Taking the Hard Road

I was thinking the other day that GCSEs aside, the past couple of months have been quite good for the government. They have not introduced any new stupid policies, nor have they been forced to scrap any existing ones. Compared with the year they have had this seemed quite promising. Then I remembered that they had been on summer holidays for six weeks.

Anyway, today, with the holiday coming to an end, it was time for David Cameron to reappear with another broken light bulb taped to his forehead. The new policy is planning deregulation which will make it easier to build houses in rural areas such as the Green Belt area around London. This, in his own words, is the problem he is trying to solve:

A familiar cry goes up, “Yes we want more housing; but no to every development – and not in my back yard.” The nations we’re competing against don’t stand for this kind of paralysis and neither must we.

The construction sector, according to Cameron, is paralysed due to a lack of places to build houses.

There is no doubt that the construction sector, along with the rest of the economy, is depressed but once again, the government is failing to understand the problem. Example time.

Imagine that Susan runs a shop that sells television sets. Susan opened her business in 2003 and her business grew nicely for four years. In 2007 she tried to get planning approval to double the size of the shop by building an extension on the park next to her. Demand was high for her televisions and by expanding she could sell even more televisions. Her application was rejected though and she had to make do with the floor space she had.

Then in 2008 the economic downturn happened and her sales dropped off a cliff. All thoughts of expanding the business disappeared and instead she had to downsize, making two of her staff redundant and cutting the number of televisions she held in stock.

Then in 2012 the council comes back to her:

Council: About that planning application you filed in 2007 – the rules have changed and you can expand your shop now!

Susan: No thanks. Things aren’t too good with my business right now.

Council: You’d be helping the construction sector.

Susan: <click>

Council: ….Hello? ….Hello?

In a depression, the problem Susan has isn’t that she doesn’t have enough shop space, it is that people are not buying televisions. Increasing the number of televisions she has in her shop won’t help if she can’t sell the few she already has. Similarly, the problem that the construction sector has is the number of people who want to have houses or extensions built has also dropped off a cliff. When people don’t want to pay for new houses or new extensions, there is no benefit in making more land available to build on – the construction industry will only build more houses when they can see there is a demand for them.

Cameron’s policy demonstrates that he either doesn’t understand the relationship between supply and demand or he believes that the construction sector suddenly fell off a cliff in 2008 because they ran out of land to build on and it happened at the same time that the rest of the economy fell off a cliff by coincidence.

I’ve talked a lot on here in the past about how to solve the problem with demand and it’s really not that complicated. But as Cameron boldly pointed out in his article:

At every turn we are taking the hard road over the easy path

Yes David, we certainly are.

The Voice of a Siren

Do you remember Going for Gold with Henry Kelly? No? Come on, did you never have a school-day off sick in the early 90’s? In case you haven’t watched it, someone has helpfully posted a whole episode on YouTube:

If you don’t want to watch all of it (and I recommend you don’t) – at least watch the opening titles. Probably the worst TV theme song that’s ever been made.

So now we’ve reminisced, we’re going to have a quick quiz now, in the format of Going for Gold. Fingers on buzzers.

WHAT AM I? I am a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards collapse.”

; Only Fools and Horses Christmas Specials?

Incorrect. Knut, you’re out of the rest of the round.

; Steve Martin?

Incorrect. Bjorn, you’re out of the rest of the round.

; An economic depression?

Correct! RedEaredRabbit, you’re through to today’s final!

#Win

The definition wasn’t really Henry Kelly’s. It was that of John Maynard Keynes and he wrote it in 1936. Although written 72 years ago, you could easily mistake it for something written yesterday describing the current state of the UK economy. We haven’t imploded but there’s no growth and the economy continues to operate below potential, with lots of workers available to work but a lack of demand for their services.

A common misconception is that a depression is just a long recession – i.e. the economy has to shrink quarter on quarter for a long time. A much better way of thinking about it is that, following a recession, the economy operates below potential for a long time. So what do I mean by ‘below potential’?

I mean that at the moment our economy:

  • Is much smaller than it used to be
  • Has the potential to a produce a lot more goods and services than it does
  • Does not produce more goods and services because we choose not to produce them

That sounds crazy. If we can produce them then we should, right?

The economy is largely based on supply and demand. At the moment we are all good to go on the supply side but we are have a major problem on the demand side and this is very important in understanding why we are in depression and also important in understanding what we should do about it.

