U-Turn

Nursey: Oh, that’s another good idea. You’re so clever today, you better be careful your foot doesn’t fall off.

Queen Elizabeth: Does that happen when  you have lots of brilliant ideas? Your foot falls off?

Nursey: It certainly does. My brother had this brilliant idea of cutting his toenails with a scythe and his foot fell off.

(From Blackadder II)

One suspects from this conversation that Nursey’s brother was a bit thick but there could be an alternative. It could be that he was a politician who had realised that his initial plan was terrible but thought it better to go ahead with than be seen to change his mind.

Yesterday Michael Gove scrapped his policy to replace GSCEs with the English Baccalaureate. “U-Turn!” cried the media. “U-Turn!” cried The Opposition. I didn’t. I saw it and thought, “A politician has admitted they got something wrong and scrapped a bad idea. I wish they’d do that more often.”

I have lots of ideas at work. Some of them turn out to be good but not all of them. Quite often I’ve overestimated the benefits that an idea would bring or underestimated the amount of work it would entail. When that’s the case I will try to adapt the idea based on my new information or I might even scrap it altogether. This is just the way things work in all walks of life outside politics.

For example, Adrian Newey is widely considered to be the greatest Formula 1 engineer of his generation. If Newey puts a new bit on one of his cars he expects it to make the car faster. If it doesn’t and it turns out that it makes the car slower he will take it off or change its shape. He won’t leave it as it is and then put lots of effort into a campaign that pretends it is making the car faster. (I’m fairly sure he wouldn’t have won nine constructer’s titles that way.)

Although that sounds obvious, we seem to have some in-built expectation that politicians must get everything right from the outset and never adapt or abandon their ideas. If they do they are “Weak” and they are “Flip-Floppers” and they are “U-Turners”. I have no love for politicians but treating them in this was leads to a very big problem because it continually makes them refuse to adapt or abandon bad ideas. Essentially we put them in a situation where the consequences of scrapping a bad idea is usually worse than just continuing with it and pretending it’s good.

Take the economy for example. I have (as you might have noticed) been fairly vocal about the government’s austerity policy. I believe that since taking power they have been pursuing the exact opposite of what was required. The initial policy though, while flawed, was not the main problem. The main problem was that for almost three years the government has refused to adapt that policy in light of a continual stream of damning evidence that has shown, time after time, that it just isn’t working.

But last week I wrote of my optimism:

One of these days, and probably sooner than you think, those people who stuck by the government when they said austerity would mean growth are going to run out of patience…when this happens the government will have no choice but to do something sensible instead.

Seems it might be sooner than I thought as well. Although the Gove story took centre stage yesterday there was another apparent change of plan as the government announced it was to borrow £2.3bn and invest it in improvement of our flood defences. This really is good news. Improving flood defences is something we need to do anyway and there is no better time to do it when there are lots of unemployed people waiting for work and when we can borrow that £2.3bn at extremely low rates.

This is exactly the kind of thing the government should be doing. Ok, this policy on its own is far too small to solve the overall problem but it does suggest that the government might have finally admitted to themselves that they need to spend in order to create growth.

Over the coming weeks and months I hope to see more policies like this and if they do materialise let’s all promise that we won’t shout, “U-Turn!” If we do that, we risk the government immediately fleeing back to austerity and back to the pretence that their initial policy is working.

And if that happens we’re going to spend the next two years as we’ve spent the last three – cutting spending, cutting the economy and cutting our toenails with a scythe.

RedEaredRabbit

Depression and Optimism

George W. Bush once famously said:

Fool me once, shame on you. Fool me… errr… twice…. errr.. umm…..

He was great, wasn’t he? I suppose the irony of that statement was that there are probably very few people in the world that you could fool more times than George W. Bush.

Just over a year ago I wrote a post called Economic Bloodletting in which I made a comparison between the government’s economic policy and the ancient medical practice of bloodletting, where doctors would try to cure an illness with a treatment that made the patient worse. Each time the patient had a a few glugs of blood removed their condition would deteriorate and in response the doctors would prescribe more bloodletting.

Fortunately our health service has moved on a lot since those days but what of the other side of that comparison? How has the government’s austerity policy served us over the twelve months since I wrote that? Do I have egg all over my face now? Have I been shown to be a scaremongering charlatan?

Let’s find out by updating the Depression Tacker!

Depression Tracker

Depression Tracker

For those of your unfamiliar with the Depression Tracker – I am comparing the current UK depression with the one from the Great Depression of the 1930s (until recently the benchmark for economic catastrophes). What’s worth noting is the position of the blue diamond on the graph. That’s when David Cameron came to power. You can see that at that time, the UK economy was doing much better than the equivalent period in the Great Depression, having never sunk as far and having been in recovery for the previous 12 months. After that point you can see that the recovery ground to a halt and in comparison, the economy during the Great Depression caught us up, passed us and kept on going. Five years after the economic collapse that started the Great Depression, the UK economy had not only recovered but was 4% larger than it was before the depression started. In comparison, our economy today is still 3.2% smaller than it was five years ago.

Now that’s a pretty stark difference and it’s not like I’m comparing things with a small economic hiccup – that green line is The Great Depression.

So what did the government do back in the 1930s to achieve the recovery? Yep – government spending. The government built a load of houses, employing a huge number of otherwise unemployed workers in order to do so. With the prospect of war on the horizon they increased military spending and built tanks and guns and planes and things. What they spent money on back then is not really important to the comparison, (I’m not suggesting we start a world war to end the depression). The important thing was the government spent money and when the government spends money in a depression they will get an extremely good return on it in terms of economic growth.

Since I wrote that post on Economic Bloodletting though, our current day government has done the opposite. They have continued to maintain their belief that decreasing spending during a depression will somehow magic up lots of growth. As you can see in the Depression Tracker above that has not happened and all they have actually achieved is the setting of a new benchmark to replace the Great Depression as the darkest point in our economic history.

Last week the ONS released its quarterly report showing that the economy is shrinking again. As I’ve said before, the results of one individual quarter is not the story here. The story is the longer term picture and when we look at that we can see that our economy has basically flatlined since the current government took office almost three years ago.

If the subject matter that I am discussing were something of a trivial nature then I would now be happily strutting around and saying, “I told you so!” but this subject is anything other than trivial. This failed experiment has meant a million people sitting at home waiting for work when there were no jobs for them. It has meant businesses going bust that could have otherwise continued and thrived. It has meant hundreds of thousands of students graduating into an economy that has no use for them. When you look at it like that you can understand why I would rather have been wrong.

Yet, I said in the title of this post there was optimism too and for the first time in years I do feel some. This is why:

One of these days, and probably sooner than you think, those people who stuck by the government when they said austerity would mean growth are going to run out of patience. Nick Clegg and Boris Johnson have both made comments in the last week to say that we need more government spending to get a recovery. They didn’t seem to want to expand too much on why they had been directly opposing it until last week but I have a theory on that – rats leaving a sinking ship.

