory Board (FRAB), a body which advises the Government on its accounts, has indicated that the Treasury's previous definition of what PFI debt should fall on its books should be scrapped. A FRAB working group said the way the Government accounts for PFI makes it too easy for it to manipulate the figures so they either fall inside or outside its own debt totals.

The finding, which is expected to be endorsed by the FRAB, undermines recent calculations from the Office for National Statistics finding that only £5bn worth of PFI debt should be added to the national accounts. Its figure was far shy of the combined £48bn value of all PFI projects - but only because NHS debts were classified as belonging to the private sector.

The FRAB's working group warned that many of the PFI debts were being left off the balance sheets of both private and public sectors. It has urged the department to withdraw the system no later than 2008-09.

In addition to this, there are the many liabilities that are simply unfunded and unacknowledged. This is a report that describes the analysis of total government liabilities by the Centre for Policy Studies:
Brooks Newmark, the Conservative MP for Braintree, Essex, says in The Hidden Bombshell, published today by the Centre for Policy Studies, that government debt is actually £2,200 billion. In the book, Mr Newmark argues that the UK’s public sector net debt is equivalent to £85,610 per household and in the last year has risen by £346 billion — or by £11,000 a second.

Mr Newmark arrives at his figure by saying that official numbers do not take into account the full cost of projects financed through the private finance initiative (PFI), which by his calculation adds £139 billion to the public debt. “A major attraction of PFI is that, in theory, it transfers the risk of failure of a project from the Government to the private sector. However, in reality, the Government carries most of the risk ... £139 billion is a cautious figure as it does not include local PFI projects, some of which may fail,” Mr Newmark says.

Unfunded public sector pension liabilities, which the Government will need to pay, are also omitted and add a further £1,104 billion. Contingent liabilities, such as Network Rail, add another £22 billion. Finally, the £130 billion cost of recent interventions in the financial sector needs to be factored in — bringing the total “hidden liabilities” to £1,395 billion and the total debt to £2,200 billion.

You will note that there is some significant variation in the figures between the two reports above. However, whichever way the problem is regarded, the liabilities of the government far exceed the official liabilities. As such, the official figures for UK government debt and liabilities are gross distortions, if not outright lies.

We are now (I hope) all aware of the rate of growth in the UK's debt, which is increasing at an astonishing rate. The latest news suggests that the government does not think the rate of debt accumulation is enough, and are planning to further increase spending:

GORDON BROWN is planning a final public spending spree to help pull the economy out of recession and put pressure on the Conservatives over their plans for deep cuts.

The prime minister is keen to use the autumn pre-budget statement to announce a new “fiscal stimulus”, with billions of pounds of extra money for housing, infrastructure projects and training.

Recent figures showing that Britain is still in recession have convinced Brown that more spending will be required next year to support any faltering recovery.

However, perhaps the most worrying part of this is that the overall debts have been generated both through the 'good' and 'bad' times, and the recent spending spree just accelerates the trend. The worry this creates is that the deficit is structural and, looking forward, there is every sign that the problem will get worse. For example, the figures given above do not address the problem of government revenues, which will be strained due to demographic changes:
The population of the UK is ageing. Over the last 25 years the percentage of the population aged 65 and over increased from 15 per cent in 1983 to 16 per cent in 2008, an increase of 1.5 million people in this age group. Over the same period, the percentage of the population aged 16 and under decreased from 21 per cent to 19 per cent. This trend is projected to continue. By 2033, 23 per cent of the population will be aged 65 and over compared to 18 per cent aged 16 or younger.

The fastest population increase has been in the number of those aged 85 and over, the ’oldest old‘. In 1983, there were just over 600,000 people in the UK aged 85 and over. Since then the numbers have more than doubled reaching 1.3 million in 2008. By 2033 the number of people aged 85 and over is projected to more than double again to reach 3.2 million, and to account for 5 per cent of the total population.

As a result of these increases in the number of older people, the median age of the UK population is increasing. Over the past 25 years the median age increased from 35 years in 1983 to 39 in 2008. It is projected to continue to increase over the next 25 years rising to 40 by 2033.
This is a dual problem. As people get older, they demand more resource from the state, and as the population ages, the size of the tax base also diminishes. In other words, the output within the economy is going to be constrained at the same time as government costs will rise. If the UK currently has a structural deficit, this structural deficit is going to grow. Even if, and it is a very big if, the UK were to return to genuine economic growth, it will need to be very significant growth to offset the effects of demography.

The fundamental problem that the UK is facing is that there is no sector of the economy that is currently offering such opportunities for real economic growth. I have, on several occasions (even in the Guardian newspaper Comment is Free section) asked for answers on where the growth in the economy might come from. The problem was that I asked for specifics; which sector, and why the sector might grow? I have never once had a clear answer.

Without such growth, the borrowing of the UK government can not be sustained. Moreover, the current contraction in the economy may linger for many years to come (and I believe will become far, far worse). In sum, the structural size of the deficit is likely to continue to grow. In the face of this politicians of all hues simply hope that (as if by magic) the UK will grow itself out of debt, without ever explaining how. This is a hope with no foundation whatsoever. The world has changed and is a more competitive place, and there is nothing to indicate that the UK is well placed in the competition. It returns to the question of which sector will produce the growth.

All of this serves as context for the current state of government borrowing. Even with the massive levels of government borrowing, which flatters the actual state of the UK economy, the UK economy continues to shrink. Not only is the borrowing expanding at unprecedented rates, it is expanding faster than forecast, and that is before the latest proposed increase in spending:
Figures from the Office for National Statistics show that national debt is now equivalent to 59% of the UK's gross domestic product after borrowing grew by £14.8bn in September, compared with £8.7bn for the same month a year ago.

Total net public borrowing now stands at a record £824.8bn, up from £695.2bn (48.4% of GDP) a year earlier.

The £14.8bn borrowing in September was, however, lower than economists' expectations of £15.3bn.

The Treasury has officially stated that it expects borrowing for the current financial year to reach a record £175bn but economists expect it to be revised higher in the Pre-Budget Report, expected next month.

Vicky Redwood of Capital Economics said: 'At this rate, borrowing still looks likely to reach over £200bn, compared to Alistair Darling's £175 billion forecast.'

The fiscal position is indeed dire, and the problem is just going to get worse. Furthermore, even as government revenues continue to collapse, along with the collapse in the UK economy, there are still no firm plans to address the gaping deficit. The Conservative party is making some vague gestures in the direction at reducing the rate of debt accumulation, but not actually addressing actual reduction of the debt:
George Osborne, the shadow chancellor, laid out a detailed “austerity package” at the Conservative conference last month with £23 billion of cuts to Whitehall spending, quangos and public sector pay.
This is hardly an 'austerity package' but represents some tinkering at the edges, and I suspect that much of it will disappoint if enacted. I would normally give a figure for the debt that is accumulating, but will instead point you to the UK debt clock here. When you look at the clock, you should note that this is based upon treasury forecasts, not the real size of the actual debt. You will note the speed of the accumulation. Even on such inaccurately low figures, the debt is as follows:

£13,536 for every individual in the UK. That includes children, pensioners and the unemployed, none of whom contribute to servicing the debt. And it is growing at a record rate.

If the Centre for Policy Studies is correct that the real liability is three times the official figures, then the liability is nearly £40,000. However, within these figures there is a mix of potential and actual liabilities, so that it is hard to see where the final debt might lie. Even if we were to accept that the real liability is just half as much again, then the figure would jump to something like £20,000 per individual. And I repeat, it is growing at a record rate.

The purpose of this discussion is to highlight something about government borrowing - that the borrowing is actually being undertaken in your name, and that you are liable for the borrowing. Barring a few quasi-commercial entities, the only income the government has is the income of individuals and businesses. I highlight this point, because it always sounds more comforting when we hear the abstracted terms 'government borrowing' and 'government spending'. The terms hide the essential reality that the government is adding debt that you will pay. It seems an obvious thing to say, but I am not sure that most of us really overcome the abstract way that government debt is presented.

