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

Good News

Today David Cameron gave a strong hint that the GDP figures to be released tomorrow will be “good news”. As Jonathan Portes quickly pointed out, someone in the know even hinting at the figures before they are released is illegal. David surely knows this and it is a sign of the pressure he is under over the economy that he has blurted this out today.

When the GDP figures are bad the government says things along the lines of, “Things are worse than we thought, this is even more of a reason to pursue austerity!” And when they are good tomorrow they’ll say, “Austerity is working!” So whatever is going on they’ll say austerity is the right policy because they’re in too deep now to say anything else. But will these “good news” figures really mean a good economy?

GDP figures are always quoted relative to the previous quarter. The previous quarter was an absolute disaster so doing well in comparison to that is not necessarily good news. As I wrote three months ago:

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.

Q3 being better than Q2 isn’t that important. If the economy had been in free fall it would be important but the economy hasn’t been in free fall, it has been in depression and as I’ve mentioned on here before, the results in an individual quarter don’t tell us much at all. The important thing is not whether Q3 was better than Q2 – it is the longer-term trend, i.e. how much longer we have to wait until the economy returns to a healthy level?

Whatever the numbers are tomorrow it will certainly not represent an advocation of austerity – the expiry date on that fallacy is long passed and, in a depression longer than The Great Depression of the 1930s, it would be fairly ridiculous to claim it had worked.

The question we should be asking now is not, “When will the economy be bigger than it was in the second quarter of 2012?” A much better question would be, “When will the economy be bigger than it was at the start of 2008?”

And I promise you this much – that ain’t going to happen tomorrow.

RedEaredRabbit

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

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