I can explain this a bit better with some examples.

The car manufacturer is producing fewer cars because fewer people want to buy cars. She could easily employ more people and produce more cars but as long as the demand for them is low she won’t do it. Her costs would go up and her revenue would stay the same. She is waiting for the economy to recover before producing more cars.

The garden centre owner is growing fewer plants because fewer people want to buy plants. She could easily employ more people and grow more plants but as long as the demand for them is low she won’t do it. Her costs would go up and her revenue would stay the same. She is waiting for the economy to recover before growing more plants.

The car manufacturer and the garden centre owner can easily ramp up their operations because taking on new employees is easy – their are lots of people who need jobs. They don’t though because demand for their products is low.

The people who don’t get jobs because the car manufacturer isn’t taking on staff don’t buy new plants from the garden centre. The people who don’t get jobs because the garden centre isn’t taking on new staff don’t buy cars from the car manufacturer.

You can see how the whole thing is self-perpetuating. Remember, my spending is your income and your spending is my income. At the moment I am awaiting for you to spend before I can spend and you are waiting for me to spend before you can spend.

We just looked at two examples but this is the case across the whole economy. The demand for goods and services is low, therefore spending is low, therefore income is low, therefore the demand for goods and services is low.

While everyone waits for everyone else we have economic deadlock and the economy is depressed. We need to appreciate this problem in order to know what to do about it.

Suppose that the government took a look at our school buildings and admitted that they probably need investment. Workers are easy to come by when unemployment is high, so they have no trouble in finding available resources to work for the next few years repairing, rebuilding and redecorating old classrooms, school halls and gymnasiums. The newly employed workers have cash in their pockets and so they start to buy other things like plants for their gardens. The garden centre take on more staff and now there are even more people with cash in their pockets. They start to buy cars and so on.

That’s how government spending solves the problem. The government could spend on pretty much anything to solve the problem with demand but it makes a lot of sense to spend it on things like schools and renewable energy because that is money we need to spend soon anyway. We can wait another five years to do it or do it now but we spend pretty much the same amount of money either way.

Not everyone agrees with this solution though. The UK government for example, believes that if they cut spending, rather than increase it, everyone will become more ‘confident’ and they’ll then start spending. How this works is a bit of a mystery but we are continually assured that it does work. Somehow.

So how’s that policy going? The latest figures are out so without further ado… let’s update The Depression Tracker!

(The blue line is the Great Depression of the 1930s and the red line is the current depression.)

Depression tracker

Damn, that doesn’t look very good. Here’s George Osborne’s reaction:

You will hear those arguing that we should abandon our plan and spend and borrow our way out of debt…these are the siren voices luring Britain onto the rock. We won’t go there.

George had clearly been working on that metaphor. Probably for most of the three months since he had to explain the last set of figures.

Here’s David Cameron’s reaction:

My message today is clear and unequivocal. Be in no doubt: we will go on and finish the job.

Finish it? Starting it would be nice. The economy is smaller now than when he took office.

The confidence argument is great for soundbites but do any of its proponents actually bother to look at the data? Do they actually look at figures like those in the graph above and think, “Hold on a moment, if my argument was a good one, that graph would not look like that.”

Not only is it not backed up by evidence, the logic of the theory seems extremely shaky. From where exactly is the car manufacturer suddenly going to gain the confidence to start employing people and building more cars? I can understand a person gaining confidence from seeing sustained economic growth but no one is going to look at that graph, see what the government has done to the economy, get all confident and then go on a massive manufacturing bender.

Referring to people as “sirens” for making a logical, evidence-based argument as opposed to an illogical, fantasy-based one demonstrates the heart of the problem. A problem that started as an economical one is now purely political, and it is two-fold.

  • We have a government whose base political beliefs are centred around a small public sector, so they will try to bring this in irrespective of the economic situation.
  • We have a government who have so publicly trumpeted the economic growth that austerity would bring that they simply cannot go back on it now without committing political suicide.

Remember, the depression definition though. Despite the 0.7% contraction in Q2 we are not falling off a cliff. We will almost certainly do better in Q3 – it is virtually impossible for us to repeat a quarter that bad. And when we get a recovery in Q3, the government will be saying it is advocation of their policy.

