Economic Bloodletting II: Revenge of the Quacks

Britain, 1642. A patient, Mister Edmund Conomy of London, sits up in bed, sipping broth from a bowl. People stand around his bed amazed at his miraculous recovery.

Four long years earlier, Edmund had been struck down with a severe case of anaemia. The new local physician, Doctor Gideon had fortunately arrived early on and prescribed a course of bloodletting to treat his condition. Doctor Gideon had pumped out a few glugs on his first visit, then returned each month and never noting a change in his patient’s condition, continued, each time, to pump out a few glugs more.

Mister E. Conomy’s housekeeper was a lady by the name of Miss Carmen Sents. Miss Sents, had taken issue with Dr Gideon’s prescribed treatment:

“He’s weak enough already.” She told the doctor. “Removing his blood will just weaken him further.”

“Rubbish,” snapped Dr. Gideon, “The cause of this man’s illness is clearly that his previous physician allowed him to produce too many blood cells.”

“Look, if anything he needs more blood cells, not fewer. If you can’t see that, then at least leave him as he is and wait for his body to eventually recover on its own.”

Miss Sents’s protests were ignored and over the next three years, Dr. Gideon continued his policy of letting blood from Mr E. Conomy. Mr. E. Conomy didn’t recover though. In fact he looked worse than ever.

By the fourth year, Dr. Gideon, noticing the pale and shrivelled look of his patient, decided to drastically reduce the amount of blood he was letting at each visit but he didn’t want to tell anyone he was doing that. He did just a tiny bit each time to show he was sticking to his “tough policy” because he was afraid of what people would say if he changed course.

Then the miracle happened. Mr. E. Conomy started to recover and once he started to recover, the recovery was quick. With every month that passed, his strength grew and within a year he was almost as strong as he was when the illness struck.

Dr. Gideon was made a hero. Stories of the success of his bloodletting on Mr. E. Conomy spread far and wide. Perhaps it would not be unfair to say that Dr. Gideon was a major factor in spreading them.

And what became of Miss Carmen Sents? When Mr. E. Conomy learned exactly what had cured him, and of the erstwhile protests of Miss Carmen Sents, he fired her and sent her out of his house to live on the streets. After all, the success of his treatment was obvious and where would he have been if people had listened to her?

Sadly, in all of the bravado, no one seemed to notice that in every previously recorded case of anaemia, the patient had, without bloodletting, recovered much faster than had Mr. E. Conomy.

Sadder still, they now thought that bloodletting was the best way to solve anaemia.



The Worst Speech Ever Made

Yesterday, George Osborne became the latest Tory politician to be sent out to demonise the poor and made, I think, one of the worst speeches I have ever heard. You can read the full transcript here if you like.

All done? Well then – allow me to retort.

Let’s look at what George said:

For too long, we’ve had a system where people who did the right thing – who get up in the morning and work hard – felt penalised for it, while people who did the wrong thing got rewarded for it.

Ok, so let’s get this out of the way quickly. If this were the case then why would people ever have had any incentive to work at all? If people were penalised for working and rewarded for avoiding work, people would not work. Something doesn’t add up and we can see that the statement from the chancellor is purely wrong by comparing how the value of job seeker’s allowance has faired relative to wages over the past 30 years. Jonathan Portes does just that here. As you can see, with JSA being pegged to inflation, and earnings increasing on average significantly quicker, that JSA has steadily fallen from 22% of average earnings in 1979 to 15% today. Work is more attractive relative to JSA today than at any time in the past.

Now, those who defend the current benefit system are going to complain loudly. These vested interests always complain, with depressingly predictable outrage, about every change to a system which is failing. I want to take the argument to them. Because defending every line item of welfare spending isn’t credible in the current economic environment. Because defending benefits that trap people in poverty and penalise work is defending the indefensible. The benefit system is broken; it penalises those who try to do the right thing; and the British people badly want it fixed. We agree – and those who don’t are on the wrong side of the British public.