Despite weak opposition, those who previously believed that austerity would create growth will not believe it for much longer and when this happens the government will have no choice but to do something sensible instead. Every quarter since the government came to power they have expressed solemn disappointment at the latest set of weak growth figures and sagely told us that more bloodletting is needed to cure the economy. The reason I’m optimistic is simply that I can’t see that there is any way people will continue to swallow it.

Fool me once? Fool me twice? Fool me thrice?

Seriously – even George W. Bush would have worked it out by now.

RedEaredRabbit

Referendum

So this week we received the (not entirely unexpected) news of the government’s plan for a referendum on the UK’s membership of the European Union. Comparing the pros and cons of EU membership is extremely complicated and I’m not going to attempt that today.  Before we even start thinking about that stuff it’s worth considering whether this issue is actually best decided by a referendum in the first place.

Referenda (pats self on back for pedantic pluralisation) are, on the face of it, a fantastic testimony to the democratic values we hold true – a single important issue and everyone of voting age gets their say.

That’s on the face of it though and I have some concerns. For a start it isn’t at all clear to me how the government decides which policies are subject to a referendum and which they’ll just go ahead and do anyway. The following are referenda (see, did it again) that never happened:

  • Should the UK cut income tax for rich people from 50% to 45%?
  • Should the UK implement real-term cuts in benefits for poor people?
  • Given that the Austerity Fairy hasn’t shown up to magic away the depression, should the UK pursue economics instead?

On these important points, the government has felt ok to decide for us, so what is special about EU membership? We obviously can’t have a referendum about everything but this process is at best unclear. I suspect the reason for this is that David has found himself in a difficult position and were he to decide this himself he would lose either way. If he said that we would leave the EU he’d lose the support of the Lib Dems (even they must have limits as to what they can forget they stand for). If he said we were definitely staying in he’d face a backlash from his own party followed by the familiar sight of the Conservative party self-destructing when Europe is mentioned. For a man who markets himself as taking the “tough choices” this appears to be little more than an attempt to dodge the issue.

Whatever the criteria really are for deciding when something should go to a referendum there is, I feel, a much bigger concern. If we do have a referendum on this decision, I would like to think it would work like this:

  • Politicians from all sides will make every effort to fairly and factually represent the pros and cons of EU membership.
  • They will be open and honest about their best predictions about what the impact on our economy and our society would be
  • They will then give their opinions, to a now educated public, as to what their preference is
  • When doing this will clearly show the reasoning behind these opinions and base this reasoning on the facts that we now know.
  • The public will make an informed choice

Ok. So now re-read those bullet-points and when doing so, please bear in mind how plausible that sequence of events is.

What I suspect will actually happen is this:

  • Politicians from all sides will make every effort to unfairly and, with cherry-picked statistics, misrepresent the pros and cons of EU membership
  • They will be a dishonest about their best predictions about what the impact on our economy and society would be
  • They will then give their opinions, to a now confused and misled public, as to what their preference is.
  • When doing this will base their reasoning on the misleading, cherry-picked statistics that they have previously communicated
  • The public will make an uninformed choice

Let’s not stop at politicians – how are the media going to behave in the run-up to such a referendum? Will The Daily Mail journalists all be writing responsible pieces to give the public as much information as possible so they can make their decision an informed one? Will The Sun, (previously of the headline, “Up Yours, Delors!”) be taking a responsible position to make sure their readers are all well-informed?

Remember when we had that referendum on whether we should change the way we elected our MPs from First Past The Post to the Alternative Vote? Do you remember quite how shamefully the politicians behaved during the run up to that? Do you remember quite how badly they misrepresented the facts? Do you remember quite how much time they spent misinforming us instead of running the country? (If you don’t I wrote about it here.)

Imagine that farce multiplied by ten. If we put this issue to a referendum then all we have to look forward to is the full force of politicians and newspapers from all sides pushing their own agendas, each one of them misrepresenting the real costs and benefits in order to intentionally mislead the people who will vote.

Don’t misunderstand me – I like the idea of democracy but this just isn’t what I had in mind. The government says we can choose fairly but let’s be clear on what we’re going to get here – a tsunami of propaganda that will make any sensible consideration of the options utterly impossible.

And you know what else? All those campaigns are going to cost a fortune. Where’s austerity when you need it?

RedEaredRabbit

Politics and Economics (and Pasties)

Looking back on 2012, I think it would be fair to say it was a fairly difficult year for the government’s economic credibility. No economic growth, no deficit reduction, a double-dip recession etc. There is one economic government policy however, that stands out from all of the rest and this is a blogpost about that one. Let’s begin.

At the start of 2012, the Conservatives and the Labour party were polling fairly closely but following the announcement of the government’s “Pasty Tax”, Labour shot into a massive lead, which they have held pretty consistently ever since.

If you are a regular reader of this blog, you might guess what my thoughts are on the “Pasty Tax” – yes, that’s right. In a year that the government spent creating and then stepping in huge economic cow pats, this one stood out for being… a good idea.

To see why I think it was a good idea and why it was ultimately scrapped we need to look at both the economics and the politics.

Economics

The phrase “Pasty Tax” was coined by the media to describe the closing of a tax loop-hole that meant certain foods were sometimes liable for VAT and sometimes exempt from VAT depending on the temperature at which they were stored in the shop or sold to the consumer. Under the previous policy if I had gone into a shop and bought a sausage roll, VAT would be charged as follows:

  • If I bought it cold and heated it up myself – exempt from VAT
  • If it had been cold when I went in and the staff heated it to order – exempt from VAT
  • If it had been kept warm in a cabinet under heater lights – liable for VAT
  • If it had been kept warm in a cabinet under heater lights but taken out of the cabinet when I ordered it and allowed to go cold before I bought it – exempt from VAT

I mean, seriously, whoever thought of that system? It is completely ridiculous. It is in no way unique though. In the UK VAT is charged on biscuits but not cakes – so the eternal question, “Is a Jaffa Cake a cake or a biscuit?” ended up in court. Wikipedia summarises it and links to the sources nicely:

In the United Kingdom, value added tax is payable on chocolate-covered biscuits, but not on chocolate-covered cakes.[12] McVities defended its classification of Jaffa Cakes as cakes at a VAT tribunal in 1991, against the ruling that Jaffa Cakes were biscuits due to their size and shape, and the fact that they were often eaten in place of biscuits.[13]McVities insisted that the product was a cake, and according to rumour produced a giant Jaffa Cake in court to illustrate its point.[13] After assessing the product on eleven criteria, including “texture”, “attractiveness to children” and “consistency when stale”,[14] the court found in McVities’ favour, meaning that VAT is not paid on Jaffa Cakes in the United Kingdom.[12]

Now I can understand that there are often reasons for charging more or less tax on certain products. My job means I often have to fly somewhere in an aeroplane. Aeroplane travel is damaging to the environment though so I can understand the reasons that my flights incur a high tax. When the government taxes something then people will use it less, so the higher the tax is the less inclined my company will be to send me somewhere. They might decide that, given the costs involved, we should do a video conference instead.