A useful way of thinking of government debt is if the government borrowing were to appear in your letter box every month in the same format as a credit card statement, with your individual share of the debt allocated to you. Although there is considerable argument about the real state of the overall debt, imagine if each person in your household were to receive a statement showing a debt of £20,000, and a demand for repayment of a percentage of the total debt (to continue the credit card analogy). This is what you would see on the credit card type statement over the last year:
  • Your monthly payments on the debt
  • The debt increasing faster than your payments
  • The minimum payments on the debt increasing in absolute terms
  • The increase in debt reflecting in a higher amount of interest repayments per month, as you are paying more and more just to service the previous debt
  • The speed of the increase in the size of the debt accelerating at an ever faster pace
  • An overall massive increase in your debt
  • That a greater proportion of your income will be needed to service the debt, month on month
If you were to see this on a real credit card statement, and if you are financially responsible, you would want to know that your future income would certainly increase, your costs were about to decrease, or a combination of the two. Without this you would be worried. The trouble is that there is every indication of increasing costs and decreasing revenues, so most sensible people would call a halt, before getting into deeper debt. The answer of the UK government is to increase the rate of debt accumulation.

Returning to the arrival in the letterbox of our personal portion of the government's debt obligation, how might your children feel if they saw their statement suggesting that they already hold a debt of £20,000, and they can see that the obligation is growing at an ever faster rate? Furthermore, how might they feel if you tell them that their share of the debt, by the time they start working, will grow as there are ever less people actually servicing the overall debt. The demographic change means that they will see more and more debt loaded into their statement, as the numbers of individuals retiring from the workforce increases. Their debt burden is set to explode, unless there is a magical period of hyper-growth of real output within the UK economy.

The debt on the statement that you hand to your child will already be something like £20,000, and, I am guessing that they will not have too much optimism about the future. Not only will they have to pay for the huge interest on the debt, maintain repayments on their share of the debt, they will also have to pay taxes for current expenditure.

The problem is that we have simply become used to thinking about these government debts as abstracted from ourselves as individuals. If you think of opening your credit card type statement, and seeing this actual debt accruing, you would be outraged. The way that the government gets away with profligacy is by abstracting away from the reality that they are putting you in debt. It is in their interest that you never see the debt in this way, but the reality is that this is what is actually happening. For example, when the government spends money to stimulate the economy, it is like you spending money on your credit card. In both cases your personal debt obligation has increased, in both cases activity in the economy increases. Whilst government pays a lower interest rate than you might (for the moment at least), in both cases your personal debt burden has increased.

The point of this post is to serve as a prompt for you to think about the underlying reality of what the UK government's debt means for you as an individual. It is not really the government's debt, but is in fact your debt. The government will not pay back this debt, you will. The politicians pretend that debt accumulation is a solution. But how convincing a solution would it appear if the consequences were to appear every month in your letter box, in the same form as a credit card bill? I suspect that the pseudo-intellectual arguments that are presented to the public would never withstand such an open approach. If the reality were presented in this way, not as an abstraction, you would see the justifications for the accumulation of the debt for what they are. Fantasy or outright lies.

Whatever your personal political affiliation, my suggestion is very simple. When the government borrows money, take it personally. It is you that they are putting in debt. When minister 'x' of minister 'y' self-importantly makes an announcement of spending more on 'a' or 'b', think of how it might look on your credit card type statement.

Take it personally because they are adding to your personal debt
.


Note 1: The credit card type statement is, of course, an impossibility due to the overly complex tax system, and changes in each individual's life circumstances seeing alterations in their share of the obligation. Also, for some individuals, such as the retired and unemployed, they would not see any obligation at all on their statement. However, I hope that it is an interesting way of seeing government debt.

Note 2: There are more calls for expansion in quantitative easing, and I am certain that the Bank of England will continue. Inflation has finally fallen close to the 1% point at which they must write a letter of explanation. This from the Telegraph:
The Bank's Monetary Policy Committee, which is meeting this week, will be pushed by economists to raise the amount of bonds and gilts it plans to buy by a further £50bn, following the recent news that unlike almost any other major economy Britain remains mired in recession. The increase would mean the Bank would soon be holding bonds worth more than 15pc of Britain's entire economy in its balance sheet – unknown territory for any developed world central bank in modern history.
The only problem with the scenario of falling inflation is the weakening £GB, which will see inflation imported in higher prices for goods from overseas. Just as I predicted a continuing inflation before QE, specifically because of the fall in the value of the £GB, the same will happen again. Just as before, there will be a time lag due to orders already in the system, but inflationary pressures will reappear. Whilst the $US has also been suffering, and trade is still (for the moment) largely priced in $US, the UK economy is in a worse state than the US, is printing proportinally more money, and the £GB will therefore trend lower against the $US over the short to medium term. Comments on this welcomed.

Note 2: It seems that the UK is about to break up the too big to fail banks, which is a rare piece of good news. It appears that this is being imposed upon the government by the EU, rather than being domestic policy. However, it is happening, and it is finally something with which I can agree. On the other side of the coin, I suspect that there may be some further interventions and other shenanigans, but have not had a chance to look into the detail. If you have more details, please feel free to add something on this, as it may be a while before I post again.

57 comments:

  1. Whilst I agree totally with this piece, I have noticed that many commentators, such as Polly Toynbee, are branding analogies between the national economy and household budgets as "economically illiterate", so that such easy-to-understand comparisons are becoming off-limits.

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  2. Lemming:

    Quite a fair comment, although I have given up on Polly. I wrote this in part in response to a survey I read, in which many people were against cuts in expenditure, and were apparently happy with the debt spigot.

    I am guessing that, for the regular readers/commentators, I am preaching to the converted. This is aimed at newer readers, and will hopefully make them think about what the borrowing will mean for them.

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  3. Government Debt is utterly different from Private Debt

    An interesting but disappointing post, as I think you repeat the tired old myths about government debt.

    For example, when the government spends money to stimulate the economy, it is like you spending money on your credit card

    Unfortunately, it is utterly different.

    The government is not an individual.

    The government has the power to rollover much of its debt. As long as people keep purchasing the debt, there’s no problem.

    Furthermore, the government has access to tax receipts which grow over time, which can effectively mean that the cost of interest servicing falls as the population rises.

    By 2031, the UK population will be over 70 million, which means a growing population with growing tax receipts in a growing economy.

    Much of the debt will be rolled over, and - if we fix our fundamental macroeconomic policies by returning to a sane Post Keynesian system - the individual cost of interest servicing will fall over time, as the tax-paying population rises and the economy grows.

    As people get older, they demand more resource from the state, and as the population ages, the size of the tax base also diminishes. In other words, the output within the economy is going to be constrained at the same time as government costs will rise.

    There’s a lot of evidence that this fear is vastly overblown, but if true, then the solution is social policy to encourage people to have more children and more immigration.

    Of course, the truth is that science and technology give us astonishing possibilities for increasing productivity and output in the future, so the current idea of a shrinking tax base and a large population of old people “leaching” money from young tax payers assumes there won’t be large increases in output and productivity in the future, in ways we can’t even imagine now.

    Regular readers will know that … [the Bank of England’s] printed money is being used to purchase UK government debt, and that it is therefore supporting the government's expenditure.

    I note that your whole argument is actually undermined by this observation.

    That fact that the Bank of England can indirectly support the issue of new government debt simply proves what the neo-chartalist economists like Bill Mitchell of BillyBlog have always argued: that a government that issues Treasury bonds in its own currency can never go bankrupt.

    It always has the power to meet its debt obligations.

    Public debt is vastly different from private debt, and always will be.

    The fundamental problem that the UK is facing is that there is no sector of the economy that is currently offering such opportunities for real economic growth.

    This is a problem largely caused by grossly incompetent financial deregulation and trade policy (macroeconomic policies). It can be corrected with a serious UK industrial policy, by doing what Germany does: develop manufacturing again and in particular high tech industries through strong state support and R&D.

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  4. Here is an excellent site debunking the "government debt will bankrupt us" all myth:

    Why Debt Doomsday is a Myth

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  5. I have been reading your posts for a while and still thoroughly enjoy them. Congratulations on the success you have had with it, and I will continue to read;
    However if I may I would like to say I have come to view your posts as less essential to my reading as the months have gone by and I thought I would offer a short comment about this which may be of some benefit.

