Monday, June 14, 2010

UK Office of Budget Responsibility

I have a semi-finished post on the Keynesians, but could not help but comment on the report from the Office of Budget Responsibility (OBR). The OBR seems to be a good idea but, as you will see, the OBR starts with assumptions and projections that are highly questionable. I will start with their preamble, which is as follows:

In the body of the report we describe certain departures from previous forecasting practice and we emphasise three in particular. The first is our stress on the uncertainty of the forecasts, particularly of the fiscal forecasts. We illustrate this principally by the use of fan charts. The second is that we have based the range of fiscal outcomes around our central view of prospects. The previous Government used deliberately cautious assumptions for some key variables in its fiscal projections. We have departed from that practice and, as we have said, have used other methods to illustrate uncertainty.
So far so promising....

We then move onto to their central forecast for economic growth, which shows the following GDP growth forecasts (for the purposes of this exercise, I will pretend that GDP is a meaningful metric, but you may wish to see my discussion of US GDP to see why it is a dangerous measure):

2011 - 2.6 %
2012 - 2.8%
2013 - 2.8%
2014 - 2.6%

It seems that, the UK is about to enter a period of relatively high growth. However, before we all become too excited, I thought it might be a good time to look at the 'economic growth' achieved during a massive credit bubble (chart from ONS).



Perhaps I am missing something, but it seems that, somehow.....the UK will achieve GDP growth rates that are close to those achieved during a massive credit fuelled bubble. It looks rather problematic, does it not? Where will the growth come from?

If we look at the forecast assumptions, it all starts to become somewhat dubious. First of all, there is that wonderful concept of the 'output gap'. What they do not explain is an output gap of what? The FT definition of the output gap is 'the difference between an economy's current output and the estimated maximum potential output (full capacity)'. This is how the OBR calculated the gap (see appendices of report for details):

  1. the productivity gap accounts for around ½ percentage point, reflecting both the large fall in actual output per hour over the recession and a judgement that underlying trend productivity has been adversely affected by the financial crisis;
  2. the fall in average hours in the recession implies an average hours gap of just over 1 per cent;
  3. just over 2 percentage points is attributable to the employment rate being below its estimated trend level. This is broadly consistent with the degree of spare capacity implied by indicators of recruitment difficulties.
These are some almighty assumptions in there, and the report does not say a gap in output of 'what'? To their credit, they do acknowledge that this is a somewhat difficult metric to calculate, but nevertheless they do not explain what sectors have the 'output gap'. Whilst there might be a notional maximum output, it is not clear how this translates into future output. If we think of the 'growth' during the bubble period, as I identified in my essay 'A Funny View of Wealth', there was no increase in output of genuine wealth creation, just 'growth' associated with debt fuelled consumption.

If we think of the way in which the economy grew, to service debt fuelled consumption, this implies that the 'output' that is not being utilised is in these sectors. For example, where consumer spending has fallen, there will be underutilised capacity in the retail sector (e.g. empty commercial property). How can this output be returned towards its notional maximum? The only way that this output might move to its maximum, in the short to medium term, would be if there was another credit boom - a highly unlikely scenario. The point is that, the output gap assumes that there is capacity in the right sectors ready to expand towards maximum capacity, but what if the capacity is in the wrong sectors?

Even if looking at, for example, employment, are the unemployed in a position to rapidly transition from their experience in one sector into another sector. For example, if we look at the expansion of the government pay roll (estimated at about 1 million over the last ten years), if reducing that payroll, what kind of retraining would be needed to make these workers productive in other sectors of the economy? Equally, how easy is it to take a person who has worked in the service sector, for example a shop supervisor, and redeploy them into manufacturing? That person may have potential for 'output', but in what?