It won’t be though. The underlying problems will remain and while we wait around for those problems to be solved by ‘confidence’, our economy will continue to flat-line, and millions of people who want to work will be forced, because of those two political problems, to sit at home, waiting for the demand to return to our economy.

And how long will that take? Well, we know from our economics textbooks that long-term output is determined by the supply side. That is, as long as the depression isn’t so bad that we lose our ability to make things, we will eventually recover anyway but we also know that we have all of the tools available to fix the problem with demand right now, so why not do it? After all, as John Maynard Keynes said, in the long run we are all dead.

With this government though, sitting around waiting for the long-run to sort things out is all the help our unemployed are going to get.

Where’s Going for Gold when you need it?

RedEaredRabbit

Lies, Damned Lies and Austerity

Today David Cameron once again reiterated his intention to continue down the path of austerity in order to sort out the UK’s economy. David does this a lot and continually comes back to his belief that government spending caused the mess and that only a severe reduction in government spending can restore economic growth. As you probably know, in contrast to David, I am in favour of an economic stimulus.

When I write about that on here I often receive comments along the lines of David’s – that government spending caused the mess in the first place and more of it would just cause an even bigger mess. I have perhaps not addressed this directly in the past so, hold on to your hats, I will do so now.

First of all saying that the cause of the mess was purely the previous government’s spending is at best an extremely simplified view. There were many factors that combined to cause the financial crisis. People who say it was caused by government spending are conveniently forgetting what the banks were up to. That’s another story though and I do need to address the misconceptions about government spending. I am going to try to explain why I think spending is sometimes a good idea and sometimes a bad idea and why at the moment I think it is a very good idea indeed. So here goes…

Over time the economy swings between periods of growth and periods of contraction. Governments (despite often making claims to the contrary) have never been able to stop this happening and perhaps this shouldn’t be too much of a surprise. After all, a government has only simple tools at its disposal and economies are complicated things in which bad things have a habit of finding ways to happen.

Although we should accept that there will always be good and bad periods in the economy we should also appreciate that the government is certainly not powerless to help out. A government can use some of its simple tools to reduce the impact and duration of the bad times when they arrive and bring back the good times as soon as possible.

One of these tools is government spending and to see how this can help we need to first take a look at the private sector. Companies in the private sector have important short-term financial goals. They generally seek to make a profit every year and additionally have certain cash flow considerations (e.g. they need to be able to pay salaries, buy stock, pay rent etc). So if their revenue drops off, they may well look to reduce their spending in line with it. If their revenue increases, they may well look to increase their spending accordingly. For example, if a company is doing badly they may reduce their costs by making redundancies and if a company is doing well they may take on more staff. Simple enough. Let’s look at what happens in economic cycles.

In periods of strong economic growth, lots of companies do well and expand and take on staff. In periods of economic contraction, lots of companies do badly and lots of people lose their jobs.

This means that private sector spending closely follows how well the economy is doing as a whole – when the economy is doing well, private sector spending increases and when the economy is doing badly, private sector spending decreases. These spending swings in the private sector actually amplify the effect of the economic cycle. i.e. the redundancies they make during weak economic times weaken the economy further because unemployed people stop having money to spend and rely on benefits and in weak economic times they cannot easily find new employment.

One way the government (or actually the Bank of England since it is now independent) can influence this is through changes in interest rates. By lowering interest rates, it becomes cheaper for companies to borrow money and therefor encourages them to spend.

There is a problem with this approach though as you can only cut interest rates so far. Once they are down to almost zero (as they have been in the UK for over three years) then there is no way to stimulate the economy by cutting them further.

Another way the government can influence things is by spending money. When spending in the private sector dries up the government can step in and fill the gap. Governments of developed economies (who borrow in their own currency) can borrow very large sums over very long periods of time and don’t have to worry about the same short term profit or cash flow issues that companies face.

When the private sector is expanding, the government can reduce public spending and let the private sector fill the gap. When the private sector is contracting, the government can increase public spending and fill the gap. If the gap is not filled then we end up with unemployment and recession.

That’s what happens if the government does nothing but now imagine an even worse situation. In this situation the government spending tracks that of the private sector. i.e. when things are going well, the government increases spending and when things are going badly the government reduces public spending. Pushing up government spending when the private sector is trying to expand will help boost the economy a bit but it is an inefficient use of funds because the public and private sectors are in effect competing against one another. Essentially we create a strong supply of jobs for which there is weak demand. In contrast, reducing government spending when the private sector is contracting further amplifies the effect of the downturn. In this situation we are reducing the supply of jobs when there is strong demand. In the latter situation the government may cause a full-blown economic depression from which the economy may take many years to recover.