    I believe the main reason for this is not a lack of research on your behalf and nor do I think you are particularly repeating yourself (as I said I still do enjoy reading the blog and will continue to do so) but perhaps I feel you do not take on board fully some other viewpoints.

    For example as much as I believe that you do read and take seriously comments from those such as LordKeynes and I believe you are more than capable of understanding the points he puts forward; I still think there is a large part of you which is unwilling to exchange some of your long held views on for example government expenditure, even in the face of strong evidence.

    I am not saying I disagree with you or fully agree with LordKeynes, but I often find myself thinking that your blog could become greater, and perhaps even come to be known in the mainstream and enjoy some influence if it were perhaps a little more rounded.

    Thanks

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  6. Hi Cynicus

    Just so that i can keep an eye out for you in the future on the guardian website - what is your user name?

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  7. CE, I hope this is on topic as continuing with UK reality check.

    I'd be very interested to know your views on the Land Value Tax campaign and Fred Harrison's prediction of a (the) 2010 depression based on an 18 year cyclical bust in land values.

    What is Land Value Taxation?
    http://www.landvaluetax.org/what-is-lvt/

    “Land Value Taxation is a method of raising public revenue by means of an annual tax on the rental value of land. It would replace, not add to, existing taxes. Properly applied, Land Value Tax would support a whole range of social and economic initiatives, including housing, transport and other infrastructural investments. It is an elementary fiscal measure that would go far towards correcting fundamental economic and social ills. The value of every parcel of land in Britain would be assessed regularly and the land value tax levied as a percentage of those assessed values.”

    The Chaos Makers: The Dreamers & The Deceived by Fred Harrison (PDF)
    http://renegadeeconomist.com/wp-content/uploads/2009/04/the-chaos-makers.pdf

    "Insufficient attention has been paid to the ways in which the chaos makers in the land market shape our destinies. Land supply is in fixed supply in those places where people need to live, close to the opportunities for employment. ...speculation in land pushes its price beyond affordable limits ...instability manifests itself in myriad forms of conflict that torture the industrial economy (labour relations, unemployment, etc). The treatment of rent as a public revenue would eliminate the acquisitive force behind the booms and busts. The fiscal reform proposed here would ensure that the short-term private interests of the individual would converge with the long-term interests of the community. This would enable people to plan the accumulation of savings over their earning lifecycle to the point where the price of capital would drop to very low levels: it would be at this point that poverty and unemployment would be permanently eliminated within a system of sustainable development."

    More detail books/articles at http://www.fredharrison.org

    Land Value Taxation Campaign - How should we be campaigning? by Fred Harrison
    http://www.landvaluetax.org/the-campaign/how-should-we-be-campaigning.html

    "It's inviting middle-class home-owners (today's aristocracy, in political power terms) to honour their value system - pay for what you get, and get rid of taxes on the incomes you earn. This is the language of a political/moral prospectus that the voting majority - middle-class home-owners - would not be able to oppose, publicly."

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  8. It doesn't add up...November 2, 2009 at 12:54 PM

    "Lord Keynes" should try telling it to the citizens of Argentina or Zimbabwe. And I see we have the neo-Ricardians here too...

    Perhaps it is worth adding the private debts of UK citizens. Mortgages outstanding exceed £1.2 trillion, up from £535 billion in 2000. That's £20,000 per head, man woman and child right there. Moreover, essentially the entire increase since 2000 has been funded by borrowing abroad via a mixture of short term bank deposits and selling of mortgage securities to overseas interests.

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  9. Did you read what the Skeptical Economist said about people like you, Cynicus? He said you're part of the "Doomsday Squad" and that your kind dominate the media with "doom, gloom and scary music in the background". I don't know about everyone else, but I think it must be pretty cool to decide goes on Forbes on Fox.

    Speaking of Fox, What are Hannity and Colmes realllly like in person?

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  10. I wouldn't worry about the naysayers, CE. Particularly not the ones who post as "anonymous". Your posts remain essential to me and Im sure a great many other people.

    Lord Keynes will never agree with you. From an external perspective he is very good at using economic buzzwords and quoting obscure economists (and sometimes well-known economists).

    But the fact is, the economists haven't done such a great job lately, have they? I've never believed that all wisdom lies in the words of those that have gone before. If Einstein had believed that we'd be far poorer for it.

    I'm no economist, I acknowledge. But I've been in business all my life and I'm no stranger to the way money works. Your position rings more true to me for the most part than Lord Keynes' long posts.

    I mean no disrespect to the Lord who is clearly eloquent, intelligent and confident - only that I tend to find myself muttering "wake up and smell the coffee" every time I read his responses.

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  11. Re Lord Keynes comments ( basically that Govt Debt is not a problem) :

    I read that, by one definition

    GDP = private consumption + gross investment + govt spending + (exports - imports )

    Now, 'govt spending', I imagine, would more or less equal 'taxes' + 'govt borrowing', where govt borrowing = govt debt.

    ( Correct me someone if I'm wrong)

    So , when we get to the all important Govt debt to GDP ratio, we get DEBT/GDP = govt_debt /( a load of other stuff + govt_debt)

    Keen mathematicians will notice that the term 'govt_debt' occurs in both the numerator & the denominator.

    [This is because 'govt spending' is - for some reason - *included* in GDP. ]

    Consequently, if we imagine 'govt_debt' approaching infinity, the debt/gdp ratio will NOT approach infinity.

    It will approach ONE.

    A dept/GDP ratio of ONE is obviously manageable ( hey look at Japan!).. so... by this faultless reasoning ..an actually *infinite* govt debt is PERFECTLY ACCEPTABLE.

    We could sit here with literally INFINITE British Govt Debt & we could all be quite happy because the debt / gdp ratio would only be a mere miserly penny pinching ONE.

    Easily manageable. :-)

    Now, it seems to me - on purely common sense grounds if nothing else - that an actually infinite govt debt would NOT in fact be supportable.

    Yet the debt/gdp ratio would be fine - basically because we would have pretty well infinite govt spending adding to GDP.

    If we accept that debt cannot , in reality, in any practical sense , go to infinity, then we must admit that using debt/gdp ratios to warn us of impending disaster is not a good tactic. Because ... well, see above.

    Debt/GDP will not warn us of anything.

    It will obstinately stick around a value of the order of 1 no matter how much the govt borrows, basically because the govt *spends what it borrows*.

    So again, debt/gdp values *will not warn of anything* , least of all impending disaster.

    All that born in mind, let's imagine that the BOE eventually one day stops buying long dated gilts & the market starts to demand higher rates if it going to continue lending....

    There could, at least concievably, come a point where we cannot face the interest rates demanded & consequently have to face the prospect of *no more borrowing*. ( QE was the way out of this thorny little problem for a while..)

    Where do we turn then ?

    To announce that this will 'never' become a real problem seems to bit on the optimistic side to me.

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  12. Once again re Lord Keynes:

    On the aging population question, you suggest that an aging polulation can be well supported by allowing more immigration ( presumably of the young).

    But you only have to look around at the sheer number of long term unemployed young (oop north if nowhere else) to know that just because you have a large population of young people, you *aren't* neccessarily able to find productive-old-folk-supporting work for them to do.

    The problem thus is not one of 'too few young folks' but one of 'too many old folks' for the productive / wealth generating part of the economy to support.

    It's a 'good jobs for sufficient of those still young enough to work' problem. If we had the jobs, then sure, we could import Hungarian kids to do them.

    But we don't & (imho) won't.

    There will be no further foreseeable demand for unskilled manual labour at 400 quid a week if the job can be outsourced to the Far East at 50 quid a week.

    The vaunted / late lamented 'service economy' was in fact a mirage powered by ever increasing debt / borrowing. When that blows away like the vaporous dream it always was, what are we left with ? Dole queues & The New Austerity, IMHO.

    ( Of course, there will be govt financed 'job creation' left right & centre. Community Arts Projects, etc etc. Anyone else recall the days before Brown opened up the gates to any & all forms of 'financial engineering' ? Pretty grim huh ? Well, that, I'm afraid, was reality. We maxed out the credit cards, decieved ourselves our houses were all worth half a million quid, borrowed to the max on that basis, new car every couple of years, granite work surfaces all over Lancashire ....had a whale of party. Now we have to pay it all back. With interest. )

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  13. I'd just like to oppose Lord Keynes views on Government debt.