Then there is the macro-picture provided by the OBR. They have noted that the emerging economies are looking stronger than the US or Europe, and that Europe is the UK's main trading partner. I will quote their analysis in full, as it is actually very vague:

The forecast for UK export markets growth (a measure of world trade weighted to reflect the geographical pattern of UK exports) is weaker than that for world trade throughout the forecast period, particularly in 2010 and 2011. This reflects the relatively weaker outlook for advanced economies compared with emerging countries and, in particular, the UK’s main trading partner, the euro area. UK export markets are forecast to grow by 4 per cent in 2010, 4¾ per cent in 2011, and by close to 6½ per cent thereafter, in line with its long-run average.

If Europe continues its turbulent ride, with potential for yet further weakening of the European economic situation and weakening (or collapse) of the Euro, where this ongoing growth might come from is not specified. Is it going to be the US, Asia or where? They later suggest that, they have based their assumptions on survey evidence, but there is no clarity on the 'where to?' question. On this, the report offers no explanation, which suggests this is nothing more than an optimistic guess, based upon currency devaluation. Whilst agreeing that devaluation has potential to drive exports, how will this work in a world of a devaluing Euro? Our most significant trading partners are seeing their own devaluation, and they are also significant competitors in export markets. Is the devalued pound enought to pull the UK out of its problems, when the US is still in trouble, the EU is in trouble, and even China is now slowing.

Then we come to domestic demand, and I have to start with a quote from their report:

The central GDP forecast embodies a rebalancing between external and domestic sources of demand. Private sector demand contracted sharply in the recession, while government spending contributed positively to GDP growth. Although recent data suggest that private sector final demand has started to recover, we expect it to remain relatively weak in 2010. For this year it is government consumption and inventory accumulation that make the largest contribution to growth. Over the year as a whole, we expect GDP growth to remain subdued, with output rising by 1¼ per cent. On a quarterly basis, growth increases from 0.3 per cent in 2010Q1 to 0.6 per
cent in Q2 and holds in the 0.6-0.7 per cent range throughout 2010 and 2011
That's right, government debt fuelled consumption is a major contributor to GDP 'growth'. This is, yet again, debt fuelled consumption being measured as 'growth'. Sure, we can keep on borrowing more and more, and sure, that borrowing will (in the short term) create lots of activity. But it can not be sustained, as borrowing has to be finite. However, the picture becomes seriously muddy in the following paragraph:

GDP growth rises to 2½ per cent in 2011 and again to 2¾ per cent in 2012 as credit
conditions ease and uncertainty subsides. All components of private sector demand are expected to strengthen, while government expenditure detracts from growth. Private consumption growth is forecast to rise from ½ per cent in 2010, to rates slightly below its long-run average and below the rate of GDP growth. Investment remains weak in 2010, but then recovers strongly as the recovery in business and dwelling investment gathers pace. Investment is expected to grow by around 8 per cent from 2012. This, together with a relatively stable household saving ratio, means the private sector financial surplus eases slightly throughout the forecast, as the government deficit contracts.
The first point in the above is a grand assumption. Why will credit conditions ease and uncertainty subside - we do not know because it is simply given as an assertion. What follows is built upon this assertion. For example, dwelling investment means (presumably) a return to significant growth in the property market, meaning that (once again) the UK economy is going to be built upon residential property. But where will the money for growth in this sector originate from?

If you view their projections for employment, from 2010 - 2011, they are forecasting an increase in employment from from 28.8 million to 29 million, and thereafter increases by 300,000 per year. There is no substantive reason given for this increase in employment, except that presumably this will follow from GDP. However, although it is not absolutely clear in the report, presumably the increase in employment is calculated in the GDP growth. If so, we have a partially circular calculation.

With regards to the corporate sector, they are placing a considerable weight on business investment to drive GDP growth upwards. In a chart of GDP expenditure share, they show net trade as an ongoing negative, government spending in decline, consumer spending in decline (and argue that consumers will increase savings), and that business investment spending will be on the increase. As an explanation for why, they offer a chart that shows business investment in the recovery from the 1980s and 1990s, implying that business investment will plot the same course in this 'recovery'. There are two problems here; first they assume they are seeing a recovery (when the economy is still being propped up by government debt based spending), and secondly they are assuming that we are in the same world as the 1980s/90s.

