Slugger O'Toole

Conversation, politics and stray insights

The politics of unreality (and the very real cost)

Tue 26 July 2011, 7:39pm

The world is potentially facing two enormous financial crises, while today’s figures confirm, if any confirmation was needed, that the UK continues to face acute economic difficulties.

While the underlying causes of these maladies are complex, and the potential remedies are far from simple, all are being exacerbated by the behaviour of political classes increasingly removed from the reach of even a rare, well-informed Joe Public.

In the UK, the Conservative Party’s dogmatic adherence to a 1930s-style ‘sound money’ fiscal policy is obviously not addressing growth, employment, inflation or living standards in any satisfactory manner.

In the Eurozone, national leaders and officials from the EU, ECB and IMF seem fundamentally incapable of forging a robust response to the continent-wide crisis of growth, sovereign deficits and unaccountable ‘market’ power.

In the United States, a weak Democratic president and an increasingly unhinged Republican party warped by witless Tea Party populism have clashed in a horrible fashion. An innocuous congressional vote on a technical matter (the level of the US’s debt ceiling) may yet lead to an American default and downgrade, and worldwide market panic dwarfing even that of autumn 2008.

In all three cases, politicians, non-elected leaders and whole, life-defining-for-billions institutions have evolved beyond true accountability, and seem unable to deal with foreseeable, avoidable problems in any sort of cogent way.

In place of leadership, shallow, silly tropes are rehearsed endlessly – ‘maxed out the credit card’, ‘Obama is obsessed with taxes’, ‘we do not foresee a default situation’, ‘the mess we inherited’ – as politics increasingly becomes little more than a dire spectator sport.

Meanwhile, jobs are lost or forfeited to more clear-thinking countries, talent goes unrealised, the quality of life of the average citizen declines and the scant remains of popular faith in politics as we know it are haemorrhaged with thoughtless indifference.

It’s a trite and often-uttered complaint of the layman, that ‘them politicians don’t live in the real world’, but it makes perfect sense in all three cases.

We’re used to this locally of course; infantile bickering and tribal politics uber alles, but, perhaps naively, we expect a gentle upward slide on the competence-meter as we look to the summit of national or continental politics.

In the UK, to take one example, a largely vapid, often wilfully ignorant media, mixed with the gutless, valueless ‘triangulation’ politics bequeathed by the age of New Labour has formed a political economy unable to process or explain important, complex matters in a sensible manner that values the intelligence of the general public. This applies to the US and seemingly most European states too.

Labour may have presided over some demonstrably wasteful spending, but its borrow-to-grow stimulus program was essentially sensible and, apparently, worked.

According to Larry Elliot in The Observer:

“Growth had resumed at the tail end of 2009, and Alistair Darling’s legacy to Osborne was an economy which was expanding at 1.1% in the second quarter of 2010, its fastest rate in nine years.”

Today, growth was estimated to be a measly 0.2% in the last quarter.

Sadly, Labour did not trust the electorate, the media, or its own social democratic instincts enough to clearly explain this to the man or woman in the street.

Hence the tame attack of “too far too fast”, and tongues tied in knots deflecting the question of “well, what would you cut?”

Anyway, about that deficit…according to the ONS’s June statistical report,

“…the public sector current budget was in deficit by £11.8 billion; this is a £0.4 billion higher deficit than in June 2010, when there was a deficit of £11.4 billion.”

So the deficit is up, growth is down, and the Business Secretary Vince Cable, interviewed in today’s FT, acknowledges that a lack of demand is the key problem, not the risk of a ‘Greek-style’ crisis.

Of course, this is exactly what Cable was saying before the Lib Dems entered government last year.

With households and businesses reluctant to spend or unable to borrow, the only possible source of increased demand is constructive, deficit-financed government spending, at least for as long as sensible, truly progressive taxation is weirdly taboo.

It’s that simple. And yet, none of the three main UK parties are capable of saying it, even where they know or believe it.