    It would seem LK's belief is that the Government can spend more or less what it likes and rack up as much debt as it wants, on the basis that the future is always bright.

    With a massively expanding population, and a somehow rejuvenated manufacturing economy then there will be plenty of tax revenues to pay off debt, so need to worry ........ but what happens if none of this happens?

    Structurally, the UK is not well placed to be a manufacturer, and high tech industries do not support a dramatic increase in employment. They tend to be highly skilled but small workkforces.

    Britain may be a magnet for unskilled third world or Eastern European workers, but these people will never transform the UK economy into a high tech and large manufacturing economy. In fact they may well act as a further drag on the countries ability to pull its self up by its boot straps.

    There is also the argument that should the country struggle economically, then many immigrants may well up sticks and be off to somehwere else

    ....... I could go on, but suffice to say there are many issues which undermine the belief that the futures always bright.

    The sensible way to deal with the current situation is to base it on whats real here and now. When and if LK's scenario comes true then that gives the UK a bonus to be enjoyed at the time.

    I worked in Sales for a long time and met many people who spent their 'bonus' before they earned it. Funnily enough I saw a lot of flash motors sent back early !

    Pretending that everything will be o.k. in the future is a very dangerous policy to follow both privately and at a Government level.

    ReplyDelete
  14. Response to Chaingangcharlie

    But you only have to look around at the sheer number of long term unemployed young … to know that just because you have a large population of young people, you *aren't* necessarily able to find productive-old-folk-supporting work for them to do … There will be no further foreseeable demand for unskilled manual labour at 400 quid a week if the job can be outsourced to the Far East at 50 quid a week.

    You are entirely correct.

    That is why I stressed that we need to fix the fundamental macroeconomic problems: we need to return to policies of full employment.

    That means the UK needs to do the following:

    (1) Introduce effective financial regulation which separates commercial banks from investment banks and that can channel money to productive investments;

    (2) Trade and tax policy that prevents outsourcing and loss of manufacturing;

    (3) Government full employment policy, specifically, industrial policy to provide both jobs for unskilled and skilled labour.

    ReplyDelete
  15. Response to Mr Welldodgy

    It would seem LK's belief is that the Government can spend more or less what it likes and rack up as much debt as it wants, on the basis that the future is always bright.

    Unfortunately, that is not what I said.

    I said that large government debt is not necessarily a problem if you have good macroeconomic policies, not that the government can borrow without any limit or endlessly.

    Structurally, the UK is not well placed to be a manufacturer, and high tech industries do not support a dramatic increase in employment. They tend to be highly skilled but small workforces

    It is undoubtedly true that it is hard to compete with the East Asia in unskilled manufacturing labour (e.g., producing toys, clothing, footwear etc), but semi-skilled and skilled labour is still a strong option.

    The solution is to provide training and education to the UK’s young unskilled labour and provide jobs in these sectors.

    There are plenty of practical plans for an effective UK industrial policy:


    An Industrial Strategy for the United Kingdom
    http://www.tuc.org.uk/extras/industrial.pdf

    Nations Choose Prosperity: Why Britain Needs an Industrial Policy

    ReplyDelete
  16. Response to Steve Tierney

    Lord Keynes will never agree with you. From an external perspective he is very good at using economic buzzwords and quoting obscure economists (and sometimes well-known economists). But the fact is, the economists haven't done such a great job lately, have they? I've never believed that all wisdom lies in the words of those that have gone before. If Einstein had believed that we'd be far poorer for it.

    As it happens, post Keynesian economists did predict the current crisis!

    So they have an outstanding track record.

    There are 11 prominent economists who predicted the crash:

    Dean Baker,US
    Wynne Godley, UK
    Fred Harrison, UK
    Michael Hudson, US
    Eric Janszen, US
    Steve Keen, Australia
    Jakob Brochner Madsen and Jens Kjaer Sorenson, Denmark
    Kurt Richebacher, US
    Nouriel Roubini, US
    Peter Schiff, US
    Robert Shiller, US.


    Did Heterodox Economists Do Better At "Calling It" Than Mainstream Ones?


    Now of these 5 are Post Keynesian (Baker, Godley, Hudson, Keen, Sorenson), and 1 a combination of an Austrian and Post Keynesian (Janszen).

    That is to say, over half of them were post-Keynesians.

    In fact, Post Keynesian economics has a well developed theory of financial crises:

    If they were to hand out medals for predicting the global financial crisis, the Gold Medal for having predicted the crisis must go to Irving Fisher, who in 1933 developed the "Debt Deflation Theory of Great Depressions" …. Silver goes to Hyman Minsky [a Post Keynesian], for combining Fisher's insights with the vision of a cyclical economy he inherited from Schumpeter, and investor behaviour under uncertainty he acquired from Keynes, to develop the "Financial Instability Hypothesis". [Steve Keen wins bronze] for having taken these two inspirations and developed mathematical models of financial instability in the early 1990s … [There are] a substantial number of [post-Keynesian economists] … in non-orthodox academic economics who, by their own developments of Minsky's analysis, also deserve awards for prescience. Prominent here are Wynne Godley, Marc Lavoie, Jan Kregel, Randy Wray, and Michael Hudson. …

    Predicting the crisis: Medal winning analysts

    See Steve Keen's blog:

    Debt Watch

    ReplyDelete
  17. ...the solution is social policy to encourage people to have more children and more immigration

    Lord Keynes

    What happens to the countries supplying the immigrants?

    ReplyDelete
  18. Reply to Adam

    Fred Harrison is a follower of Henry George (that is, a Georgist). I dont think Henry George cyclical explanation of recessions is very convincing, but I would have to look at it in more detail.

    You can see his site:
    http://www.fredharrison.org/

    ReplyDelete
  19. Lord Keynes has set me thinking.

    Until recently I presume that a country's population would increase over time naturally, either to a level that could be sustained economically, or limited by the rate at which women could give birth. Adam Smith's pronouncements would all have been made in this context.

    Now, we have a situation where people choose whether or not to have children in a far more conscious way than ever before. Can we assume that this is an insignificant factor economically? Lord Keynes is confident that the UK population will increase, thereby absolving us of any debts incurred today, but a part of his formula involves importing people from abroad - presumably from the countries he his hoping to sell goods and services to in the future.

    I notice that the UK's total fertility rate (TFR) is, indeed, up on what it used to be, being at 1.94 births per woman, but this is still below the replacement rate of 2.1. Interestingly the TFR for Poland, one of the main sources of our imported labour is way down at 1.28, and it is 1.3 for Latvia, Germany 1.4, Italy 1.47, Russia 1.5, France 2.01 (all from Wikipedia). I am sure that these figures can all be broken down further into different ethnic communities etc., but the main point is that we cannot take for granted that the obvious customers for our industrial renaissance will be there, even if we've engineered a temporary population boom of our own.

    ReplyDelete
  20. Lord Keynes" should try telling it to the citizens of Argentina or Zimbabwe.

    Argentina's metdown in 2001 is a textbook example of how neo-liberalism, not Keynesianism, can ruin an economy.

    With respect to debt, Argentina’s first major problem was the fact that it borrowed money in US dollars: its government bonds were denominated in US dollars, and many private firms were allowed to borrow heavily in US dollars too. That was insane. A sovereign government should always borow in its own fiat currency, as I said in my earlier post, and there should be regulation of private borrowing in foreign currenices in any country to make sure this does not become too great.

    Secondly, Argentina had a currency board that pegged the peso against the US dollar, in a way that was unsustainable.

    When the US dollar became very strong in the late 1990s, this led to an overappreciated peso that ruined Argentina's exports.

    A free floating currency managed only in times of crisis would have been better.

    As for Zimbabwe, it was a country under international sanctions that prevented it from obtaining foreign exchange. It also suffered massive supply shocks due to droughts and the seizure of farms in a way that crippled production, at a time when the government did recklessly expand the money supply.

    But this has no relevence whatsoever to Britain: that the UK is not like Zimbabwe should be self evident.

    If (1) Britain's agriculture was crippled by transferring ownership and management of farms to people who were incompetent, and (2) if it had severe droughts and (3) came under international sanctions, then you might have a case.