With regards to the latter, the world in the 1980s and 1990s was not in the midst of a global crisis. Our next door neighbours in Europe, our main trading partners, were not on the brink of crisis. The world was a very, very different place. At that time, there were not the massive emerging economies creating a hyper-competitive environment. As such, why should a pattern of activity from a completely different set of circumstances apply now?

Whilst they present a case that consumer savings will present a growth in the funds available for investment, the question of 'invest in what?' is not addressed. One problem is that there is no certainty that such savings will be invested in the UK. Another is that, before a business invests, it must see opportunities for profitable investment, and it is not clear where these might be. By the OBR's own reckoning, export growth is going to be relatively small, presenting few opportunities for investment, and again we come to the question of the output gap. According to their arguments, presumably, there is considerable slack in capacity for exports, and this slack will need to be utilised before any further investment.

Then there is domestic demand as a potential driver of business investment. However, if consumers are moving from consumption to saving, then it is not clear that this sector would encourage business investment. In fact, quite the opposite will take place. The same goes for government expenditure, which will be reducing over the period of their forecast. Again, there will be no impetus for investment from this source.

We then come to housing. Is this going to be the source of business investment? If so, then it appears that we are destined to repeat history, and have an economy built upon residential property investment. This is, of course, an unsustainable investment path, and offers no long term route out of the problems that are apparent in the UK economy. The route for the UK to pull itself out of trouble must be the export of goods and services, the route to generating income with which to pay debts owed to creditor countries.

What we can see in this report is an assumption that the world is simply going to return to the pre-crisis economic system. The assumption that the UK will follow the same path out of the current economic problems as took place in previous decades says it all; nothing has really changed and the economic crisis is just a blip in the path of normality. The assumption that underpins this report is that everything will return to 'normal', despite the fact that the structure of the world economy has changed, and is in the process of further change. It is a naive and forlorn hope.

Whilst applauding the principle of the OBR, I can not help but return to the chart above which shows the GDP growth in the credit boom of the pre-crisis years. If, we are returning to such growth levels, there must be a new factor that explains where such growth might come from. On reading this report, I can only conclude that the OBR thinks this will happen, because it will just happen. The lack of acknowledgement of the structural problems in the UK economy, and the world economy, makes the report questionable. The UK economy, over a period of over ten years, has seen 'growth' being built upon credit (both government and private), and this has left the UK economy structured to accommodate this credit based consumption. A decline in the value of the pound is not going to see a magic restructuring of the economy in the way that they imply. At some point, the credit fuelled structure must go, and that must mean a period of painful transition.

Is it really possible that the UK economy will just return to 'normal'? I do not believe so. After all, normal was conumption of more than was produced.

31 comments:

  1. I should say that, while I have probably come across as one of your 'keynesian' opponents here, I do agree with an awful lot of what you say , or rather, should i say, I am scratching my head too with regard to where exactly any long term growth is going to come from.
    The real outlook , as this rank amateur sees it, is like a november weather forecast , dark, grey cloudy & cold.
    We can see , I think, now , that the much lauded 'service economy' was a piece of newlab ( not only newlab) wishful thinking. ( Or was the 'knowledge based' economy' ? ). What all that really seems to have been was a marvellous magical cover story for a gargantuan debt fueled spending binge, now dead & buried.
    So, since Joe Public ( God LOve HIm) is no longer maxing out the cards, ok the govt can partially fill the gap ( or not) with X amount of spending ( ie basically spending our own saved money for us, since we refuse to play anymore) , but despite my somewhat reluctant feeling that this is the best we can do, I don't see any amount of govt spending really curing our deathly problem.
    ( It can smooth over the bumps on the generally downward road but it doesn't provide any new shiny model for a vibrant british economy).
    I think i reached the limit for one reply & will continue in another...