Actually, that sounds familiar.

Anyway. During the years preceding the economic crisis, the UK was experiencing some unspectacular growth. The Labour government at the time coupled this with some unspectacular increases in government spending when they should have, if they were sensible, made some unspectacular reductions in public spending.

So yes, I agree that they got things wrong. Their increase in spending was certainly fairly benign compared with the current government’s version of what happened but yes, they would have been better to reduce spending overall.

Since the crisis hit, however, the economy has contracted hugely and the private sector has shed hundreds of thousands of jobs. Now we have one of those spending gaps I mentioned and it’s a really big one. This is why government spending now would be a good idea – we’re not competing with the private sector, we are simply trying to increase the supply of jobs to help meet the huge demand for them. Let me be very clear – I am not saying that fiscal policy under the previous government was right but just because they got it wrong does not mean that we should be backing a plan now that is even wronger.

If it is this simple though, why is our government backing an austerity plan at all? Given the above argument, isn’t it the exact opposite of what they should be doing? Yes it is. Politicians are people with agendas though.

Let me give an example of an agenda. Suppose you were a politician who very much liked rich people. Your ideal UK might consist of low taxes on rich people but that’s expensive so you might try to fund those tax cuts by severely cutting public spending. Of course, since most people are not rich, you couldn’t just say that’s what you were doing because you need more than just rich people’s votes to stay in power. You might therefore invest significant time and effort trying to convince people that government spending during bad economic times was a terrible thing and the only way to restore economic growth was through reducing spending and cutting taxes on rich people.

The government has managed to get away with it quite well so far because the economy is complicated so it’s very hard for people to know whether they are telling the truth or have a hidden agenda. Additionally, the government is extremely effective at misleading the electorate. For most people the “reduce spending when things are bad” makes a lot of sense because they are able to relate it directly to their personal finances. If I have a big credit card bill and my household income drops I’d better cut back spending and pay off my credit card, right? Yes, that’s right for your household but there is a subtle and very important difference between household finance and the economy as a whole.

In your personal finances you are only concerned about your own personal incomings and outgoings. In the economy though, your spending is my income and visa versa. If we decide to kill off spending in the economy we by definition kill off income too. The government continually draws an analogy with personal debt and never takes the time to explain this distinction.

You might say that you accept the above arguments but it’s too late for us to borrow money because we already have so much debt no one will lend to us. You’d be wrong though – we have people queuing up to lend to the UK at the moment. A developed economy borrowing in their own currency (this importantly excludes the Eurozone) has a truly amazing capacity to borrow money cheaply. If you think we’re anywhere near the limit then have a look at Japan’s government debt in comparison:

And guess what? They can borrow even more cheaply than us!

Also worth pointing out on this graph is how little our debt actually increased during the years preceding the financial crisis. Yes, it should have been reducing but it wasn’t exactly the mad spending spree that everyone seems to think it was. Labour had, on the eve of the financial crisis, more or less the same amount of debt they inherited when they were elected in 1997.

In summary there are three important points in this post that David Cameron doesn’t want you to know because if you know them his argument falls to pieces:

  • Government spending during a period of economic growth and spending during a period of economic contraction are very different things. Just because the former is bad does not mean the latter is, especially when interest rates are at zero.
  • The personal spending analogy does not work when considering the economy as a whole because one person’s spending is another person’s income.
  • There is plenty of scope for the UK to borrow money

I know this post is quite a lot to digest but I have done my best to explain why I think the things that I do. Perhaps you’ve read through the post and think my reasoning is wrong and David Cameron’s is right. Perhaps you think austerity really is the way to restore economic growth. That’s fine, after all David and I each have a theory and at the end of the day that’s all they are – theories.

I suppose though, if I were being really picky, I might point out that the growing evidence strongly supports my one.

RedEaredRabbit

Taking it on the Chin

…when the facts change, the responsible thing to do is to examine the decisions you have made and to be willing to change your mind, however inconvenient that may be…not burying your head in the sand and ploughing on regardless…

So said Defence Secretary, Philip Hammond this week.