The examples discussed above are in no way related to giving people sensible incentives though. Although it is cheaper for me to order my sausage roll and wait for it to go cold before paying for it, exactly what incentive is this policy trying to create? I have a cold sausage roll and the government has no tax revenue. Is that the outcome that the government is trying to engineer? No, of course not. Therefore closing this loop-hole was a good economic policy.

Let’s have a quick glance at VAT on heating your house. VAT on gas and electricity is 5% rather than the standard 20% applied to most other purchases. This makes heating my house much cheaper than it would be if gas and electricity were taxed at the standard rate. Using gas and electricity though is not something that we want to encourage so why in the world would we want to give it a tax break?

Let’s move on to the next subject.

Politics

It turned out that the government’s one good economic policy of 2012 was so unpopular that they quickly reverted to economic incompetence and abolished it. The Pasty Tax was scrapped and we retained the existing bizarre set of rules and incentives. But why was this?

The answer is that, although it was economically good, it was politically bad. The media got hold of the policy and reframed it as a tax by the nasty party on pasties, which were, as we learned, the quintessential sustenance of the working classes.

Now I doubt you will ever meet anyone who spends their free time being more disillusioned with politicians than me but even I found the next chapter in this story funny. First Ed Miliband and Ed Balls rushed down to the closest Gregg’s, news teams in tow, to show how much the Labour party liked pasties:

Ed & Ed out pasty shopping

Ed & Ed out pasty shopping

I like this photo. Ed Balls has even taken off half of his jacket in order to look more working class.

Anyway. David Cameron and George Osborne then found that the only sensible political response was to show that they liked pasties even more than Ed and Ed. Cameron waxed lyrical over his last pasty – which it subsequently turned was from a shop in Leeds station that hadn’t existed for five years. Still, no better time to put things right:

I like pasties more than Ed Miliband

I like pasties more than Ed Miliband

I like pasties more than Ed Balls

I like pasties more than Ed Balls

With no clear winner, the cabinet then challenged the shadow cabinet to a pasty eating competition to decide who liked pasties the best. Labour was initially bullish but their advisors then realised that they’d be taking on Eric Pickles and it would be akin to playing the cabinet at football with Lionel Messi as Foreign Secretary.

As it was then, we never found out which party liked pasties the best and shortly afterwards the government made a U-turn on their only sensible economic policy of 2012 and renounced the Pasty Tax.

Politics & Economics

What is actually going on here is a clash between politics and economics. The two often don’t agree and when they don’t the government always favours the former over the latter. Although economically it is far better to have a sensible VAT system without odd, unexplainable loop-holes; politically it is harder to explain. Predictably the policy was dropped.

Sometimes I meet someone and when we’re discussing things they say that they studied “Politics and Economics” at university and I think, “Shit! That must have been confusing.”

I imagine them in their finals, sitting down in the morning to their economics paper and seeing the question, “Should VAT be set at the standard rate for gas and electricity?” and them having to say “Yes!” then going to their politics exam in the afternoon, seeing the same question and having to say, “No! We’d kill all our pensioners!”

And I am sure that some of you reading this will be saying that this is all well and good but if we put VAT up on heating our homes we will kill all our pensioners. Well, this is where we can use economics to trump politics. If I get more tax revenue from everyone then I can use some of it to pay more in benefits to the poor and old. I can make it so that a pensioner’s increase in income is equal to what they lose on heating their home. By doing that the pensioner doesn’t lose anything and the government still gains overall.

I am in full-time employment but at the moment I pay 5% VAT if I switch the heating on and I pay 20% VAT if buy a jumper. This is not a tax policy that encourages sensible behaviour.

Sadly we live in a society where politically good things always better economically good things. It’s not just economics though, health, eduction, the environment and everything else is subject to politics over sensible policies.

So what should we do? I would like to live in a society where the government chooses to implement sensible policies and makes a big effort to explain why they were sensible so that we have a foil to the propaganda of The Sun and The Daily Mail and politics and sensible policies became aligned to the same things.

Sadly I see little prospect of that though, so while we wait we may as well munch on a couple of Jaffa Cakes. They’re tax free after all.

RedEaredRabbit

The Great Benefit Swindle

Tomorrow MPs will debate the real-terms benefits cuts proposed by George Osborne in his Autumn statement last month. (Was it Autumn last month?) Anyway, I’ve been wondering what all of this is about and have found some quotes from the government to shed some light on things.

…Conservative methods are not just good for the strong and the successful but the best way to help the poor, and the weak, and the vulnerable. David Cameron

Oh, that’s a relief – I thought they were going to do something nasty to poor people for a moment. Oh, hold on – here are some more quotes from the government about what it’s like to live on benefits.

Don’t get a job. Sign on. Don’t even need to produce a CV when you do sign on. Get housing benefit. Get a flat. And then don’t ever get a job or you’ll lose a load of housing benefit.David Cameron

…out of work for years, playing computer games all day, living out a fantasy because he hates real life… David Cameron

…it pays not to work. That you are owed something for nothing. David Cameron

…fairness is also about being fair to the person who leaves home every morning to go out to work and sees their neighbour still asleep, living a life on benefits. George Osborne

And all of this time I’d thought it would be quite unpleasant to have to live on benefits but actually having read those things, it sounds ace! They continue:

The system we inherited was not only unaffordable. It also trapped people in poverty and encouraged irresponsibility. Those within it grow up with a series of expectations: you can have a home of your own, the state will support you whatever decisions you make, you will always be able to take out no matter what you put in. David Cameron

…there was a stronger culture of collective responsibility in this country. But as I’ve argued for years, the welfare system has helped to erode that culture. David Cameron

Time and again people were not just allowed to do the wrong thing, but were actively encouraged to do so. David Cameron

So it would seem from the government’s position that over time, working-age benefits have become more and more attractive. That the welfare system has, over time, changed people’s incentives from wanting to work to not wanting to work. The one statistic used to back this up was presented in George Osborne’s Autumn statement but has been quoted many times in the press since:

…over the last five years those on out of work benefits have seen their incomes rise twice as fast as those in work. With pay restraint in businesses and government, average earnings have risen by around 10% since 2007. Out of work benefits have gone up by around 20%.

Well, no wonder people’s incentives are moving from wanting to work to wanting to live off benefits – the benefits are going up twice as quickly right? Hmmm.