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  2. The report you discuss just highlights what Post Keynesians always argue: we face fundamental uncertainty about the future.

    Given that the world seems set on austerity, this will just contract demand and choke off export markets and trade. That the report is too optimistic seems quite convincing.

    Some comments:

    the UK will achieve GDP growth rates that are close to those achieved during a massive credit fuelled bubble. It looks rather problematic, does it not? Where will the growth come from?

    Have you factored in the surge in UK exports due to the depreciated pound?:

    [sc. the UK is] an economy already showing signs of a strong recovery, with manufacturing output and exports expanding at the fastest rate in 15 years in April, according to a closely watched survey … “Manufacturers reported a flying start to the second quarter, with the weak pound boosting export growth to the fastest for at least 15 years,” said Rob Dobson, economist at Markit …. Mr Dobson added that the data pointed to manufacturing output growing by as much as 2 per cent in the past three months, a growth level that suggests the sector will make a strong contribution to second-quarter gross domestic product growth.

    Norma Cohen, “UK manufacturing surges as demand picks up,” May 4 2010, Financial Times


    The point is that, the output gap assumes that there is capacity in the right sectors ready to expand towards maximum capacity, but what if the capacity is in the wrong sectors?

    Reigning in asset bubbles and excessive private debt will redirect resources away from the unneeded capacity in these sectors to capacity elsewhere.


    Even if looking at, for example, employment, are the unemployed in a position to rapidly transition from their experience in one sector into another sector.

    That can happen in the long term, but you seem to miss the point of short-term Keynesian stimulus: it is to reduce economically and socially harmful unemployment now to restore demand and business confidence through short term public works, employment programs which can then be scaled back when private sector growth resumes.

    In the long run, better vocational training and education can deal with the problem of moving labour from one sector into another sector.

    Education by itself won’t necessarily give you the jobs of course – you will need trade and industrial policy to restore domestic production.

    Whilst agreeing that devaluation has potential to drive exports, how will this work in a world of a devaluing Euro? Our most significant trading partners are seeing their own devaluation, and they are also significant competitors in export markets. Is the devalued pound enough to pull the UK out of its problems, when the US is still in trouble, the EU is in trouble, and even China is now slowing.

    You have just given an argument for more aggressive global fiscal stimulus – done in the context of cleaning up Western banks of course, with financial regulation and addressing global trade imbalances: namely, the “export profligacy” of China, Japan, and Germany.

    That's right, government debt fuelled consumption is a major contributor to GDP 'growth'. This is, yet again, debt fuelled consumption being measured as 'growth'. Sure, we can keep on borrowing more and more, and sure, that borrowing will (in the short term) create lots of activity. But it cannot be sustained, as borrowing has to be finite.

    Those who don’t believe that government debt is at all like private debt have no reason to accept this argument.

    Please do publish your post on Keynesianism.

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  3. (continued..)
    The horrible truth seems to be that with god knows how many added to the world industrial labour force over the past 15 (?) years or so, the price of labour has plummeted & now the average Joe is in direct competition with N million Chinese /Indian S/E Asian workers who are prepared to work for wages we would regard as positively insulting.
    The upshot being that in the long run our standard of living is going to go down as theirs goes up, and that really there's nothing we can do about it short of closing up the borders & pretending the rest of the world doesn't exist.
    But if you add to this peak oil, ie that the cost of energy is going nowhere but up up up over the medium / long term, then it won't be a case of everyone else rising to our level but of the mean income all over the world slowly or not so slowly falling as the decades slide by, which will mean above all reducing our collective expectations from those Gucci Highs we are all so used to being seduced by and ... ( gulp) ... starting to basically head economically backwards into the future...
    Those of us who have delved into our ancestors lifestyles ( see ancestry.com..) will realise that this will not be easy and will in all probability require a mass downscaling of expectations . But who will vote for the "Back to the 19th Century" Party ? No-one.
    So politicians will lie & promise the impossible because otherwise we will not vote for them.
    I foresee a good future for the brewing industry !