    ReplyDelete
  21. @Lord Keynes: So some people you agree with predicted the crash. So did I, but I don't see me on your list.

    Lots of normal people predicted the crash, because anyone with half a brain knows that you can borrow money and spend it for only so long. It doesn't matter if you are a person or a govt. Eventually the facts of life catch up with you. The relevant one here being - you borrow money, you have to pay it back, with interest, OR ELSE. Eventually the interest alone will consume ALL of your income.

    You can quote all the fancy economists with letters after their names (a lot of which are probably paid out of my hard earned tax payments) you like, but you are going to be sadly mistaken if you think that a country can run a budget deficit of 14% of GDP with no consequences.

    ReplyDelete
  22. The problem I have with all this is the lack of any details of the alternative(s). Apart from Lord Keynes, no one seems to be saying anything concrete about what Britain should do in the future to get to a more sustainable footing. Britain DOES need proper industrial policy that builds on strengths and uses the spare capacity in the economy (i.e. people). Technology in the broad sense is an area we should be concentrating on, not science or engineering. Technology is where science, engineering, services and markets meet. Look at Apple as an example if you do not know what i mean by this. Britain can do this and generate real wealth. Let China do all the mass produced easy stuff. All this debt stuff is a waste of time, move on. The banking system will end up paying most of what it got back. The real problems are climate change, third world development and real wealth creation for real people.

    ReplyDelete
  23. You can quote all the fancy economists with letters after their names (a lot of which are probably paid out of my hard earned tax payments) you like, but you are going to be sadly mistaken if you think that a country can run a budget deficit of 14% of GDP with no consequences.

    Unfortunately, government debt is nothing like private debt.

    The proof is easily demonstrated.

    In 1945, the US had a government debt to GDP ratio of 117.5%.

    In Canada, the federal debt to GDP ratio was 120% in 1945.

    New Zealand's sovereign debt was 145% of GDP in 1945.

    The Australian government's debt was 120% of GDP in 1945.

    So were all these countries ruined in 1945? Did they soon all collapse after the war, under the weight of debt servicing?

    On the contrary: all these countries and dozens more with huge government debt went on to enjoy the most prosperous boom in history, with high growth rates and massive increases in living standards It's now called the "golden age of capitalism".

    The debt to GDP ratios fell rapidly and some to less than 10% percent, which meant the debt servicing costs fell rapidly as well.

    With the right macro-economic policies, a government can easily manage large amounts of debt.

    Get used to it: government debt just isn't like your personal debt. Any such analogies are misguided.

    ReplyDelete
  24. Mark (Cynicus)

    I think you have previously asked the question: why do governments need to borrow at all? Presumably for 'investment', a word which I would have assumed usually applies at the start of some enterprise or other. But the UK is a very old country: what exactly is it that we're supposed to be starting that we haven't done before? As the deficit has been with us for years, we must have been investing in something for an awfully long time. When will the investment stop?

    Am I right in thinking that there are different types of government debt? There's a difference between being in debt to foreigners and being in debt to your own population..? Is that yet another variable that renders debt-to-GDP ratios meaningless?

    And is the amount of government debt which can be regarded as manageable affected by the level of the population's own personal debt? I am pretty sure it must be.

    ReplyDelete
  25. @it doesn't add up

    I'm new to the LVT perspective and I appreciate your pointing me towards the appropriate school of thought:
    http://en.wikipedia.org/wiki/Neo-Ricardianism

    @Lord Keynes

    Thanks for the '11 economists' and the Fred Harrison links.

    --

    The only thing that troubles me about UK government is the opportunity cost to creditors given that we don't have any viable production with which to settle our debt.

    In 1945 there were obvious prospects for growth given the global post-war rebuild. We just don't have that space to expand into, and the prospects are made even worse with dwindling supplies of cheap energy. The longer our politicians go on spinning their fantasy stories of "growth", the more itchy investors are going to become.

    Just look at the all time highs in gold. Institutional investors are moving in now before they are forced in later. This is a huge no vote of confidence in paper assets including government debt. When China opens a market for its paper, I just don't see how the UK will find buyers for its maniac levels of borrowing. It seems like every month S&P threaten to downgrade UK debt.

    ReplyDelete
  26. @ Steve Tierney.
    you seem to be suggesting I have remained anonymous as though I have somehow jumped in and shouted some abuse and then ran away into a corner.. I simply used anonymous as many people on here do because it was the simplest option, I dont have a livejournal account.

    Unfortunately neither do I have the allowance from my place of work to read and reply on here so I am simply trying to make a short point about the blog - I didnt think the username would be of concern to anyone.

    I also stated that the blog is still very good, and that I enjoy it, how exactly that is nay-saying I am unsure.

    LKeynes has already refuted most of the points you made, however one of the things I was trying to get at was that if CE was to change tack slightly at some points within the blogs he might be able to save some of the less pertinent points which are repeatedly raised and have to be repeatedly refuted by those who bother to research.

    One of the above posters 'sobers' for example has made some evidently non-sensical points such as 'I dont see me on your list' which is irrelevant and ignores what LK in that instance was replying to.

    I would hope that if CE were able to back away from some of the debt/gdp ratio posts and focus in on some other areas it might make the site more influential to a wider audience, and perhaps discourage some from jumping in without reading what others have actually said (to hope that they would actually go and read a few hundred articles is sadly a hope too many for now).

    Its only on here that I would be willing to offer any criticisms as I would expect them to be taken on board - CE is clearly very willing to listen to differing points of view.
    Outside of this board I would only ever state the positives about it and try to get as many people as possible to read his blog as I think he can be a factor in changing peoples thoughts about debt and the way politics and business are conducted across the country.

    Once again thanks, and keep up the good work.
    Hugh

    ReplyDelete
  27. @ Lord Keynes: Hmm, 1945 was a good year for debt it seems. I wonder why? Ah perhaps the exertions of a world war had something to do with that.

    If you want to equate what we are going through now with defending ones nation from a megalomaniacal pyschopath, then by all means go ahead. Somehow I don't think building tanks, guns, planes and ships to defend your country from destruction compares with spending equally large sums on providing benefits for a large proportion of the nation to sit on its backside, and to fund an equally large proportion of the nation to do non jobs such as equality advisers and other such pointless activities, but hey, who am I to criticise? Just a nobody who lives by the motto 'neither a borrower or lender be', oh and pays taxes that funds the current largess.

    I have dug out the figures for the post war years (link here: http://www.ifs.org.uk/bns/bn26.pdf) and they show that yes, the UK did have a large budget deficit of 6% of GDP in 1946, but that rapidly became a budget SURPLUS of more than 2% of GDP for the next few years.

    I don't see any one from either party suggesting policies that would reduce the deficit in the same way now as the late 40s. All we get is tinkering at the edges from the Tories, and 'full steam ahead' on spending plans from that financial genius Gordon Brown.

    An economy can sustain a budget deficit of around the long term growth rate (roughly 2% in the UK). Anything more than that and you are asking for trouble.

    If neither party gets hold of this issue, makes significant spending cuts, and tax rises, then the bond market will take the 'hard decisions' for us.

    Debt is nothing other than slavery. If you owe a man money, especially a lot of money, then he owns you and what you do. Ditto for countries. You may wish to see the current and future generations of this country enslaved to decades of hard labour paying back debt run up by their forebears, but I don't. Such a view is incredibly selfish in my view.

    ReplyDelete
  28. See this great interview with James K. Galbraith on Youtube:

    Bill Moyers: James K. Galbraith (1)

    ReplyDelete
  29. Surely immigration of the kind we have experienced over the past 12 years will make things worse? The majority of immigrants arrive here through the "family reunion" route and are in no way selected on the basis of their likely economic contribution. Most of them from from "communities" which demonstrate:

    1) High male unemployment levels;
    2) Low earnings levels;
    3) Low rates of female participation in the labour market;
    4) High birthrates.

    Let us imagine Mohammed, born in the UK to Bangladeshi parents, employed in a job paying slightly above minimum wage. At the beginning of year 1 his arranged bride enters the UK. At the start of year 2, their first child is born. Futher children follow at the beginnings of years 4, 6, 8 and 10.