What was he changing his mind about? I don’t know, something about ordering the wrong type of aeroplane; the details are not material to my point. My point is that whether or not he made a bad decision previously, no matter how terrible his judgment at the time was, it is still a good thing to be able to adapt his policy now based on how things are going. The alternative would be, as he said, ploughing on regardless with a strategy that he knew wasn’t working. He may have made a bad decision in the past but this week he made the right choice.

Shadow Defence Secretary, Jim Murphy was not impressed though, gleefully calling it a U-turn and finding another occasion to use Labour’s new favourite word, omnishambles.

Omnishambles was very funny when Malcolm Tucker used it and still a bit funny when Labour used it the first time but (shambolic as the government is) it won’t be funny if we have to hear it every week until the next general election. Perhaps they should steal another Malcolm Tucker quote to keep things fresh. For example when David Cameron and George Osborne next take their seats in the House of Commons, Ed Miliband could shout:

Laurel and fucking Hardy! Glad you could join us. Did you manage to get that piano up the stairs ok, yeah?

Or they could just think of their own jokes.

Where was I? Oh yes. It is an unreasonable expectation that the government should get every policy perfect in the very beginning and never have to change it. If they implement a policy that later turns out not to be delivering the benefits that they predicted and they change it, not only should they not be ridiculed, I would say that they should be praised.

A more reasonable expectation would be that the government should continually monitor their policies, keep them if they are working and adapt them if they aren’t.

I wrote a whole post on this subject last year, Creationist Economics and in it I was fairly scathing of politicians’ ability to admit when they were pursuing a bad strategy and adapt it into a better one.

So could it be that politicians have learned their lesson and have abandoned Creationist Economics in favour of Evolutionary Economics? Let’s recap on what Philip said:

…when the facts change, the responsible thing to do is to examine the decisions you have made and to be willing to change your mind, however inconvenient that may be…not burying your head in the sand and ploughing on regardless…

And let’s have a look at how the government has applied these words of wisdom to their economic policy.

Last week, the government got a fairly massive kicking at the local elections and therefore had the perfect opportunity to review the policies that weren’t working and adapt them. The early signs were good:

George Osborne:

The government understands your message. We take it on the chin and we have got to learn from what you are saying.

David Cameron:

The message people are sending is this: focus on what matters, deliver what you promise – and prove yourself in the process. I get it.

But does he really “get it”? David Cameron a couple of days later:

…we can’t let up on the difficult decisions we have made to cut public spending…

David and George say they understand exactly why they lost loads of votes and it was because, although their economic policy was really popular, they lost votes because they were focusing on other things too – people were worried they would reform the House of Lords or legalise gay marriage rather than purely focusing on their excellent work on the economy. In other words, this seems to be the government’s interpretation of the message the electorate were sending:

Dear David and George,

We love what you are doing with the economy, high five! Absolutely love this economic depression and always thought that having a job was overrated.

But, (and this is a big but) we have to let you know that we are voting for someone else because of your evil attempts to have a discussion about whether all of your unelected posh mates should be responsible for deciding the laws of the land. Additionally we are all intrinsically homophobic and hate the fact that you might consider treating homosexuals as equal citizens.

And in any case, it’s not like the government can possibly do more than one thing at once.

Kind regards,

The Electorate

P.S. In addition to the above, this vote is definitely in no way influenced by your NHS reform, which was also really popular.

David and George say they “get it” and want to “take it on the chin” but in reality all they are doing is trying to market a disastrous election result as support of a failed economic strategy, and opportunistically trying to bin some other proposals that don’t fit in with their own idealism.

Since I don’t think they did “get it” I’ll offer an alternative interpretation of the message from the electorate:

Dear David and George,

You said that you could revive the economy through spending cuts. You said that in 2011 we would have 2.6% economic growth but we had none and now we are in a recession again. You said that your spending cuts in a depressed economy would bring growth through “confidence” but two years later there is still no growth. We are in the worst depression in recent history, worse than The Great Depression of the 1930s – and your continual refusal to change course has put us here. Your policy is not working and while the opposition’s is at best vague, we need to send you a message to let you know that we think you have no idea what you are doing.

Kind Regards,

The Electorate

P.S. Don’t try to get out of this by saying something pathetic like we want you to put House of Lords reform or gay marriage on the back burner – you should be able to do more than one thing at once.