I think this intentionally misrepresents what those of us who oppose benefit cuts are actually saying. I am not defending every line item of welfare. I don’t even know every line item. I’m sure it is not perfect and could be improved. I do dispute though that the benefit system is a significant factor in the reason that we have high unemployment. I don’t believe the reason that we do is that people who would otherwise be working are trapped, for the reasons I gave above.

But! I have vested interests!

Well let me divest them now.

I don’t receive any benefits. I am lucky enough to have a job. I “get up in the morning and work hard” and have never felt that the welfare system penalises me for doing so. My interests are:

  • I would like to live in a society that looks after the poor and the vulnerable
  • I believe that something as important as welfare should not be reformed based on misrepresentations and lies
  • I believe that pushing the poor and vulnerable further and further into poverty is more likely to trap them there than the alternative

But I’m on the wrong side of the British public!

Well, as FiatPanda points out here – the government’s way of measuring this is to say the least, underhand, misleading and dishonest. But should we be surprised that a large section of the public believes that benefits are evil? We have a government and a right-wing press who have mounted a huge campaign to convince the public that people on benefits are lazy scroungers. You’ve probably all seen the Daily Mail today right?

We’re facing more and more competition from vast new economies like China and India. There are quite literally billions of people who are joining the world economy. That’s human progress. If we’re not careful, Britain risks being out-worked, out-competed and out-smarted by those hungry for a better life.

Oh no! Jonny Foreigner is going to take all our jobs again! Except they won’t. When developing countries become developed countries we all benefit through increased trade and more jobs are created and we are all better off. China and India’s development is a huge opportunity for us to increase exports to those markets and boost growth. Well it would be if we had a government who could understand that, rather than thinking of these countries as foreign rivals who must be beaten at all costs.

By taking hard decisions in the last few years to save money, this Government has cut that deficit by a third.

I would phrase it as. “By making bad decisions coupled with dodgy accounting sleight-of-hand we have reduced the deficit by much less than we said we would and missed yet another economic target.”

Some politicians seem to think we can just wish away Britain’s debt problem. They want to take the cowardly way out, let the debt rise and rise and just dump the costs onto our children to pay off. I don’t think that would be fair. And I don’t think we’d get away with it. The interest charges would soar. Interest rates would rocket. People with mortgages would struggle. Businesses with loans would go bust. Jobs would be lost.

Again, George is intentionally misrepresenting his critics. There are countless people who have made very strong economic arguments as to why the government’s economic policy is flawed and have described sensible alternatives. Paul Krugman, Joseph Stiglitz, Jonathan Portes, David Blanchflower, Brad de Long, Martin Wolf etc. etc. are not “wishing debt away” when they use the discipline of economics to analyse the mess the government has created.

Oh, and interest rates would not soar – I covered that here and there is absolutely no economic basis for such a claim. Until recently we were told interest rates would soar if we were to lose our AAA credit rating. What happened when we did?

…one in every six pounds of tax that working people like you pay was going on working age benefits. To put that into perspective – that’s more than we spend on our schools. That’s one reason why we’ve got such a big deficit.

No it isn’t. The Labour government was running a surplus between 1997 and 2003 with the same benefits system. The reason we have such a big deficit is because the banks caused a huge financial crisis. Still, can’t blame the rich can we? Not when the poor are such easy targets.

So our reforms have one simple principle at their heart – making sure people are better off in work than on benefits.

But they already were! Just look at the figures! A million people didn’t decide when the financial crisis hit that unemployment benefit suddenly looked good and therefore quit their jobs.

When I took this job, I discovered there were some people who got £100,000 a year in Housing Benefit.

No evidence is given for this claim. No figures to show who they were, what their circumstances were or if they even really existed. But even if we take that claim at face value, it is hardly a reason to cut benefits for every single person who receives them. This again, is a thinly-veiled attempt to demonise the poor by taking the Daily Mail line that every one of them is a rich scrounger.