It’s hardly news that artifice and rhetoric routinely trump ethical outcomes in politics; it just seems that routine is finally delivering enormous, simultaneous reckonings on multiple fronts.

In the UK, the States and in the Eurozone, the lives of countless blameless citizens continue to be avoidably ruined, while none of the ‘democratic’ systems underpinning the political classes of these areas seem capable of breaking the spell.

 

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Comments (24)

  1. Alanbrooke (profile) says:

    well let’s see

    most countries are maxed out on their borrowing

    consumers are maxed out on their pay their debts

    anyone with an ounce of sense is using spare cash to pay down their debts or mortgage before interest rates go

    banks have been told by Cable among others to rebuild their balance sheets so are cutting lending.

    So why would you expect there to be a surge of demand ?

    There isn’t going to be one until debt is back under control. What did you expect ?

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  2. Lorcan Mullen (profile) says:

    “So why would you expect there to be a surge of demand ?”

    Well…I don’t: you’ve sort of missed the point there, Field Marshal.

    An aggressive cuts strategy isn’t helping to get debt ‘under control’ – if growth remains weak, borrowing (and of course debt) will continue to increase. This is what’s happening right now.

    Furthermore, the OBR has (very quietly) admitted that personal debt will have to rise quite dramatically if the Chancellor’s growth plans are going to come good. (http://krugman.blogs.nytimes.com/2011/03/30/austerity-games-here-and-there/)

    So you’re getting a bit muddled on political action to counter private and public debt simultaneously.

    Sensible deficit spending could stimulate enough demand to get a higher rate of growth, meaning more people in work, more people paying more in taxes, etc.

    Money for stimulus could even come from better-levied property taxes, CGT rising to match income tax, restoring the bonus tax, etc etc

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  3. Alias (profile) says:

    “With households and businesses reluctant to spend or unable to borrow, the only possible source of increased demand is constructive, deficit-financed government spending, at least for as long as sensible, truly progressive taxation is weirdly taboo.”

    The core ploblem is debt from spending borrowed money, so increasing the debt to spend more borrowed money isn’t going to solve the core problem. The borrowed money will still have to be repaid by the simple expedient of increased taxes, thereby further reducing the ability of consumers to buy goods and services.

    The problem with expansionist monetary policy as practiced by the Bank of England and the ECB and the federal reserve is that you create demand for good and services in the immediate term only by reducing it in the long term. These European economies have enjoyed a decade of growth based on spending borrowed money so their economies adjusted to that practice and switched from wealth-creating industry to supplying the goods and services for which the easy money created the demand. Now, instead of borrowing money and spending it, these European consumers are going to have to earn money and to repay it. That means, of course, that consumer demand collapses as the debt increases to the point where those lending it finally realise that there is a very real risk that those borrowing it cannot repay it.

    The idea that you can get out of that debt prison by switching borrowing from the private sector to the public sector is just, frankly, nuts. Public sector debt is private sector debt since it is the same consumers who must earn the taxes to repay it.

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  4. Lorcan Mullen (profile) says:

    Alias, this article deals with expansionist fiscal policy, not monetary policy. Two different arguments.

    “These European economies have enjoyed a decade of growth based on spending borrowed money so their economies adjusted to that practice and switched from wealth-creating industry to supplying the goods and services for which the easy money created the demand.”

    It’s possible to have deficit-financed stimulus that creates lasting, productive wealth, not just simple demand.

    New railways, bridges, directly-financed renewable energy component works, telecommunications upgrades etc etc could increase competitiveness, future productive turnover and tax revenue. Stimulus needn’t be a simple subsidy for unsustainable consumer spending, if it’s designed and implemented correctly.

    Of course that would take thoughtful, courageous leadership.

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  5. Zig70 (profile) says:

    Global economics happens despite politicians. All they do is get in on the photo shoot when the going is good and draw up strategies when its not. They didn’t foresee the credit crunch because they weren’t involved. Despite this they’ve spent all our dough and are in debt up to their necks.spending money to make money is a calculated risk, not the way you run your household finances. I’m with Wenger on this one.