Jonathan Portes immediately spots the slight of hand George used here. Although that stat is correct George has done some quite amazing cherry picking and completely discarded the vast majority of the useful data. As Portes notes:

The value of out of work benefits relative to average earnings (and more broadly the incomes of those in work) has fallen steadily over the past three decades, until the recent slight uptick resulting from the recession:

In 1979, unemployment benefit (the predecessor to Jobseekers’ Allowance) was about 22% of average weekly earnings; today it’s about 15%, a relative decline of about a third. What’s going on? Simple: JSA has been indexed to inflation. In normal times, earnings rise faster than prices, as workers become more productive and the economy grows; this chart shows the cash value of both JSA and average weekly earnings:
So indexing benefits to prices has been far from unsustainable, or “unfair” to working people, over the last 30 years. Indeed it has resulted in a substantial reduction in spending on out of work benefits as a proportion of GDP, compared to the alternative of indexing benefits to earnings.

So take a good look at that green line compared with the red line in Portes’s second graph. Average weekly earnings have far outstripped job seeker’s allowance for the past thirty years. If we accepted the idea that people are now choosing not to work because the benefits system makes job seeker’s allowance so attractive, then how would we explain that graph? It should have been much more attractive in the past than it is today.

(Another possibility for people not working is that the economy is depressed and there are fewer job opportunities than there are people who want to work. I think that one might be worth considering before we wage war on the unemployed. The government and I disagree on a lot though.)

Now when it comes to many of the things that have gone wrong in the economy, people argue that George Osborne has been dealt a difficult hand, or that he is well-meaning but numerically incompetent. On this occasion though we can see exactly what has happened and it is just pure deception. There is absolutely no way that George wasn’t able to access to stats before 2007 – he simply ignored all of the data that didn’t back up what he wanted to do.

When we look at the true picture we see that the income of those on job seeker’s allowance has fallen further and further behind the income of those in work. I don’t doubt that there are a small number of people who exist who can’t be arsed to get a job but these are a tiny minority and to label everyone out of work in this way, especially during a depression, is really unbelievable.

The government wants to cut benefits – I understand that. If they said something like:

“We understand that job seeker’s allowance was closer to average wages in the past and understand that it has fallen further and further behind over the years. Even taking this into account though we still think that it is too high and we would like to have a debate to discuss this.”

Then at least we would be going into a debate on an honest premise. If we go into a debate based on a single statistic that was cherry-picked for the express purpose of distorting the debate and couple it with the propaganda in the quotes above, how can we really expect to get any kind of sensible outcome?

And to the politicians it might just be a debate but let’s remember what we’re actually talking about here. Banks around the world caused a financial crisis on a truly huge scale. In the UK a million working people lost their jobs. They didn’t overnight choose not to work because they were “scroungers” or because they wanted to spend their days “playing computer games”. We are talking about cutting the benefits for people who, through no fault of their own, lost their jobs and are now in dire trouble with no imminent prospects to return to the work they had.

Sometimes when I write these posts I’m despairing of the government. On other occasions I am angry with them. Today I am neither of these. Today I am just ashamed.

RedEaredRabbit

The Austerity Fallacy

If you’ve been on a long-haul aeroplane ride in recent years you will no doubt be familiar with the fantastic invention of noise-cancelling headphones. Noise-cancelling headphones use a microphone to measure background noise and then cancel it out by transmitting the “opposite” noise through the headphones.

I use the word “opposite” a bit clumsily here. I don’t mean that if there is a “woof” in the background then the headphones transmit a “meow”. I mean that if there is a sound wave that looks like this:

Background noise

Background noise

Then the noise-cancelling headphone produces a sound that looks like this:

Noise-cancelling effect

Noise-cancelling effect

Note that the peaks of the background wave line up with the troughs of the noise-cancelling wave and vice versa, so when we add them together they offset one another. The noise-cancelling wave probably won’t be perfect and remove the sound completely but it will get rid of most of it resulting in a smaller version of the original background noise (the green line below):

Noise-cancelling wave

Noise-cancelling wave

Essentially it works the opposite way round to a hearing aid. A hearing aid also has a microphone but instead of transmitting the “opposite” noise through the earpiece, it transmits the same noise – i.e. the peaks and troughs all line up. This time, rather than cancelling each other out, the waves combines to produce a bigger version of the original wave:

Amplifying Wave

Amplifying Wave

Now you might wonder what all of this has to do with austerity. I’m coming to that but before I do let’s remember an important economic principal that I have mentioned many times before:

In the economy, my spending is your income and your spending is my income.

What I mean by this is that everyone’s income is a result of someone else spending money. If I buy a new pair of shoes then that gives income to the people who work in the shoe shop, people who work in the factory that produces the shoes, people who produce the raw materials such as leather, rubber, cotton, plastics etc that go to the factory, people who drive the lorries etc that deliver the raw materials to the factory, etc etc etc.

How did I get the money to buy the shoes? Someone else spent some money on the good or services that I help provide in my job. The point I am making here is that in the economy, spending and income are two sides of the same coin – you can’t have one without the other. Although this is the case, it is far easier to find a politician who says that we should all reduce our spending than it is to find a politician who says that we should all reduce our income. Politicians are a funny sort though. Anyway let’s talk about spending.

In the economy, at the highest level, we have two classes of spending – private spending and government spending. Private spending covers things like household spending, (such as the pair of shoes I bought) and the spending of companies. Government spending covers things like the NHS, state education, the armed forces, council budgets, roads – well, anything the government might want to spend money on.

The sum of private spending and government spending represent the total spending that is going on in the economy and therefore the total income. In order to maintain a healthy economy a healthy level of spending needs to be maintained but unfortunately the private sector is very unreliable in this respect.

The economy is sometimes good and sometimes not so good. When the economy is good the private sector wants to spend money – companies have lots of demand for their goods and services so they increase supply to meet the demand. This means employing more people opening new shops or offices or buying more raw materials from suppliers etc. When the economy is bad and demand for their goods and services is low they respond by reducing spending – making redundancies, closing shops, buying less raw material from suppliers etc.

So private spending over time might look a bit like this:

Private Spending

Private Spending

Those peaks are nice but those troughs are a problem. During those troughs, other things being equal, the economy as a whole is going to suffer from a lack of spending and a lack of income. Other things do not have to be equal though.

When the economy weakens, the government usually responds by cutting interest rates. This helps by making saving less attractive and borrowing and spending more attractive. More often than not this is enough to get the economy heading back in the right direction. In the case of the current financial crisis though it has not been enough to get things back on track. Interest rates were cut to near zero over three and a half years ago but the economy is still not recovering. Even with extremely low rates people would still rather save and pay down debt than borrow and spend.

So what are we left with? Remember that total spending is made up of private spending and government spending. We know that the private sector isn’t spending so we’re left with government spending. If the government keeps their own spending constant then overall spending will drop by the same amount that the private sector cuts spending. That doesn’t help.

The government could act as noise cancelling headphones though – increasing spending when private spending drops and cutting it when private spending rises. This might look like this:

Sensible Government Spending

Sensible Government Spending

You notice that when the government spends like this it helps to fill in the troughs and helps to stop overall spending (and therefore income) plunging by as much as it would if left to the private sector. (Note – we’re not asking the government to spend more overall – we’re asking the government to spend more when the private sector is not spending and less when the private sector is spending.) When interest rates can’t help then this is a very sensible fiscal policy – spending and income is to a large extend maintained.