    What is the effect on the public finances? It seems to me to be pretty obvious that from year 2 until the time their eldest leaves school (year 21)they will represent a huge financial drain, making debt interest payment harder. What happens after their children start leaving school depends on how well integrated and educated they are (i.e. do they get high paying jobs, or do they in turn import spouses and start producing lots of children) but , even on the most optimitic assumptions, it is difficult to see how the ability of the UK to pay interest on its Government debt could be improved before, say, 2035.

    ReplyDelete
  30. Reply to Sobers 2

    If you want to equate what we are going through now with defending ones nation from a megalomaniacal pyschopath, then by all means go ahead

    This is a straw man argument, since I did no such thing. I merely pointed out that most countries had huge debt to GDP ratios after WWII (some over 120%), yet they all went on to enjoy an economic boom, rather than debt slavery. You haven’t refuted my point in any way.
    They could have spent the money on bank bailouts or stimulus packages.
    Running budget surpluses in times of economic prosperity to reduce debt is normal Keynesian policy, by the way.

    Somehow I don't think building tanks, guns, planes and ships to defend your country from destruction compares with spending equally large sums on providing benefits for a large proportion of the nation to sit on its backside, and to fund an equally large proportion of the nation to do non jobs such as equality advisers and other such pointless activities, but hey, who am I to criticise?

    No, it doesn’t, but then I didn’t say any such thing, did I?
    Furthermore, the claim that government money is merely spent on “providing benefits for a large proportion of the nation to sit on its backside” is false. The bank bailouts (which were done in the wrong way, in my view), QE, and the stimulus at least stopped the banking system and economy from collapsing and causing a new Great Depression.
    Perhaps you would have preferred to see a new Great Depression were 25% of the population would be claiming the “dole” and “sitting on their backsides”? That would have been a great solution…

    I don't see any one from either party suggesting policies that would reduce the deficit in the same way now as the late 40s.

    True, as they would have to change basic macro-economic policies first.
    The solution is full employment, financial regulation, industrial policy to make the economy grow rapidly and to reduce the debt to GDP ratio which will also reduce the cost of interest servicing.

    Debt is nothing other than slavery. If you owe a man money, especially a lot of money, then he owns you and what you do. Ditto for countries.

    Countries are utterly different. Individuals don’t have the power to tax a growing population and growing economy, or the power to roll over debt. Or the power of issuing the currency.

    The analogy is utterly ignorant.

    ReplyDelete
  31. Question to Lord Keynes.

    Re:"Countries are utterly different.Individuals don't have the power to tax a growing population and growing economy,or the power to roll over debt."

    Do Countries always have this ability?

    ReplyDelete
  32. Ooops! Should have included in above.

    http://www.se2009.eu/polopoly_fs/1.20260!menu/standard/file/slutsatser%20eco-efficient%20economy.pdf

    ReplyDelete
  33. As a (very) regular reader on this blog i have to say that its easy now to see how arguments start!

    Its obvious that there is no one-true-religion and the flat-earthers (whoever they may be - i guess in half a century we'll know for sure) just don't see the world through the same lense.

    The debate here is robust and committed as always but recently its got....well lets just say the language is more combative than in the past.

    CE has the motivation (after a long hard day at work i dare say) to consistently put together grammatically correct and economically insightful entries. I even have trouble just finding the time to read them...

    We don't have to agree with one another but we should respect each others views. We all MAKE the time to click favourites and get informed so this is no place to marginalise individuals and their viewpoint.

    One thing we can all agree on though I guess is that none of us educated professionals here knows which way all of this is headed.

    CE himself may have bet the family silver on the US$ collapse earlier this year because thats what he believed...he may be right but his timing by his own admission was wrong...many of you contributors may be right in your predictions but without an accurate timeline its almost academic.

    We are deep into unchartered waters where things will change very quickly.

    Ive recently finished reading about the fall of Long Term Capital Management and it only reinforces MY BELIEF that whats going on out there in the financial world cannot be drawn with a graph or referenced with historical data.

    Whatever happens I eagerly await the outcome since there is nothing anyone can do to stop it.

    Stay informed guys

    Best Regards,

    Phil.

    ReplyDelete
  34. @ Lord keynes:

    At the end of WW2 how much personal debt did everyone have? The govt may have had a lot, but my guess is that people didn't. They didn't live in mortgaged houses, or have credit cards, or personal loans. They lived within their earnings. There was therefore a lot of spare credit taking capacity in the economy. There was also a huge market for 'stuff' all over europe, which had been devastated by 6 years of Total War. Ergo there existed the conditions for exports to grow (as we still made stuff then) and for domestic consumption to expand as well. In those conditions it is possible to grow your way out of debt.

    Compare that to now when personal debt levels are above the level of GDP and Govt debt levels will soon be above GDP as well. On top of that corporate debt levels are massive too. Overall there is NO capacity to increase consumption domestically via extra debt. We are tapped out. The only way to grow out of this debt is via exports. And which sector of the economy will lead us forward? The financial sector? I don't think the boom times will be back there for a while. Oil? We've had the best of that 20 years ago. Manufacturing? Very little left now due to over zealous regulation and cost competition from the far east. What exactly do we have that the world wants? Natural resources like the Australians, Russian or Canadians? High tech electronics like the Japanese or Taiwanese? Heavy engineering like the Koreans? Precision engineering like the Germans?

    We have nothing left in the UK - we are a hollow shell. The wealth producing bits have been exported elsewhere, the natural resource bits have been wound down (mining, farming, fishing), the heavy engineering is gone (shipbuilding and the like). We bet the farm on the City of London, and look where that has got us. All we are left with are a bunch of estate agents driving round in Mini Coopers (one of the few things still made here, and guess where the profits go? Germany of course!) looking for their 2.5% of the property bubble. Thats what we are - a nation of spivs, all looking to take our little cut of the pie someone else has created.

    Well its not going to fly. This bird is so over laden with debt its never going to get off the ground again, and will be easy prey for the up and coming economies of the Far East.

    With regards to debt and countries, answer me this - how much power do the Chinese have over the Americans right now? With the flick of a switch they could dump the dollar through the floor and make paupers of the US population. They might lose all their dollars in the proces but then they have the capacity to earn those again. The Americans would be finished though. They know this and that is why US politicians make kow-towing visits to Beijing to try and keep them sweet. It is obvious where the power lies, and it isn't with the country up to its neck in debt.

    ReplyDelete
  35. Fascinating that the discussion here is almost completely removed from what is discussed in the mainstream media every day. Lord Keynes seems closest, in arguing that a return to growth is inevitable, but even he requires a mythical "UK industrial policy" to appear.

    Most 'ordinary' people I talk to are sure that renewed growth is inevitable, as all we are experiencing is a particularly severe version of the business cycle. A very intelligent person today was telling me that he expects the car industry to be booming again within 3 years, for example. (How do people come up with timeframe estimates like that?). And I know a once-regular reader of this blog who has stopped because the predicted crash didn't happen.

    Stephanie Flanders et al seem to offer no insights beyond the government line, though I suspect Evan Davies is more perceptive than his colleagues.

    ReplyDelete
  36. See Anonymous 1.18 AM.

    The following failed and did not 'Take' @ 1.18 AM November 6th.

    Transition to Eco economy.

    Council of European Union.

    Council Conclusions
    Towards Sustainability: Eco-Efficient Economy in the context
    of the post 2010 Lisbon Agenda and the EU Sustainable Development Strategy

    2968th ENVIRONMENT Council meeting
    Luxembourg, 21 October 2009

    The Council adopted the following conclusions:

    "The Council of the European Union.

    RECALLING the invitation from the European Council in March 2008 to start reflecting on the future of the Lisbon strategy in the post-2010 period.

    RECOGNISING the urgency of turning the current multiple crises into an opportunity by shifting to an eco-efficient economy, i.e. a safe and sustainable low carbon, resource-efficient economy, based on sustainable production in all sectors and underpinned by more sustainable life-styles focusing
    inter alia on the housing, transport and food sectors. This will improve the well-being of all citizens
    while at the same time reducing the use of energy and natural resources and minimising negative
    impacts on health and on the environment, especially eco-systems and climate change.