David and George’s public interpretation of the electorate’s message is so ridiculous that it’s funny. What is less funny though is that two years after promising growth and prosperity through spending cuts all we have is economic depression. But what exactly should they do about it? Let’s ask Philip Hammond:

…when the facts change, the responsible thing to do is to examine the decisions you have made and to be willing to change your mind, however inconvenient that may be…not burying your head in the sand and ploughing on regardless…

Well said, Philip. I couldn’t have put it better myself.

RedEaredRabbit

Depression

Do you remember that time that Alistair Darling did that terribly apolitical thing of trying to tell the truth and said there was a recession coming that would be the worst since the Great Depression? And then Gordon Brown “unleashed the forces of hell” on him? I think in hindsight, there are a couple of interesting points to make about this event.

The first one, which is important to Christians, is that the forces of hell are clearly far weaker than we were taught at school. As we can see from this recent interview, Darling is alive and well, having suffered little more than a minor singeing of the eyebrows.

Secondly, we can say that Alistair was wrong. The Office for National Statistics published their quarterly Economic Review today and conveniently it contained some figures comparing the current economic cow-pat with that of the Great Depression. The below graph shows their results of comparing quarterly GDP against the pre-crisis peaks. The red line shows how GDP has changed since Q1 2008. The blue line shows how GDP changed for the equivalent period in the Great Depression (starting at Q1 1930).

(I have added a green dot to show when David Cameron came to power.)

Darling got it wrong because the current depression is actually worse than the Great Depression. By this stage in the Great Depression, the UK was going through a period of significant economic growth and had already passed the pre-crisis peak. The UK’s current GDP is still 4.3% lower than it was at the start of 2008.

The report said also, as you have probably heard today, that the UK economy has now contracted in two consecutive quarters and therefore, by the government’s definition, we are once more in recession.

If the government had achieved 0% growth as opposed to -0.2% in the first quarter they would have avoided recession and the media would be reporting it as such. The media, I feel, often puts so much weight on whether we are in or out of recession that we are essentially missing the big picture. Look at the red line on the graph above since David Cameron was elected and you see the real picture. We might be technically sometimes in growth and technically sometimes in recession but what we are actually in is a sustained period of economic stagnation.

Predictably, Cameron and Osborne have each made statements today saying that they will be strong in the face of the recession and stick with their current policy of reducing government spending. It makes me want to weep. Recession, stagnation, whatever you want to call it, this situation was caused by them. The government’s fiscal policy since they took office has been the exact opposite of what was needed to create growth in the economy and the effects are there for all to see.

When proposing a stimulus, I am often told that spending more would send us into a recession! Well, without spending more we’re now back in one but nevertheless I will explain my stimulus thoughts in a bit more detail.

Let’s take a look at say, renewable energy. By 2020 we are legally obliged to have 20% of our energy consumption coming from renewable energy. How’s that going to happen? Well it won’t happen without investing a lot of money building wind farms, tidal power stations and the like. This is money we need to spend anyway – we have agreed to be legally bound to the target. Why not bring the investment forward and spend the money now? The difference in government debt between spending the money now or in a couple of years is nigh on nothing and believe me, we won’t even get close to that target if we don’t get our arses in gear.

Or how about schools? I find it hard to believe that there are not thousands of state-funded schools not needing their ailing buildings, classrooms, gymnasiums fixing and rebuilding.

As you can see, I am not promoting the idea of spending money on things we don’t need – we need to do these things anyway so this money has to be spent sooner or later. All I am proposing is spending it now, at a time that we have economic stagnation and lots of people waiting for the jobs that such spending will create.

The government chose to implement a policy that opposed basic macroeconomic theory and that policy has had exactly the effect that basic economic theory predicts – depression. So how could they have got it so wrong? How could they not see that the fiscal policy they were pursuing was not just erroneous, it was completely irresponsible and entirely negligent?

One may as well ask, how could they not see that cutting tax on the rich at the expense of the poor was a terrible idea? Or, how could they not see that selling places at the Prime Minister’s dinner table in return for influence over government policy, was both morally and democratically abhorrent?

The answer is both surprisingly simple and hugely depressing. This government, (as with many other governments throughout history and throughout the world), did not come into power, assess the circumstances and devise the best possible policies to benefit the population and the country as a whole. They came into power with a particular idea of how they wanted the country to be. It involved private health care, lower taxes on the rich and yes, low government spending.