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  6. Pete Baker (profile) says:

    “With households and businesses reluctant to spend or unable to borrow, the only possible source of increased demand is constructive, deficit-financed government spending, at least for as long as sensible, truly progressive taxation is weirdly taboo.”

    To paraphrase, Lorcan.

    Tax and spend!!!

    “It’s that simple.”

    Of course it is…

    Economics is not a science.

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  7. aquifer (profile) says:

    To grow we have got to have more money coming into the country than is going out. Tourism is good, importing fossil fuel is bad if it is due to waste, making and exporting things that people want is good.. Re-use is better than recycling.

    So the government should set up some online marketplaces, for holiday accommodation, for energy efficiency instead of fuel, for the finance and skills needed to make things, for companies that have gone bust and for equipment that is being underused.

    But politicians will never do such a thing, as it allows matters to proceed without them, even if risk and reward averse civil servants proposed it.

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  8. aquifer (profile) says:

    And efficient markets for entertainment in particular. An empty seat is a dead loss, so sell it cheap, automatically.

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  9. Alias (profile) says:

    “Alias, this article deals with expansionist fiscal policy, not monetary policy. Two different arguments.”

    Is that not what I said? “The problem with expansionist monetary policy as practiced by the Bank of England and the ECB and the federal reserve…” I didn’t say that government practiced it.

    I was explaining that these levels of debt arose because of a misguided monetary policy which held that borrowing money and spending it on goods and services would create wealth when in reality it simply created debt. That policy was instigated by the Federal Reserve and copied by the ECB in order for the EU’s growth rate to keep pace with the US, and duly copied by the Bank of England in order for the UK’s growth rate to keep pace with the EU. Those three central banks all implemented the same policies and all of them got the same results. Other central banks which did not implement them do not have the same problems.

    That leads to fiscal policy, and your proposal that the same misguided policy should be applied to it. What is the purpose of borrowing money and spending it when that policy will simply add to the debt and further deflate economic growth in the long term? The purpose is purely political, i.e. to provide immediate relief for the political class at the direct expense of taxpayers in the long term.

    If the policy did work then, given the trillions borrowed and duly squandered within the EU to promote it, we’d all be millionaires by now instead of being bankrupt and debt-laden.

    What dedicated Keynesians such as yourself cannot grasp is that government cannot create wealth but merely taxes and duly squanders the wealth that others have created. Worse still is that any investment in infrastructure that may enable others to create wealth is made by people who have no regard at all for the national interest and will duly squander as much of the public’s money as they can get their grubby hands on their own pet projects in their own constituency in order to promoe their own interests. All these parasites do is suck money out of the economy and squander it. We wouldn’t be in this mess if Keynesians didn’t get us into it.

    The hard economic reality here is all of the money that would have stimulated growth into the future by being used by consumers to purchase goods and services has been borrowed and used by those consumers to purchase goods and services in the past; so instead of buying new goods into the future, they now have to generate the wealth to pay for the goods and services that they have already purchased. In addition, a greater part of their disposable incomes will also be taken from them by the state in the form of increased taxes and reduction of state services in order to repay public debt, so consumer spending is also going to be reduced by that means.

    The last decade of growth was financed by a multi-trillion borrowing spree, and unless you can find another multi-trillion source, the next decade (and more) is going to be about the austerity measures that you have to take to pay it all back. The goods times are over, and wishing them to continue by asking government to continuing the spree is nuts.

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  10. Lorcan Mullen (profile) says:

    Alias –

    If you can’t tell the difference between monetary and fiscal policy, and really believe that “We wouldn’t be in this mess if Keynesians didn’t get us into it”, there’s little sense in entering into a debate.

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  11. Alias (profile) says:

    White towels in the corner, please.

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  12. Lorcan Mullen (profile) says:

    Why feed the silly Randian trolls?

    You’ve got a fundamentally different view of what governments are capable of, the relative permanence of money, what constitutes ‘real’ wealth, etc etc etc. We won’t meet in the middle, and one of us won’t ‘win’.