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  4. Reply to Chaingangcharlie

    The horrible truth seems to be that … the price of labour has plummeted & now the average Joe is in direct competition with N million Chinese /Indian S/E Asian workers who are prepared to work for wages we would regard as positively insulting.

    The answer is trade and vigorous industrial policy. If Japan got rich through creating high value-added industries through state intervention, then there is no reason why the US can't keep its industries and create new ones too.

    The crucial factor now, however, is that technology must be used to increase manufacturing productivity and cut costs.

    If you want to decrease the trade deficit of, say, the US or the UK, then use industrial policy to domestically manufacture things imported from China.

    Strong use of automation and technology to increase productivity and to lower price is necessary. This process can be made faster and more efficient through publicly-directed money for R&D to do it.

    There is already a very interesting initiative in the US called the

    Save Your Factory movement/ launched by a company called Fanuc Robotics America Inc.

    There is an absolutely excellent analysis of this in a 2005 issue of Manufacturing Engineering magazine. It shows how automation can cut costs and even beat low wage countries like China:

    Rick Schneider, “Robotic Automation can cut costs,” Manufacturing Engineering 135.6 (December 2005): 65-72

    Read the article for examples of how they have cuts costs and saved US manufacturing.

    The US federal government needs to take up these ideas and implement this sort of policy at a federal level – which would make it more effective.

    Also, the article points out that from 1995 to 2002 the global labour force actually lost 22 million manufacturing jobs because of labour-reducing productivity gains through automation and robotics.

    It is extremely likely that the 21st century will see manufacturing employment as a percentage of the world labour force decline to a level as low as agricultural employment (2 or 3%).

    However, if output massively increases, prices fall and Western current account deficits fall or go into surplus, this will be a very good thing.

    We will have an abundance of cheap goods.

    But we will have to face the fact that because of automation and technology, employment in tradable goods and services in many countries will probably fall dramatically.

    Our employment future will be mainly in services, education, and most probably in government-sector non-tradable services and other essentially non-productive jobs.

    There will probably be a great reduction in the hours that people need to work as well, and education and research might become the sector that most people work in.

    In other words, in the face of massive productivity and output gains and cost reductions in many goods and services through technology (just like, say, agriculture in the 19th century), the government must use policies for full employment to maintain demand for such goods and a rising standard of living for all.

    Our future is more service industry jobs and more government-funded jobs, not less.

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  5. Further point

    I should have made it clearer in the previous post that using automation and technology to improve productivity will in some, and in perhaps many, cases lead to loss of employment from industries.

    If you can manufacture vast amounts of cheap goods through automation, but high umemployment results, then demand for the goods - cheap though they are - will still collapse. Just like the depression of the 1930s, the capacity to produce goods will be there, but no demand for them.

    The point is that should production go down the route of radical automation in the course of this century, then equally radical Keynesian demand management will be necessary to maintain demand for goods and services and ensure continuing rises in living standards.

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  6. A rash of new strikes in China, in defiance of the country's long-standing aversion to industrial action, is posing an unprecedented threat to its reputation as an exporting powerhouse .... China is wrestling with the implications of rising wages. The country's new prosperity is built on cheap labour ... Some companies are already moving to Vietnam and Cambodia. While wages in China account for only five per cent of the cost of manufacturing, other costs are also on the rise, such as electricity and water.

    http://www.independent.co.uk/news/world/asia/strikes-threaten-chinas-status--as-the-factory--of-the-world-2004790.html

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  7. Hard to fault the logic that the growth envisaged by the OBR is based on assumptions of past behaviour in the UK / world which are not going to be repeated.

    One wonders why the presumably experienced and intelligent people who make up the OBR cannot see this for themselves.