The fact that basic economics said that cutting spending would screw the economy was totally irrelevant. They probably knew it would. Their efforts have not gone into putting good policies into being but have instead gone into trying to make the country into their Etonian Utopia. They have cleverly coupled this with a massive campaign of bad marketing to mislead the electorate into thinking that all of these things are necessary. They know that economics is not a subject that is easily understood by the majority of the public and know they can use this to their advantage.

In forcing through the changes they wanted to make anyway, they have unnecessarily caused a depression on a scale not seen in recent history. As a direct result of these policies, people have lost their jobs and people have lost their houses.

If the 1930s was the Great Depression, then our current day situation will surely be looked on in history as the Even Greater Depression.

And the most depressing thing of all is that this was completely avoidable.

RedEaredRabbit

The Austerity Fairy

Today I’ve been playing with the greatest toy ever created. It’s not a Sony Playstation and it’s not a Pokemon. It’s a Rubik’s Cube.

The Problem

The Problem

One of the things that makes a Rubik’s Cube so great is that the problem you are trying to solve is very easy to understand. From the time you first picked one up, you understood exactly what you had to do – arrange it such that each face of the cube was the same colour.

The Solution

The very best people in the world have solved it in under 10 seconds, putting through around 5 moves per second.

I’ve just tried making 5 moves per second and I couldn’t even get close.

Let’s imagine taking someone who could move the cube this fast but didn’t know what they were aiming at, that is they know there is a single arrangement of the cube they are aiming for but don’t know what it is so they need to try every possible permutation. I done a sum and by my reckoning, assuming they were able to go at 5 moves per second and were able to keep track of every permutation they had tried so that they never hit the same one twice, it would take them around 274 billion years to get through them all and be sure to have hit the solution.

6 seconds vs 274 billion years – the importance of understanding the problem you are trying to solve.

So anyway, the economy is shrinking again – down 0.2% in the final quarter of 2011 😦

George Osborne was not worried though:

We have the right plan and we’re going to stick with it!

In fairness to him he was half-right. We are going to stick with it.

George thinks the problem is spending. He thinks that as long as we spend less, at some stage the Austerity Fairy will show up and magic the economy back to health.

He blamed firstly, the reckless spending of the Labour government. Let’s get this one out of the way quickly with the IMF data I’ve put on here before. Between 1997 when Labour came to power and 2007, the year before financial meltdown, the UK’s debt as a proportion of its GDP was the lowest in the G7. In every single year:

Government debt as a percentage of GDP (Source IMF)

Government debt as a percentage of GDP (Source IMF)

Yes, the UK is the orange line at the bottom.

Next he blamed Europe. Wait a moment – is that the same Europe who are also awaiting the arrival of the Austerity Fairy? How’s that working out for them? Oh.

Much as George would like it, it’s actually not all everyone else’s fault. The reason George has not solved the problem is because, like the poor bugger spending eternity on a Rubik’s Cube he doesn’t understand the problem he is trying to solve.

The problem isn’t that we currently have too much spending. The problem is a lack of growth and high unemployment. Let me explain further.

In normal economic times when employment is high, if the economy starts looking a little shaky the Bank of England can cut interest rates. Lower interest rates make people want to save less money and spend more. When people spend more the economy picks up. Even Robert Peston knows that.

We are not in normal economic times though. Interest rates have been at an all time low for almost three years and you know what? No one is spending. For the rising number of unemployed this is understandable but for the people who kept their jobs why would they be saving more and spending less with such low interest rates?

It’s fairly simple. In an economic depression, even those people with jobs are scared that they might not have jobs at some time in the not so distant future. What would happen if they were made unemployed? Probably they wouldn’t walk straight into another job so they save. Even with crappy interest rates they save.

We have reduced interest rates pretty much as far as they can go but have still not got people spending again and we have therefore become stuck in something that economists call a liquidity trap. We have nowhere to go with interest rates so as long as the economy is weak no one will spend and as long as no one will spend, the economy will be weak.

This is the problem. Understand that much and the solution is a bit easier to grasp – you plug the gap with government spending until employment goes back up to healthy levels and people are spending again. When people are spending again, then you reduce it.

Even if George were able to grasp the economic problem, it would lead immediately him to a political one. How would he possibly explain to the public that for the past 20 months he had pursued exactly the opposite strategy of the one he should have? It would be political suicide. He’s not going to do that.