    Just promise not to harangue the next nurse, fireman or binman you come across, as they gormlessly squander ‘real’ money ‘created’ by prime movers elsewhere, the fools.

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  13. CharlieMcCarthy29 (profile) says:

    i think that a large part of the problems was due to the “fancy” economic instruments that the “Masters of the Universe” created in order to make themselves incredibly rich. Given that the creators and promoters didn’t quite understand them themselves, what chance did the general public have? People are currently shell shocked and afraid to spend which, in the long term, is the only way out of the mess. That’s without getting into the argument that we cannot have indefinite growth in a finite world. There is still money to be made, temporarily at least, by turning the Chinese and Indians into super-consumers.

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  14. Alias (profile) says:

    Lorcan, is there such a category of troll?

    And what about the troll who squeels “you’re a troll” when he is unable to counter the argument?

    As regards your tripe about “nurse, fireman or binman”? What has that got to do with anything? You were not arguing that the government should borrow to fund wages, but rather that they should borrow to squander taxpayers’ hard-earned money on fiscal profligacy. Do you not remember your own spiel?

    Spiralling government debt and impending bankrupcy is the evidence of what governments are capable of, my fickle Keynesian friend.

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  15. Alanbrooke (profile) says:

    Lorcan

    the argument that we should keep borrowing more to “stimulate” ourselves out of debt is just ridiculous.

    Fat people don’t lose weight by eating more.

    Consumers have to go on a debt diet and yes that means pain, come to terms with it.

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  16. Lorcan Mullen (profile) says:

    Alias; my ‘tripe’ was ironic, your tripe sadly isn’t. I think I was tickled by your paranoid ranting about governments; go back and hug your copy of the Fountainhead.

    “Spiralling government debt and impending bankrupcy is the evidence of what governments are capable of, my fickle Keynesian friend.”

    And the financial crash didn’t happen, did it? That’s not even a part cause of all this mess?

    And if it is, it was, I bet it was the fault of all dem pesky guvmint reggerletters? More market freedoms would have been just the ticket, eh?

    Alanbrooke; continue to ignore the actual evidence if you must.

    “Consumers have to go on a debt diet and yes that means pain, come to terms with it.”

    Read my first response; the Osborne cuts program is built on even higher personal borrowing than now. I think you’re into sadofiscalism, not addressing the actual issues.

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  17. tuatha (profile) says:

    In another World, on the far side of the Atlantic ditch, a Treasury ‘spokesperson’ said that “people need access to credit so that they can continue consuming”.
    WTF? Many have called for Shrub, bLIAR & others in the Coalition of the Killing to be tried at Den Haag but there doesn’t seem to be a similar tribunal for Alan “if you think you understand then I haven’t made myself clear” Greenspan of recent history nor the current monetary criminals such as Geithner & Goldmann Sachs.

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  18. Alanbrooke (profile) says:

    Lorcan

    you appear to be in that category of people who believe what the government says.Just because the OBR give a forecast doesn’t mean to say its true . Like trains there’ll be another one along in a while.

    Looking at first principles there’s too much debt and it has to be piad down. Or put another way all that growth of the last decade wasn’t real as debt isn’t wealth,

    In simple terms governments are fast running out of other people’s money and they have very few other tricks up their sleeves except more taxes and cuts.

    So call it sado-fiscalism if you want but it’s increasingly the only game in town. Furthermore what you term 1930s rectitude is anything but, when the UK is borrowing £120+ billion more each year and the Republic proportionately more. If you want to see what the 1930s were like put those sums down to zero and then see what happens.

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  19. Lorcan Mullen (profile) says:

    Alanbrooke -

    “you appear to be in that category of people who believe what the government says”, as I attack its economic strategy? And say they’re not living in the real world?

    The OBR has been shown to be over-optimistic over and over since its inception, but still says private borrowing will go up. If you believe it’s deliberately playing those figures down (which I’d also be inclined to believe, and I think that’s what you’re saying, as increased personal borrowing is bad news…), then that actually reinforces my argument, and further undermines yours.