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  8. Lord Keynes said.
    "The crucial factor now however is that technology must be used to increase manufacturing productivity and cut costs."
    and
    "it is extremely likely that the 21st century will see manufacturing employment as a percentage of the world labour force decline to a level as low as agricultural employment."
    I think these two comments are spot on. By doing these things it will make low wage areas a non issue as most manufacturing will be done by machines, which can be anywhere in the world. If we can remove low wages from the equation then all necessary manufacturing can be brought back into our own countries. This will not create much employment but at least the "country" will be making money. All we need then is a suitable social policy to keep every body happy. Or is that too utopian to happen.

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  9. The good lord Keynes speaks of: a dramatic reduction in manufacturing employment, a proliferation of cheap goods, further growth in the service industry, guvment taking up the employment slack. An increase in the standard of living for all.
    What on earth would fuel this? How would the poor people who once manufactured the plastic crap subsist? Would they too become service workers?

    Do not adjust your mind; there is a fault with reality.

    JSP.

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  10. Lord Keynes :

    Re your 'automation!' 'productivity!' ideas , the problem that most strikes me is that the world is - correct me if I'm wrong here - suffering from a general ( ie world wide) lack of DEMAND for all those beautiful consumer products we all went gaga for over the previous 15 years. ( The reason being that we are no longer willing or able to go deeper into debt to get hold of all these vital items ).
    To caricature , you paint a picture of a world where goods are produced by Chinese ( working for a pittance) or Robots ( working for nothing ) and are consumed by a population kept afloat in service industry employment provided by means of hefty govt spending.
    I don't know if this is possible - it sounds very much like a return to the marvellous magical debt fueled world of 2006 - but I do think that we are very possibly reaching the end of the era of cheap energy & apparently perpetual ( economic & population) growth & approaching some kind of watershed where we find that instead of eternally climbing ever onwards & upwards to greater & greater material prosperity , we find that despite all our best efforts we ( i mean the human race in general) find ourselves to be inexorably sliding down the far side of the Hill of Prosperity to a new world where tommorrow is not to be assumed to be ever & always brighter & better ( at least materially) than today.
    Since this seems to me to be the very basis on which our economic life - our collective dream of the future - is based, I do believe we are going to have to see a slow transformation in expectations to a new era where, perhaps, we might see more adverts for courses on 'Being Satisfied With What You Have' than adverts for 'The Best Amusing Places To Spend Your Fourth Annual Holdiday That Your Friends Will Be Like Totally Impressed By' .
    In a way, I kinda hope so ;-)

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  11. There is a good research from BIS that I came across a month ago. The future growth looks dull and I tend to agree with this report more than with the one published by OBR. Here is the link: http://www.bis.org/publ/work300.htm

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  12. RMB to appreciate or depreciate or just float within bands again?:

    The RMB [was] ... pegged at around 8 to the dollar until July, 2005; began a "managed float" to about 6.8 to the dollar until July, 2008; and [was] ... frozen again at around 6.8 ever since, as part of a Chinese government effort to preserve its export industries when the financial crisis made foreign demand collapse

    http://www.theatlantic.com/international/archive/2010/06/this-could-be-significant-announcement-of-rmb/58405/

    But some change in this policy seems to be happening and has been announced on the people's Bank of Chian website:

    In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility ....
    In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand ... The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.

    China´s external trade is steadily becoming more balanced ... With the BOP account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist. The People´s Bank of China will ... maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.


    http://www.pbc.gov.cn/english/detail.asp?col=6400&id=1488

    It's unclear what this will mean...

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  13. Reply to Chaingangcharlie

    the problem that most strikes me is that the world is - correct me if I'm wrong here - suffering from a general ( ie world wide) lack of DEMAND for all those beautiful consumer products we all went gaga for over the previous 15 years

    I have already addressed this lack of demand problem: you need Keynesian demand management policies.

    To caricature, you paint a picture of a world where goods are produced by Chinese ( working for a pittance) or Robots ( working for nothing ) and are consumed by a population kept afloat in service industry employment provided by means of hefty govt spending.