Let’s look for a moment though at the opposite fiscal policy – what would happen if the government chose to cut spending at the same time as the private sector? (Essentially fitting a hearing aid when noise-cancelling earphones were required.) Now the government actually amplifies the effect of the private sector downturn:

Daft Government Spending

Daft Government Spending

Bizarre as it might seem, this was the choice of the UK coalition government. Rather than act to offset the spending cuts of the private sector they chose to amplify them and instead of smoothing over the cracks they have opened them up.

This is the Austerity Fallacy – the widely held belief that cutting government spending when private spending is depressed will create economic growth. But your spending is my income and my spending is your income. The government has intentionally engineered a situation where no one in the economy is spending which bizarrely they expected to create growth.

Just in case I get the usual arguments in the comments on this post, I’ll address them now in a pre-emptive strike:

But government spending is what got us into this mess in the first place!

No it isn’t, I already covered that.

But if we don’t slash spending then the rates at which the UK government can borrow will become unaffordable!

No they won’t, I already covered that too.

Damn you! But we can’t spend more than our income forever! (Ha! I have you this time!)

You have not read this post properly. I do not say the government should increase spending forever. When the private sector is weak and unemployment is high then there are lots of spare resources in the economy that increased government spending can utilise. When the private sector is strong then the government can reduce spending safe in the knowledge that there are plenty of jobs being created in the private sector for people to move to.

I am definitely not advocating high government spending when the private sector recovers – quite the opposite in fact. We have long-term problems in the shape of the government’s commitments to pensions. With an ageing population our pension liability is increasing far quicker than our motivation to address it. I agree that we need to get on top of these things but to decide to try to do it in the middle of a depression is frankly very stupid.

When the economy is not working our government has an immediate obligation to fix it. When it is fixed we can go about tackling the long-term things but attempting to tackle them when the economy is depressed is self-defeating – both in theory and (thanks to the government) we can now see, in practice.

The government’s policy of choosing to amplify the downturn is not just a mistake, it is entirely negligent and is not just causing unnecessary hardship and unemployment today, it is creating problems that will negatively affect the economy and the lives of many for years to come. Middle-aged people who have worked all their lives are now amongst the long-term unemployed, their savings spent and the prospects for the second half of their careers in tatters. University students are graduating into an economy that has no use for them. Rather than take the skilled jobs for which they have trained they are forced to choose whatever is available and this will affect their prospects and their incomes and their spending and everyone else’s incomes for their whole lives.

Whatever we do now, the effects of Cameron’s and Obsorne’s austerity experiment will be felt far into the future and the Chancellor’s new policy of further cuts to welfare in order to pay for the backfiring of this experiment is almost beyond belief.

Every model of the current depression says that we will eventually recover. Even with the current government’s policy of amplifying the downturn, all models suggest we’ll get back to a sustainable economy eventually. But why didn’t we do something that would have brought us to that conclusion two years ago? Or failing that why don’t we do it today?

The government won’t do it though because it would be political suicide to admit that they had got things so wrong. Too late for that – better to plough ahead and hope they can convince the public to swallow The Austerity Fallacy for another two and a half years.

RedEaredRabbit

*In the UK The Bank of England were made independent in 1997 so it is now they who set interest rates rather than the government. If only we could find someone to take over fiscal policy too…

The Interest Rate Fallacy

I wrote recently of The Debt Fallacy – the widely held belief that the financial crisis was caused by government debt. If you read it you’ll recall that it’s fairly easy to prove this as a fallacy because figures for government debt are easily available. Nevertheless it’s a myth that is widely believed because the government puts a lot of effort into propagating it in the knowledge that most people won’t actually check.

Another fallacy that the government often uses hand in hand with this is one regarding interest rates. It goes something like this:

Interest rates on UK debt are low because the markets have built confidence in the UK’s economy because of the austerity measures. If the government were to increase public spending, the markets would lose this confidence resulting in the UK losing its AAA credit rating and interest rates on our debt soaring.

This, ladies and gentlemen, is the Interest Rate Fallacy – the widely held belief that interest rates are low because of the market’s confidence in our economy. To show why this is a fallacy is a little harder than it was with The Debt Fallacy because I can’t just download a graph from the IMF website. So before reading on you might want to get a cup of tea and an exciting type of biscuit, such as a Jammy Dodger.

All settled? Then let’s get started. Before we tackle the fallacy we need to look briefly at what government debt is and why people buy it at all.

How does the government borrow money?

The government borrows money by issuing bonds. A bond is essentially an IOU, which anyone can buy. It will say something like, “I will borrow £100 from you for 10 years and at the end of the 10 years I’ll pay you back your £100. As compensation for you not having access to your cash for 10 years, I will additionally pay you interest at an annual rate of 5% for those ten years.”

Why does someone lend money to the government?

Imagine that I have £100 in cash. I could keep the £100 as cash or use it to buy a bond. Cash is good because I can do useful things with it like buy stuff. However, I need to think about my future and if I want to save money for later rather than spend it now then I would be better off buying a bond because I get paid interest as compensation for me not having access to my money. If I want to spend now then cash is good. If I want to save now then bonds are good.

What determines the interest rate on my bond?

The interest rate on a bond is determined by the rate that savers are willing to accept in compensation for not having access to their cash for the period of the bond. So if I want to invest my £100 for 10 years what are the factors that will influence the rate I am prepared to accept?

Probability of default

If I tie up my money with someone for 10 years then it’s quite important to me that they don’t go bust during that time because if they do I will lose my money. If I am lending to someone risky I might decide to ask for a higher rate of interest in order to compensate me for the risk that they might not be able to repay me.

Demand for bonds vs Demand for cash

If I want to save money and everyone else wants to spend money then I can probably get a high rate on my investment. If there are few savers and lots of spenders in the market (i.e. the demand for bonds is low and the demand for cash is high) then the government will need to offer better rates to attract investors. Conversely if there are lots of people who want to save money and few who want to spend, the government can offer much lower rates knowing that there are still lots of people who will invest anyway.

Expected future short-term interest rates

That’s a mouth full isn’t it?

Short-term rates are set (in the UK) by the Bank of England. These rates determine the rate I can get for investing money for a short period of time.

If I am going to invest for a longer period of time, my expectation of what the Bank of England will do with short-term rates in the future is important. This is all sounding a bit wonkish so I’m going to explain with an example. Imagine the following scenario:

  • I live in a country where the government offers two different types of bond
  • One lasts for one year
  • The other lasts for 10 years
  • I have £100 that I would like to invest for ten years

I have a choice:

  • Invest my money once in the 10 year bond
  • Invest my money ten times (once every year) in one year bonds

If I choose the first option then my money is tied up for ten years at the pre-agreed rate of interest. If I choose the second option then every year when I invest my money again I get whatever the new short-term rate set by the government is. Supposing that short-term rates are 2% but I expect them to rise by 0.25% every year. My expectation of what the second option looks like is this:

Year Interest Rate Value of Savings
1 2.00% £102.00
2 2.25% £104.30
3 2.50% £106.90
4 2.75% £109.84
5 3.00% £113.14
6 3.25% £116.81
7 3.50% £120.90
8 3.75% £125.44
9 4.00% £130.45
10 4.25% £136.00

Therefore for me to decide that investing in a 10 year bond is worth it, I need a rate of at least 3.1225%, otherwise I expect to lose money on it.