    STRESSING that a transition to an eco-efficient economy represents new business opportunities and, given adequate framework conditions, will boost EU competitiveness and stimulate significant employment growth.

    http://www.se2009.eu/polopoly_fs/1.20260!menu/standard/file/slutsatser%20eco-efficient%20economy.pdf

    ReplyDelete
  37. Reply to Sobers 3

    At the end of WW2 how much personal debt did everyone have? The govt may have had a lot, but my guess is that people didn't. They didn't live in mortgaged houses, or have credit cards, or personal loans. They lived within their earnings.

    Yes, you are correct.
    But the debate we were having was about government debt, not private debt. It now appears you are conceding that I was right.

    Compare that to now when personal debt levels are above the level of GDP and Govt debt levels will soon be above GDP as well. On top of that corporate debt levels are massive too.

    Yes, the solution is orderly deleveraging of private debt. Post Keynesian economists have plenty of good policy proposals to do this.

    Overall there is NO capacity to increase consumption domestically via extra debt.

    Yes, you need rising real wages, and full employment. It’s called “demand management” in Keynesian economics.

    Manufacturing? Very little left now due to over zealous regulation and cost competition from the far east.

    Manufacturing must be rebuilt through changes in macro-economic policies, as I said above.

    You also exaggerate the extent of the loss of UK manufacturing. The UK was the 7th largest manufacturing nation by output in 2007:

    Top 12 Manufacturing Countries in 2007

    It is above South Korea and France.
    It is therefore in a much better position to re-build its manufacturing base.

    Reply to Lemming

    Lord Keynes seems closest, in arguing that a return to growth is inevitable, but even he requires a mythical "UK industrial policy" to appear.

    I never argued that a return to growth is “inevitable.” I said it will require a complete change in macro-economic policy: financial regulation, trade policy, R&D policy, industrial policy, etc.
    There is nothing “mythical” about industrial policy. It’s the reason why Germany, amongst others, is still a great industrial power.

    ReplyDelete
  38. I think Lord Keynes and I are closer in where we want to get than might be thought, it's a question of how do you get there from here?

    I do not think, given the indebtedness of all private sectors, that taking on more public debt will help. You are pushing on a string.

    You say that personal debt must be deleveraged - I agree - but how? Mass defaults? A debt Jubilee? Reduction in credit availability and decades of paying down the existing debt? Ten years of medium to high inflation to inflate it away? We have become addicted to personal debt and and resource allocation is totally out of line as a result. If you remove that prop the whole ediface will fall.

    This is why I think we are faced with only painful choices from here on. There are no good ones.

    ReplyDelete
  39. Lord Keynes

    I would like to know more about this industrial policy that will ensure the productive harnessing of the UK's burgeoning population.

    Having Googled for "german industrial policy" I am still none the wiser as to what their secret is. This article summarises the results of a conference on how the EU might implement industrial policy, but I would challenge anyone to come away from it with a clear view of what to do.

    http://www.cepr.org/PUBS/Bulletin/meets/611ROL.htm

    For example, this paragraph:

    Germany, Sweden and Switzerland, he argued, are economies in which newly emerging technologies and large complex systems (for example, telecommunication or airline systems) are not easily developed. This contrasts strongly with the UK and US. Germany is strong in incremental product and process innovation, often at the scientific leading edge in established technologies such as machinery.

    Do you think that the UK and US should enact policies to compete with Germany in the established industries, or to develop their abilities in new technologies? 'Picking winners'?

    Most suggestions from the conference seem to be a little non-specific such as:

    ...greater attention should be paid to providing an environment in which firms, particularly start-ups, are able to succeed commercially with both existing and new technologies.

    Most of it reminds me of a CE post from many months ago in which he described a job he once had in the UK, working in a government-funded department. The aim was to offer free IT training and web site services to private businesses, and to promote links between a local university and local industry (as I recall). It turned out to be a disastrous waste of money which ended up competing with real commercial businesses and producing nothing of value.

    Without going as far as a 'command economy', just what is it that the UK government can do to ensure the growth that will be necessary for us to pay off our government and private debts?

    ReplyDelete
  40. Reply to Lemming 2

    First, as I pointed out above, the UK’s manufacturing base is not dead.
    There are about 193 countries in the world. Nevertheless, the UK was the 7th largest manufacturing nation by output in 2007:

    Top 12 Manufacturing Countries in 2007

    In 2007, the UK was above South Korea and France. So it is therefore in a much better position to re-build its manufacturing base than many other countries.

    Having Googled for "german industrial policy" I am still none the wiser as to what their secret is.

    Germany has an efficient state-directed industrial policy that is aimed at making it internationally competitive, and has education policies that produce a highly-skilled work force.

    For an excellent overview of the history of German industrial policy, see Wilfried Feldenkirchen, “Germany: The Invention of Interventionism,” in J. Foreman-
    Peck and G. Federico (eds), European Industrial Policy (Oxford: Oxford University
    Press, 1999), pp. 98-123.


    Do you think that the UK and US should enact policies to compete with Germany in the established industries, or to develop their abilities in new technologies? 'Picking winners'?

    The first thing to do is to manage the exchange rate and protect domestic industry from downturns. A system of financial regulation that directs investment to industry is the second thing to do. You don’t necessarily need to “pick winners.” You provide cheap credit, make large investments in R&D and allow that research to be easily transferred to industry, possibly by setting up new nationalised industries. It’s a complete myth that nationalised industries can’t be competitive and profitable. Nationalise the pharmaceuticals companies to start with. Their R&D is mostly paid for by tax-payers anyway, and most of their private investment goes on advertising and promotion, not innovation.

    Developing new technologies is the main way to proceed. We know what areas have great potential for future development: biotechnology (genome and proteomic sequencing, genetic engineering, cell and tissue engineering, stem cell research etc), rational drug design, robotics, artificial intelligence, IT, nuclear fusion, solar power, hybrid cars and nanotechnology.

    The UK needs a highly educated work force. That requires large investments in education as well.

    The UK can also make large investments in infrastructure as well.

    If some short-term protectionism is necessary to provide jobs to unskilled manufacturing labour, then so be it.

    It will reduce trade deficits, even if people pay slightly higher prices for some goods.

    ReplyDelete
  41. @ Lord keynes: It all sounds horribly like Concorde, British Shipbuilders and British Leyland to me. Name one successful nationalised industry/company. I can't. Nationalisation might work in theory - the power of the State backing an idea/technology that the private sector will not, but in practice it ends up a being politicians plaything, with decisions made for political purposes, rather then economic ones.

    As for education - we spend more on education than we have ever done, and the quality gets worse. Its not the amount of money spent but the useless ideologies enforced within the system. The only hope for education is the Tories voucher system, which might just break the State stranglehold on education for the masses.

    ReplyDelete
  42. Reply to Sobers 3

    Name one successful nationalised industry/company. I can't.

    Then let me enlighten you:

    (1) Singapore Airlines
    (2) PSA International
    (3) Neptune Orient Lines
    (4) Chartered Semiconductor Manufacturing
    (5) Sing Tel
    (6) SembCorp
    (7) Petrobras
    (8) CODELCO (Corporación Nacional del Cobre de Chile), biggest copper company in the world
    (9) LKAB (Luossavaara-Kiirunavaara Aktiebolag)
    (10) Air India Limited
    (11) China National Offshore Oil Corporation
    (12) Anshan Iron and Steel Corp.

    Furthermore, there are actually large numbers of nationalised companies that were subsequently privatised even though they were highly profitable:

    (1) Renault
    (2) Alcatel
    (3) St Gobain
    (4) Usinor, merged into Arcelor and now part of Arcelor-Mittal
    (5) Thomson
    (6) Thales
    (7) Elf Aquitaine
    (8) Rhone-Poulenc now part of Sanofi-Aventis
    (9) EMBRAER, Brazil
    (10) POSCO (South Korea)

    The Cambridge development economist Ha-Joon Chang in Bad Samaritans (London, 2007) on pp. 108-112 totally destroys the myth the nationalised industry can’t be successful, competitive and profitable.

    ReplyDelete
  43. See the interesting post of the post Keynesian economist Thomas Palley:

    Death by Renminbi.

    ReplyDelete
  44. Reply to Sobers 4

    I am not sure why you list British Leyland as a failed nationalised company, as it has been private since 1988.