    There is no reason why a future in which employment is increasingly in services or government-funded jobs must require perpetual or even significant government deficits.
    If (1) output and productivity rise and (2) costs are lowered in many sectors, this will lead to massive prosperity, especially if manufacturing is rebuilt and countries like the UK or US go back into current account surplus.
    The economy would grow and tax revenues would rise – there is no reason why increased spending couldn’t be done in boom times with balanced budgets.
    In recessions, you might need deficits, but that has always been the case.

    but I do think that we are very possibly reaching the end of the era of cheap energy & apparently perpetual ( economic & population) growth & approaching some kind of watershed where we find that instead of eternally climbing ever onwards & upwards to greater & greater material prosperity

    This kind of pessimism reminds me of Malthusianism. That wretched and anti-human ideology was shown to be utterly false back in the 19th century.
    No doubt we DO face resource constraints, but we have the power of modern science and technology and the sheer power that government can exert in mobilising resources and skilled labour through R&D to solve such problems.
    For example, worried about energy?
    Then have the EU and the US organize a NASA-style program to solve the engineering problem of nuclear fusion or develop much more efficient solar cells. And why not put huge solar panels in space and connect them to the earth to provide continuous reliable solar energy? (If possible, this idea totally demolishes the idea that the 1960s moon mission was a waste of money: the cost of developing the basic principles of space travel technology might pay off handsomely soon, just as the cost of massive1950s US government funding of computer R&D payed off ).

    With high unemployment now in many countries, then people may as well be employed to do something of potential benefit to the world.
    Unfortunately, our contemptible and deeply flawed free market economics/neo-classical ideology has an irrational hostility to government intervention.
    We have to reject it completely before moving to a more rational world.

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  14. Reply to Anonymous

    An increase in the standard of living for all. What on earth would fuel this? How would the poor people who once manufactured the plastic crap subsist? Would they too become service workers?

    The logic is inescapable: if technology lowers costs and increases productivity and output dramatically, there is an abundance of goods.
    Manufacturing can be brought back to the UK or the US. Current account deficits will fall.
    Once the external deficit (= current account deficit) is removed, you have much greater freedom to organise your domestic employment sector to provide jobs for all who want to work.

    Additional jobs will be created in new private industries as well of course but government can step in and provide employment for those who are unemployed. As I said above, it might well be that much of the government-funded labour force will be in education (universities) and research or other services.
    A much greater labour force working in basic sciences and applied R&D in physics, chemistry, biology, medicine etc would mean a much more rapid advancement of science and technology too - a virtuous circle.

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  15. I have posted my critique of Keynesianism but I have noticed that it has published before this post due to the fact that it was created before this post. If you look at the recent posts links, it can be found there.

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  16. @ lord Keynes,

    To me the ‘virtuous circle’ seems more like a disconnected car wheel. I give you credit for your optimism.
    I can’t see an orderly repopulating of the paddy fields neither can I see the average person in the West holding on to his or her standard of living let alone improving it.
    Reality is inescapable. ‘Logic that is inescapable’… well you see sometimes the logic is clouded in such obfuscation & sophistry that it is rendered meaningless to any thinking person.

    JSP.

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  17. Could you please just provide a link to all of "lord' keynes comments, as I get tired wading through all his stuff, does he not have his own blog? 'Lord' Bramall

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  18. The rather authoritarian idea to marginalise Lord Keynes comments is a somewhat disappointing conclusion to reach.

    I like LK's posts, they're well researched, informative, controversial and more importantly thought provoking.

    Even Chaingangcharlie, who at first appeared to be a Keynesian acolyte has mellowed his view in what amounts to a little less than few days, which I suspect is more to do with LK's work rather than anything that the anti pro-Keynes lobby have posted.

    Inclusiveness is surely the best way to highlight any differences and to reach an informed view, in any walk of life?

    The real challenge is to see if LK can be convinced that there is another way and not necessarily the Lords.