Conversely, if I expect interest rates to go down then I will be happy with a lower rate for my 10 year investment.

Still with me? Good. Get yourself another Jammy Dodger – you’ve earned it.

Why are interest rates low now?

The government says that interest rates are low because the markets have lots of confidence in our economy because of their austerity policy. Lots of people lap this up as gospel but let’s stop for a moment and think about that. The government is borrowing at the lowest rates in the country’s history at the same time that the economy is in the longest depression in living memory. Would this really be the point in history that confidence in our economy hit an all time high?

Umm… no. So using what we’ve learnt, let’s look at some sensible explanations instead.

Expected future short-term interest rates

Short-term interest rates are very low at the moment. We know why – in reaction to the financial crisis, the Bank of England cut interest rates in an attempt to boost the economy.  (They cut them to 0.5% in March 2009 where they have remained ever since.)

Remember though, that long-term interest rates are determined by what the market expects short-term rates to be in the coming years. One explanation (this is the right one by the way so pay attention) for low long-term interest rates would be that the markets expect The Bank of England to keep short-term interest rates low for the foreseeable future.

Why would the markets expect The Bank of England to keep short-term rates low in the future? Well remember why short-term rates became low in the first place – an attempt to stimulate a weak economy. If the market expects the UK economy to remain depressed in the future they will expect The Bank of England to keep short-term rates low. If they expect a recovery is just around the corner they will expect short-term interest rates to rise and they will demand higher long-term rates in compensation.

Demand for bonds vs Demand for cash

Ok, I said the last one was the right answer but it’s important to consider this point too. The demand for bonds is huge at the moment. Why? Because when the financial crisis struck, people who had spent happily during the good years changed their behaviour dramatically and started saving. We are living in a world of people saving money rather than spending it. Again they are doing that because of a lack of confidence in the economy.

Probability of default

Enough of sensible explanations. Let’s look at a daft one. You’ll recall that people demand higher interest rates if they think that the person to whom they are lending might go bust before their bond matures. Therefore if the markets think that there is a good chance that the UK might go bust within the next 10 years they will demand higher rates for their 10 year bonds.

Let me be absolutely explicit here. There is absolutely no chance of the UK going bust in the next ten years. Despite the least economically competent government that anyone can remember, it is still impossible.

The UK is a large, developed economy whose debt is in a currency that they control. We print our own money – we can’t run out of it. Barring alien invasion, the UK will service its debt next year, the year after, the year after that etc. etc.

What about Greece?

A common comparison, used by George Osborne amongst others, is that Greece has a weak economy that is expected to remain weak but has high interest rates on government debt. They do but there is a difference between Greece and the UK and although George Osborne chooses to ignore it, it is a very big difference. When a country adopts the Euro they give up something very important – control over their currency. The countries that have seen their interest rates rise, Greece, Ireland, Italy, Spain, Portugal all have something in common – their debt is in a currency they can’t control.

But what about Argentina in 1999/2000?

Their debt was in US dollars so the same thing applies. They borrowed in a currency they could not control.

What about Iceland? They weren’t in the Euro and their government debt wasn’t that bad.

That’s true but Iceland’s three major banks had somehow been allowed to build up about €50bn of foreign debt between them. To put that into perspective, that was about 600% (!) of Icelandic GDP. Nice one Icelandic banking dudes.

What if the UK loses its AAA credit rating? Interest rates will soar!

The first thing to mention is that this argument assumes that austerity will prevent any downgrade of the UK’s credit rating. I’ll return to that point though because I want to tell you a few things about credit rating agencies first.

A credit rating agency is a private company that expresses an opinion about a borrower’s likelihood of repaying money they have borrowed from someone else. You will note that the UK currently has a AAA credit rating, which is the highest possible. (Not all agencies use AAA as a code to signify the safest borrower but the UK has the highest rating from all of the major ones.)

For example, the biggest credit ratings agency, Standard & Poors, gives the UK a AAA rating. To understand what that rating means, let’s benchmark it against something else to which Standard & Poors have given a AAA rating.

In the run up to the financial crisis, banks lent money to risky borrowers in the form of subprime mortgages. Those banks would then package up a few thousand of these dodgy mortgages together and sell them on to someone else. Guess what rating Standard & Poors gave to these packages of toxic debt? Yep, AAA!

Reread that last paragraph – the largest credit rating agency in the world gave their highest possible rating to packages of subprime mortgages. I am not a credit rating agency and you are not a credit rating agency but if you and I were forced to form an opinion on the creditworthiness of 2,000 subprime mortgages all mixed together we would probably not come to the conclusion that it was the safest investment possible. The credit ratings agencies did.

If you think I am cherry picking one (albeit hugely damning) example, I’ll give you another. On the 15th September 2008, Lehman Brothers went spectacularly bankrupt. All three of the major agencies rated Lehman Brothers as a low risk counterparty.

So the upshot of this all is that no one actually listens to these people. S&P downgraded the United States from AAA to AA+ last year. Did the markets all panic and think that the US was about to go bust? No. They ignored the discredited opinion of an organisation who thought that subprime mortgages were a good investment and went their about business as usual. Interest rates on US bonds actually went down.

But wouldn’t rates go up if we abandoned austerity?

The last refuge of the “Austerity=Low Interest Rates” cult is always, “Even if your ‘economics’ mumbo-jumbo is right about the reasons for low rates, if we actually took advantage of them and borrowed some more money, those rates would not stay low for long!” I’ll address that now.

Demand for bonds vs Demand for cash

As I’ve mentioned before we are currently in a liquidity trap. In normal times, cutting short-term interest rates stimulates spending. A liquidity trap occurs when we have already cut interest rates as far as they can go but people still want to save. At the moment, no one wants to spend money but The Bank of England have already cut rates to almost zero.

Being in a liquidity trap means that we would need a significant change in behaviour back from saving to spending before it made any difference at all to actual interest rates. The interest rate we would need to get people spending is negative but The Bank of England can’t set a negative rate* so we’re left with demand for bonds far outstripping demand for cash. Being in a liquidity trap isn’t good news but it does at least mean we can increase borrowing without changing the interest rate.

Probability of default

What would happen if the markets thought the UK was about to go bust and everyone tried to sell their bonds all at once? (Yes, I know the idea of the UK going bust is stupid but people use this argument a lot so I should address it.)  Unlike Greece, Ireland, Spain, etc we have a flexible exchange rate. If the markets suddenly decided to start offloading UK government debt interest rates would not actually rise. What would happen is that the pound would just devalue** and interest rates would stay the same.***

Summary

So as we’ve seen interest rates are low because everyone wants to save rather than spend and the markets expect short term interest rates to be low for the foreseeable future because they expect the economy to remain weak.