    In 1986, British Leyland became Rover Group plc and was privatised in 1988 by the sale of the company to British Aerospace. In 1994, it was sold to BMW, and in 2000 its car-making and engine manufacturing assets were sold to the Phoenix Consortium. It finally collapsed in 2005.
    It had long ceased to be a nationalised company by then.

    ReplyDelete
  45. As for Concorde, the British and French government investment created something that private industry would never have created.

    In 1983, the UK government sold the aircraft to British Airways for £16.5 million plus the first year’s profits, and British Airways made a profit on Concorde flights.

    I have no objection whatsoever to government investment creating technologies then sold to the private sector for commercial use.

    That principle is at the heart of industrial policy. Without govenrment R&D, you wouldn't have computers, the internet, a great deal of biotechnology and numerous other technologies.

    And Concorde flights stopped because of the effecst of the 25 July 2000 crash, the slump in air travel following the September 11 attacks and rising maintenance costs, not because of government.

    ReplyDelete
  46. @Lord Keynes

    An impressive list, but is it possible to set up such successful companies to order? How many failures should one expect for every success?

    In one of your comments yesterday you said that we should concentrate on new technology.

    I remember a company called Inmos in the 80s which, on paper, should have been a text book example of a world-beater in new technology, but failed, despite heavy subsidy from the UK government. In the end the exotic transputer just wasn't the right product, but how could the government have known it at the time? Is it possible to solve the UK's debt problem by simply deciding to create some new technology companies most of which would turn out to be just like Inmos?

    ReplyDelete
  47. @ Lord Keynes: an impressive list that has one slight problem - not one of them is British. Whatever may or may not have been achieved overseas by nationalised industries/companies, you can't put your finger on one here in the UK.

    If you think British Leyland in its nationalised years was a success, well I think I'll leave others to judge what that means of your economic competence.

    Oh, and Concorde never made a penny back on the hundreds of millions the UK and French taxpayers spent on it either. According to that fount of all knowledge, wikipedia, the 20 aircraft built cost £23m each in 1977 prices. Thats nearly half a billion 30 years ago. Technologically superb as it may have been, economically it was a dodo.

    On the whole, large, world beating companies do not arise by the stroke of a bureaucrat's pen, but by providing goods and services that people the world over want to part with cash for. They make that dirty word to the Left, profits, and they get bigger. Not because the govt said so, but because their csutomers keep coming back, in increasing numbers. Its called capitalism, and perhaps we should try it here in the UK for once.

    ReplyDelete
  48. Reply to Sobers 5

    an impressive list that has one slight problem - not one of them is British. Whatever may or may not have been achieved overseas by nationalized industries/companies, you can't put your finger on one here in the UK.

    You only said name one nationalized industry, not a British one. Given that Thatcher privatized the UK's nationalized industry, it is (to put it mildly) a bit idiotic to demand that I name a present British one. Even with the mass nationalization in the 1980s, British industry still declined. So privatization wasn't the panacea free market advocates thought it was.

    And, by the way, there are instances of successful state-owned or nationalized industries after the Second World War.
    E.g.,
    Rolls-Royce plc, 1971-1987, sold off by Thatcher
    British Petroleum plc was owned by the UK government between about WWI and the 1980s.

    On the whole, large, world beating companies do not arise by the stroke of a bureaucrat's pen, but by providing goods and services that people the world over want to part with cash for.

    Actually they can. South Korea, Japan and Taiwan have created many such companies.
    You also seem to be confused about two different forms of state ownership. There is :

    (1) State owned industries but not run directly by the state
    (2) State owned and run industries

    Oh, and Concorde never made a penny back on the hundreds of millions the UK and French taxpayers spent on it either. According to that fount of all knowledge, wikipedia, the 20 aircraft built cost £23m each in 1977 prices. That’s nearly half a billion 30 years ago. Technologically superb as it may have been, economically it was a dodo.

    That Concord never made its money back does not in any way refute the argument that state R&D can create very useful high-technology that goes on to be profitable. One example refutes nothing.

    If you have 10 technologies created by the state and 6 or 7 go on to make money, while 3 or 4 fail, then that’s an acceptable loss, when you create viable industries in other areas.

    And furthermore, you ignore the obvious point that socially useful things don't have to be profitable - just like public utilities they can be subisidized.
    If the social value of something is very great (e.g., sewage, clean water, public infrastucture) then it is worth the loss that went into creating it.

    If, for instance, we discovered a cure for cancer through government R&D that was reasonably expensive to produce and that most people couldn't afford, would you really urge
    the government NOT to produce it?

    This kind of absurd free market ideology is a recipe for technological and scientific stagnation.

    ReplyDelete
  49. Reply to Lemming

    I remember a company called Inmos in the 80s which, on paper, should have been a text book example of a world-beater in new technology, but failed, despite heavy subsidy from the UK government.

    So what? Private industries fail all the time. As I said above, if of 10 industries nurtured by the state 6 or 7 go on to be profitable, and 3 or 4 fail, then that's an acceptable loss.
    The difference is that state intervention can create productive industries and technologies that the private sector will never create.

    This is why Japan, South Korea and Taiwan have highly productive industrial sectors.

    ReplyDelete
  50. I should have added in my reply to Sobers that privatising utilities is an utterly stupid idea as well.

    Do you believe that British Rail is better after privatisation?

    I don't often agree with Peter Hitchens, but he makes a terrific point here at 7.45 minutes into the video, as he rips into the hapless Iain Duncan Smith:

    Peter Hitchens on British Rail

    Go Peter!

    ReplyDelete
  51. Correction to Sobers 5

    When I said:

    "Even with the mass nationalization in the 1980s, British industry still declined"

    I meant of course:

    "Even with the mass privatizations in the 1980s, British industry still declined"

    ReplyDelete
  52. Concord

    According to that fount of all knowledge, wikipedia, the 20 aircraft built cost £23m each in 1977 prices. Thats nearly half a billion 30 years ago. Technologically superb as it may have been, economically it was a dodo.

    You need to read this:

    Concorde


    Some facts:

    20 Concordes were built and 14 entered airline service. There were 2 prototypes, 2 pre-production models and 2 "first off the line" production models. Of these, five are on show in museums and one has been stripped for spare parts.

    How much profit did Concorde make for British Airways?

    On average Concorde made and operating profit of £30-50 Million a year for British Airways in the boom years where many passengers were travelling first class. British Airways reportedly received £1.75 Billion in revenue for Concorde services against an operating cost of around £1 Billion. Air France made a much smaller profit.

    ReplyDelete
  53. OK, so a few notable examples make a small-ish profit, or loss, depending on which way you look at it, and the know-how probably permeates into other British, and non-British, companies. Some people even get quite rich when the business is finally sold at a knock-down price to a successful foreign company.

    But the fact remains that there are 61 million people in the UK, of which a very small fraction possess the skills, knowledge and attributes to work in a new technology company. The remainder will effectively have to be supported by these new state-run enterprises. Of course we can talk about educating the workforce and improving schools etc. but that will take years to feed through. How long can we continue printing money and "rolling over" our debts?

    ReplyDelete
  54. Reply to Lemming 6

    Some people even get quite rich when the business is finally sold at a knock-down price to a successful foreign company.

    Then you don't allow your companies to be sold to foreigners, just like the Japanese.

    The remainder will effectively have to be supported by these new state-run enterprises.

    Not true, as the UK can employ people in large investments in infrastructure.

    As I also said above, if some short-term protectionism is necessary to provide jobs to unskilled manufacturing labour, then so be it.

    It will reduce trade deficits, even if people pay slightly higher prices for some goods.

    How long can we continue printing money and "rolling over" our debts?

    As I argued above, there is no problem, provided the government implements macro-economic policies tomake the eocnomy grow

    ReplyDelete
  55. CE:

    I know you believe in free markets but can't we impose some caps on the amount of posts people can make after each post?

    Although I admire his tenacity I do grow weary of Lord Keynes' objectionable rambling.

    ReplyDelete
  56. CE:

    I know you are a stern supporter of free markets but can't we impose a cap to the number of posts commentators can make after each article.

    Although I admire his tenacity I do grow weary of Lord Keynes' objectionable rambling.

    ReplyDelete

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