    Dave O'Carroll Romford

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  19. lord keynes aka will hutton

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  20. The question of the cost of the UK's interest Burden on Gilts as a Percentage of UK GDP is an important question. I have a new post on it here on my blog for the curious:

    http://socialdemocracy21stcentury.blogspot.com/2010/06/projections-of-uks-interest-burden-on.html

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  21. Lord Keynes

    A few weeks ago, prior to the General Election, I asked whether you could come up with some specific policies that the new government should announce, in order to set the ball rolling on your vision for the UK. You failed to make any actual, specific suggestions. The emergency budget is tomorrow so now's your chance. If you were Osborne, what would you be announcing?

    ReplyDelete
  22. A great article on the Guardian:

    Politicians on the right love to scare us. George Osborne, in his Mansion House speech cited "fears" over government solvency and sovereign debt crises .... [but the] vast majority of [UK] interest payments [on government debt] are going back to us, the people, who lent the money to the government in the first place – since only 20% of UK public debt is held by foreigners

    http://www.guardian.co.uk/commentisfree/2010/jun/17/fiscal-deficit-threat

    ReplyDelete
  23. Chaingangcharlie,

    Interesting take on things. What in your view will be sectors/areas to be in if this future you talk about materializes.....in addition to offering courses on 'Being Satisfied With What You Have'. ;-)

    ReplyDelete
  24. Reply to Lemming

    A few weeks ago, prior to the General Election, I asked whether you could come up with some specific policies that the new government should announce, in order to set the ball rolling on your vision for the UK ... If you were Osborne, what would you be announcing?

    If I were the PM, then my suggestions are here at the end of my blog post:

    http://socialdemocracy21stcentury.blogspot.com/2010/06/projections-of-uks-interest-burden-on.html

    I have fixed the comments so that anyone can comment now.

    I have already given a specific proposal above for US industrial policy that could also be adoped by the UK.

    ReplyDelete
  25. Strange thing happened to me today. Traveling back from work (rural New Zealand) by chance listening to scratchy BBC on am radio. BBC introduced two guys who then proceeded to give solo talks on benefits / belt tightening. One of them Will Hutton. I had never heard of the name until reading it on this blog. The name stuck.

    His humanity stood out in what he said in those couple of minutes. It was good.

    JSP.

    ReplyDelete
  26. A further deflationary shock for the world economy: commodity prices are falling:

    the price of major commodities like oil, sugar, and steel have been sliding. The iShares S&P GSCI Commodity Index Trust (NYSEArca: GSG - News), which tracks a basket of 24 different commodities, is down 14.55 percent year-to-date.

    http://finance.yahoo.com/news/Do-Falling-Commodity-Prices-etfguide-224603605.html?x=0&.v=1

    Naive monetarism foolish believes that inflation is just a monetary factor.

    At least even the Austrians admit that inflation is caused by both real and monetary factors.

    Falling world commodity prices are a further real factor causing deflationary forces.

    ReplyDelete
  27. I hope I don't do a disservice to "Lord Keynes"'s suggestion by summarising it as follows: (a) There won't be real jobs for people because stuff will be made by robots, (b) the stuff made by robots will create great wealth, (c) some of that new wealth can be used by government to provide jobs for the otherwise unemployable.

    Isn't that essentially what happened during Mr Brown's tenure at No 11? It matters not where the money comes from (be it goods made by people, goods made by robots or services provided by man/machine/beast) a part of the wealth that was actually produced was taken in tax and turned into jobs that did not previously exist and, some would say, exist solely for the purpose of giving people a job.

    And still unemployment existed in large numbers when he left No 11 and then when his fingers were prised from the doorframe of No 10.

    The whole concept is fanciful. If it couldn't deliver full employment when Mr Brown did it I see no reason why it should be able to do so at any other time. The rates of tax required to sustain millions of non-jobs on the government payroll would be crippling.

    ReplyDelete

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