We’ve also seen that credit ratings agencies’ opinions are not worth listening to. Despite the government claims that austerity is the barrier against a downgrade, I fully expect the UK to be downgraded next year. And you know what? If that happens the markets won’t give a toss and long term interest rates will remain low.

If you have read this whole post down to here then well done – treat yourself to another Jammy Dodger. You know now what determines interest rates on government bonds and you know that it has the opposite to do with everyone being happy about our economy. The sad reason for low interest rates is simply that the markets expect our economy to remain bad for a long time yet.

And to be honest, who could really blame them?

RedEaredRabbit

* They could in theory make interest rates negative but then people would just hoard cash instead of investing it. (You’d get a better return by keeping cash under your mattress than lending it out.)

** Although a devaluation in the pound sounds bad it would actually boost the economy. When the pound is weak then foreign goods and services become more expensive. Also our goods and services become cheaper for foreign investors. This means more money being spent on UK goods and services, both by us and our friends overseas.

*** I brushed over the reason for this because it would have doubled the size of the already too big blogpost. If you’re interested in why this is the case read this.

The Debt Fallacy

Because this blog has a strong political theme, it might surprise you to learn that I don’t watch Question Time very often. Partly this is because I’m usually in bed by the time it comes on, but if it were called “Answer Time” and the politicians were forced to give proper answers to the questions I would probably be compelled to stay up late once per week and watch it. Instead it is generally an hour of politicians indulging in their favourite pastime of evading, misrepresenting and misleading and to be honest, I get enough of that already.

Still, I did watch some of it a few weeks ago and noticed that in pretty much every answer the Conservative or Lib Dem gave they managed to blame having to take lots of “difficult decisions”, such as cutting benefits for poor people and cutting taxes for rich people, on…

The mess we inherited from the Labour government

The government seems to believe that this is some kind of carte blanche to do whatever they want without any accountability; a Get Out of Jail Free card that they never have to give back. It isn’t though. It’s the political equivalent of saying, “OH MY GOD, WHAT’S THAT BEHIND YOU?” then running away when you turn around. That particular favourite phrase is not what I am going to spend time talking about because no one believes it anyway. Despite the government’s best efforts, no one is actually dumb enough to agree that they don’t need to be accountable for their policies.

They did come up with another favourite line, however, that narks me even more than this one because a lot of people do actually believe it. When someone mentioned government spending they said something like this:

It was the irresponsible spending of the last government that got us into this mess in the first place…

And the thing that annoyed me more than them wheeling out this spin-doctor nonsense for the thousandth time was that no one else on the panel directly challenged it. If I’d been on the panel, (I was on holiday so they had to go with Steve Coogan as the non-politician), I would have directly challenged it. I would have directly challenged it because it isn’t true. It is a lie and when politicians say it they are lying. This, ladies and gentlemen is The Debt Fallacy, the widely-held belief that UK government debt caused the financial crisis.

Before we delve into what actually did cause the “mess”, let’s see why this is a fallacy by looking at UK government debt between 1997 when Labour took office and 2007 when the financial crisis started. (Source IMF)

National Debt of G7 Countries as % of GDP

National Debt of G7 Countries as % of GDP

Yes, not only was borrowing significantly lower in every single year than everyone else in the G7, it was actually lower in 2007 than when Labour took office ten years earlier. Staunch Conservatives will no doubt be hugely disappointing that there is no marked increase in UK government debt in that graph. Don’t worry, just for you I’ve done another one for just the UK with the previous five years under John Major added in. Now you can see a government who did oversee a marked increase in the national debt. I’m nice like that. Don’t mention it.

UK National Debt as % of GDP

UK National Debt as % of GDP

So you can see why the government’s claim about a debt-fuelled spending binge is a lie. This level of public debt clearly didn’t cause the financial crisis. So what did?

The cause is actually fairly simple. Banks make profits by borrowing money and then investing it. Their profit comes by getting a higher return on their investments than they have to pay on to the people from whom they borrowed the money. For example if I put £100 in a bank account the bank might pay me 1% interest and then invest that £100 in in a scheme that makes them 5%. Simple enough.

Banks though, like any other businesses, want to compete against one another – they want to make the biggest profits for their shareholders and show everyone that they are the best bank. This is what caused the crisis.

Over time, banks became increasingly competitive and concerned themselves more with trying to make the biggest profit and less with the risks associated with what they were doing. With the £100 I put in my bank account they could invest it in something safe and make 5% or they could invest it in something risky and make 10% or 15% or 25%! The more risky the investment the more return it could yield. No bank was going to invest in something risky if its likely return was less than a safer alternative and so risk equalled reward. Competition between banks, all vying for the biggest profits, led to riskier and riskier investments and nowhere was this more prevalent than housing. It became possible for people to borrow crazy amounts of money to buy a house, even if they had poor credit worthiness. This irresponsible lending fuelled housing bubbles all over the world. Here’s how Florida house prices changed in the four years prior to the financial crisis.

Florida House Prices (Q4 2002 = 100)

Florida House Prices (Q4 2002 = 100)

In just four years they increased by almost 80% and people’s wages were definitely not increasing at anything like that rate. In short it was unsustainable. There is a useful principle in economics called Stein’s Law after the late American economist Herbert Stein and I wish more people had paid attention to it in the pre-crisis years. It says simply this:

If something can’t go on forever, it will stop.

Stop it did and we all know the rest. In hindsight it’s easy to look back at this and say that the banks were lending irresponsibly but much harder to say why they didn’t they realise it at the time. The only explanation I can offer is that they were too concerned with out-performing one another and not concerned enough about the risks involved until it was too late. Like a gambling addict who’s had a good night but doesn’t know when to quit, the banks didn’t want to think about Stein’s Law.

Essentially the positions they took on the housing market assumed that:

  • House prices always go up
  • Mortgage defaults are pretty rare

On the first point the banks thought, “Even if this individual doesn’t repay their 120% mortgage, the house will be worth more than that in a couple of years, so where’s the risk?”

On the second point they seem to have committed a really basic error in their probability calculations. Imagine I have lent to 5 risky individuals. The chances of any one of them defaulting on their mortgage is 5%. Therefore the risk of all of them defaulting on their mortgages is:

5% x 5% x 5% x 5% x 5% = 0.00003125%

But those of you who remember your GCSE maths will recall that you can only multiply probabilities together like this when they are independent. For example if the probability of a person having a beard is 20% and the probability of someone being female is 50% the probability of a lady having a beard is not 10%. (Unless of course you work in a circus.)

Similarly, the chances of individuals defaulting on their mortgages are not independent. When an economic downturn occurs, unemployment rises, incomes drop and lots of people all suddenly can’t repay their mortgages at the same time.