    “increasingly the only game in town” – but it’s leading to INCREASED borrowing. What do you say to that?

    “If you want to see what the 1930s were like put those sums down to zero and then see what happens” ….yes, this is what the government is looking to achieve…and it seems to be failing…

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  20. Alias (profile) says:

    Lorcan, you have a very poor attitude for a blogger but a very apt attitude for “government knows best” underling.

    There was no irony at all in your comment, and it doesn’t exist retrospectively just because you claim it. You deliberately obfuscated spending on essential state services that are provided by “nurse, fireman or binman” with non-essential state spending on a fiscal stimulus package, and you did this to create the impression that opposing your proposal to squander taxpayers money on a fiscal stimulus package was as aburd a position to adopt as opposing spending on those essential state services. In short, you constructed a straw man and you did so to further your misguided agenda via propaganda rather than valid argument.

    Government debt is the result of a government decision to borrow money, child, as is the conversion of private sector debt into public debt a result of a government decision. It was the wrong decision to make, but and it was government that made it. The correct decision would be for government not to underwrite the debts of private business. But that isn’t the end of the wrong decision made by government since the EU has now made the moral hazard explict by giving a guarantee to underwrite all such debts in future. It seems goverments just can’t help interfering in the free market at the direct expense of their citizens, can they?

    Governments like Keynesian dogma because it provides them with a quasi-economic basis to justify tax and spend policies. And public servants like it too because any idealogy that promotes big government promotes more jobs and more power for them.

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  21. Lorcan Mullen (profile) says:

    I think it might be better if I leave that blizzard of tetchy pomposity to undermine itself, Alias.

    “Government debt is the result of a government decision to borrow money, child”…

    I know, aul boy!

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  22. Alanbrooke (profile) says:

    Lorcan

    you appear to be confused by your own arguments, perhaps it’s because you’re trying to have it both ways.

    To date the government hasn’t cut spending. It is spending less quickly, but that is not a cut. A cut is when you spend less than you are currently. the government isn’t doing this.

    That’s the reason why debt is in increasing even though the annual deficit is coming down. But we still have to pay the money back.

    it’s easy to say the government isn’t living in the real world, however I fail to see what alternative you are advancing. Borrow more ? Hardly realistic as there are increasingly fewer lenders. Print money ? We are already doing that.

    So aside from saying it’s all very difficult and you don’t like George Osborne what are you proposing instead ?

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  23. Lorcan Mullen (profile) says:

    Alanbrooke,

    “you appear to be confused by your own arguments” well, I don’t think so. ‘Less spending’, like ‘savings’ is just semantics. A cut’s a cut.

    “even though the annual deficit is coming down” – unless I’ve been reading the wrong things, it isn’t. If growth continues to fall behind the government’s projections, it will increase.

    I’m saying that austerity isn’t succeeding in bringing down deficits: this is hardly a new argument.

    Borrowing more would be difficult, but it’s hardly impossible; the interest on UK sovereign borrowing isn’t bad by international standards.

    A lengthening of the paydown time to 7, 10, 12, 15 years, combined with a well-designed stimulus before the end of this year seems sensible to me.

    Make the savings from gradual efficiencies and wastage over a long period of time, wind up unnecessary wars, redesign the tax system to combat tax evasion and make some sort of dent on inequality, and invest to grow.

    This’ll lead to market grumbling and a higher rate of interest, but the UK isn’t, wasn’t and shouldn’t be in any serious danger of a default. Most UK debt is held here by big, institutional investors, who have little to gain from playing around with sovereign-baiting chicanery.

    I don’t dispute that the money needs to be repaid: the decision to repay it over an arbitrary, relatively short period of time (one parliament) is playing politics with the economy. I’m not cribbing that it’s difficult; I’m pointing out that the current strategy is self-defeating.

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  24. Lorcan Mullen (profile) says:

    I should clarify; the decision to eradicate the deficit over one parliament not ‘the decision to repay it’ (ie, the debt)

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