Better to take David by the hand and skip off together down the road to nowhere in search of the Austerity Fairy.

RedEaredRabbit

Crappy New Year

As far as the economy goes, 2011 was a bit of a poo. It was also the year in which my already extremely shaky faith in politicians hit an all time low and so, as we enter a new year it is natural for us all to look forward and wonder what 2012 might bring.

So where better place to look than David Cameron’s new year speech? I’ve just watched it on YouTube. If you’d like to you can do so here or read the full transcript here. If you can’t be bothered then don’t fear, I have a selection of the best bits below.

On 2012, David says this:

It must be the year we go for it – the year the coalition government I lead does everything it takes to get our country up to strength.

I’d kind of assumed he was already going for it in 2011 but it seems as though he wasn’t. It does beg the question as to what exactly he was doing. Was he perhaps biding his time? Was he just waiting for the economic depression* to reach a certain level of calamity before calmly springing into action? Or perhaps he was just lulling it into a false sense of security?

Anyway, let’s not dwell on that. We are “going for it” now so let’s look forward:

The coming months will bring the global drama of the Olympics and the glory of the Diamond Jubilee.

It gives us an extraordinary incentive…to look our best: to feel pride in who we are and what – even in these trying times – we can achieve.

I know that there will be many people watching this who are worried about what else the year might bring…The search for work has become difficult… I get that… I know how difficult it will be to get through this – but I also know that we will.

This all sounds deeply uplifting until you think about it – at which point it makes absolutely no sense whatsoever.

I’ll start with the Olympics. I am glad that we have the Olympics and I even have some tickets for the tennis. I’ll also watch loads of it on the TV and cheer on the UK’s athletes all the way. Having said that, I don’t really understand the link David is making. What has getting excited about the Olympics got to do with finding a job? Is he implying that unemployed people just need some motivation? I hope not but either way I don’t understand it.

About the Diamond Jubilee I’ll be honest and concise – I don’t care. I absolutely could not possibly care about anything any less. The country’s most privileged family celebrating another milestone for the length of time they have been living a life of ridiculous luxury is I think, if anything, demotivating. If I were unemployed and having severe difficulty in making ends meet I’m not sure the royals having another party at the country’s expense would be the motivational catalyst that propelled me back to employment.

Back to David:

Too often our schools aren’t up to scratch, our hospitals aren’t always clean enough and our police don’t catch criminals. Brilliant and committed people work in public services – but somehow the system stops them doing their job. So we’ll change it.

Ok, but tell me how. The current government has cut funding for education and the police without providing any coherent policy on how, with less funding, those services will be improved. We’ve heard the big society idea about parents running schools but I don’t think too many people found it coherent. I find the policy of changing schools into “academies” to be at best confusing. The news is full of teachers’ concerns about this policy and rather than offer a clear explanation to ease these concerns, the government instead chooses to label the teachers as “ideologues happy with failure“.

If a government chooses to cut funding for education and the police whilst at the same time maintaining that education standards will rise and crime will go down, then the public deserves a very clear explanation of exactly how this will be achieved.

(I do appreciate though, that in 2011 the government hadn’t started going for it yet, so perhaps a good explanation is just around the corner.)

The NHS on the other hand does have a protected budget but the government’s justification for reform is one of the most shameful examples of misleading the public I have ever seen. I wrote about that here.

Onwards and downwards:

I will be bold about working to cure the problems of our society. While a few at the top get rewards that seem to have nothing to do with the risks they take or the effort they put in, many others are stuck on benefits…

David said exactly the same thing many times in the run up to the election but in the 20 months since he took over he has done nigh on nothing about the former problem of the few at the top (other than attempt to cut inheritance tax on the very rich) and in dealing with the latter has responded by cutting benefits and public services. In this respect, not only has he not been going for it, he has been going for the exact opposite.

So none of his speech so far made sense. What rabbit was he going to pull out of the hat that would possibly address all of the glaring holes in his arguments?

I profoundly believe that we can turn these things around. That’s what I mean by the Big Society…

I lost the will to live at that point.

RedEaredRabbit

* Yes, I said “depression” – the word that politicians around the world have been avoiding like the plague. It’s been three and a half years. Perhaps in 2012, their New Year’s resolution should be to wake up and call it what it is.