Banks, in their bid to out-profit each other, took huge positions on the housing market. They were betting that economies would grow and house prices would go up. It had been so long since the economy had been through a really serious downturn that they had forgotten the lessons of the past. The resulting crisis shows that so confident were they in endless economic prosperity, that none of them had a Plan B in the event of a downturn. The global economy isn’t like that though and if economic history has taught us anything it is that bad things have always eventually found a way to happen and by the time the banks spotted the bubble was about to pop it was too late.

Banks weren’t just lending irresponsibly on mortgages though. People took cheap loans and were able to borrow more than ever before on their credit cards. Banks were so desperate to lend that they offered amazing deals to secure our credit card debts. Fee-free transfers, interest-free balances for 12 months etc etc and the same thing happened – all of a sudden lots of people were unable to make repayments at the same time and the banks had no fallback.

This had a short term effect of making the banks insolvent and governments world-wide were forced to bail them out. While this solved the short-term problem there was another problem that almost six years later remains unsolved.

When economies around the world turned bad, people were left with mortgage debt, loan repayments and credit card bills that were ridiculously high. Those lucky enough to keep their jobs switched overnight from not worrying about their personal debt to worrying only about their personal debt. The thousand pounds they had on their credit cards was no longer something they could kick into the long grass and assume they would just pay it off later. Seeing their friends and co-workers losing their jobs made the risk of redundancy a reality.

This shock led to a very sudden and very dramatic change of behaviour. People moved almost overnight from spending to reducing their debt. Even those who had avoided running up debt became very worried about how little they had tucked away for the hard times and moved from spending to saving.

In the economy your spending is my income and my spending is your income. When everyone stops spending at the same time the consequences can be catastrophic. I say “can be” because a responsible government could plug the gap by increasing public spending but in most cases they didn’t, hence it was catastrophic, hence the depression. (I like saying “hence”. I think it makes me sound all knowledgable.)

So that’s how it happened and that’s the real reason we are in a depression and it had nothing to do with UK government debt at all.

There is a good argument that the previous Labour government should have spotted what the banks were up to and should have done something to address it. Although the banks caused the crisis, the previous government was asleep on the job while this was going on. If the current government were pushing that argument they would have a valid criticism but they aren’t because although it is the truth, it doesn’t pin all of the blame on the previous government.

Politics aside, the years before and since the crisis really are a shameful and embarrassing period in economic history. A first year economics student taking their first macroeconomics module will learn that government spending increases economic growth and that it works best of all when the economy is suffering from a lack of demand. They will learn that my spending is your income and your spending is my income. They will learn that if your spending disappears my income does too. They will learn about economic cycles – the economy will go down as well as up, so plan for it.

Sadly these are lessons that the current government has either not learned or has simply chosen to ignore. Simple enough as those lessons are, it’s sadly far more convenient for them to just propagate The Debt Fallacy.

RedEaredRabbit

A Letter To America

From checking the stats on this blog I see that after the UK, the second highest readership is in the United States. In fact, I get more hits from the US than from positions 3 – 12 in the list combined. (Australia, Canada, India, Ireland, Spain, France, Germany, The Netherlands, Sweden and New Zealand, if you’re interested.)

Tomorrow, my second highest contingent of readers will be going to their voting booths to decide whether Obama or Romney is their next president. So, American readers, this post is for you.

The Romney campaign has focused primarily on the terrible job Obama has done with the economy. The Republican plan is benefit cuts for poor people, tax cuts for rich people and generally cutting public spending wherever possible. Might this work? Well we have a good test case in the UK. In contrast to Obama we have done all of these things in the pursuit of economic growth. I’ll be frank, it hasn’t gone well. While Obama has presided over 13 consecutive quarters of economic growth, the UK is currently celebrating one consecutive quarter of economic growth. While the US economy is bigger than it has even been before, the UK economy is smaller than it was five years ago. On the economy, Obama wins.

Of course, it doesn’t stop there.

Romney on abortion, when asked whether he’d support a bill to ban all abortions:

I’d be delighted to sign that bill.

Romney on equality for gay couples:

I’m going to want to see a marriage limited to a man and a woman. I don’t want to see civil union either.

Romney on Obama voters:

There are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it — that that’s an entitlement. And the government should give it to them. And they will vote for this president no matter what. These are people who pay no income tax. My job is not to worry about those people.

Romney on Obama’s ethnicity:

My dad, as you probably know, was the governor of Michigan and was the head of a car company. But he was born in Mexico and had he been born of Mexican parents, I’d have a better shot at winning this. But he was unfortunately born to Americans living in Mexico. He lived there for a number of years. I mean, I say that jokingly, but it would be helpful to be Latino.

No one has ever asked to see my birth certificate. They know that this is the place that we were born and raised.

Romney on why public health care is bad:

I like being able to fire people who provide services to me.

Romney on climate change:

My view is that we don’t know what’s causing climate change on this planet. And the idea of spending trillions and trillions of dollars to try to reduce CO2 emissions is not the right course for us.

Tomorrow, America you have an opportunity to vote for someone who has not only, for the first time brought in health care for the poor in the wealthiest country in the world, he has also massively outperformed Europe in economic growth. He hasn’t done enough on climate change but at least he doesn’t deny its existence.

Tomorrow, America you also have the other option of voting for the climate-change denying, economy-destroying, tax-cuts-for the-wealthy-pursuing, health-care for-the-poor-withdrawing, gay-rights-denying, Mr. Mitt Romney.

It’s up to you but we’re all watching.

America, it’s your call.

RedEaredRabbit

Obama vs Cameron

Last night’s question time had a bit of a US election theme and Conservative MP, Kwasi Kwarteng couldn’t resist taking a stab at Obama for not pursuing a policy of austerity. Because Obama hadn’t gone for austerity like we had in the UK, the US economy was now in a mess etc. etc.

It’s an all too familiar noise from the government but is it actually true?

Here’s a graph showing how the US and UK economies have grown over the past four years:

US vs UK GDP (2008Q3 = 100)

US vs UK GDP (2008Q3 = 100)

(The green diamond is when Obama came to power and the purple diamond is when Cameron came to power.)

It’s fairly clear from that graph that the US economy has far out-performed the UK economy in the last few years. If you compare just the time since David Cameron came to power things look even worse:

US vs UK GDP (2010Q3 = 100)

US vs UK GDP (2010Q3 = 100)

If the performance of the US economy is a failure then I would love some of their failure over here.

It makes me wonder why politicians say things like this. Why, as an austerity pursuing government, would you even bother bringing up this subject when talking about the United States? Of course they still have problems but it’s an economy who didn’t pursue full out austerity and who massively out-performed our own who did.

One possibility is that when politicians say things like this they just hope none of us will check the actual facts and find out they’re telling lies. Worrying as that possibility is, I think the reality is even more scary:

This government is so far down the road of austerity that the truth just isn’t important any more.

RedEaredRabbit