Some have said it’s the end of the welfare state. That is shrill, headline-seeking nonsense. I will tell you what is true. Taxpayers don’t think the welfare state works properly anymore. When did this start to happen? When we created a system that encouraged people to stay out of work rather than find a job.

Another gross misrepresentation of the facts. As we know, the system has over time seen unemployment benefit falling further and further behind working wages. The line about taxpayers not thinking it works is just more rhetoric designed to divide the country. I am a taxpayer and I don’t believe that the system encourages people to be out of work. If it did I would have chosen to be out of work.

Our reforms are returning welfare to its most fundamental principles – always helping the most vulnerable, but giving people ladders out of poverty.

So pay the vulnerable less money and they’ll just see the error of their ways and go out and get one of those freely available jobs? If you want to help people get back to work, fix the economy so there are some jobs for them to go to. The idea that people are just choosing to be unemployed at the moment is plainly stupid. There are no jobs because of a financial crisis caused in the banking sector but George seems to think it’s “fair” that the poor and vulnerable should foot the bill.

And here’s another change we’re making. On Saturday, the top rate of tax will be reduced from 50p to 45p… In a modern global economy, where people can move anywhere in the world, we cannot have a top rate of tax that discourages people from living here, setting up businesses here, investing here, creating jobs here. If you don’t believe me, ask France. They’re planning to whack up their top rate of tax – and you know what’s happening? Job creation is down as people are leaving the country. The opposite is happening here because we are welcoming entrepreneurs and wealth creators – and the jobs they bring with them.

So let me get this right. With income tax for rich people at 50%, the rich all go and live in Monaco but with income tax at 45% lots of rich people are all moving to the UK? That sounds suspicious. Perhaps we could have some evidence to back that claim up? Err…. no.

So this all seems like smoke and mirrors for something more sinister. Fortunately George went on to explain exactly what that was.

I’m a low tax Conservative. I believe what you earn is your money, not the Government’s money. So I want to take away less of it in tax, and leave you to spend it how you wish. Give me the choice between people choosing how to spend their own money, or a politician choosing how to spend it, and I know who I would pick. That’s good for the economy. That’s good for society – the more people get to keep from what they earn, the more likely they are to work, the more independent and responsible they will be.

As much as George would have you believe it, tax is not a fundamentally bad thing. It’s true we could do away with it and just pay for everything directly but where would that leave us?

A couple of months ago there was a massive pot-hole in my road. The council came along and filled it in, (paid for by taxes). Now we could say that we won’t pay taxes to cover road maintenance and when a pot-hole opens up in my road the residents will all club together and pay to repair it….

Oh, but wait a minute, I don’t have a car – I don’t care. I’m not going to pay for it. And actually most of the traffic coming down my road probably isn’t from people that live on it anyway. I receive the tiniest share of the pain from the pot-hole in my road, so why am I going to put money towards it? But then everyone will have this attitude and the pot-hole won’t get fixed and over time my road will fall to bits without anyone doing anything about it.

At the moment the council collects my rubbish, (paid for by taxes). We can pay for it individually ourselves but I suspect a lot of people, rather than pay individually to arrange to have it transported to the local landfill are just going to go out in the middle of the night and wang it in each other’s hedges.

Or how about the armed forces, (paid for by taxes)? The next time that there is a need for a peace-keeping force to protect citizens in a third world country beset by civil war, are we all going to have a whip round and see what kind of private army we can muster?

This is, of course, all nonsensical government spin. While it is easy to make it sound good that I should get my wages and then choose how it is spent, I don’t want to spend 100 hours a day deciding on how much I should be spending on the armed forces and how much I should spend on a hole in my road. Taxes have an absolutely essential place in any society and they are not just something that we can do without.

Taxes have another important benefit though, and it is this one that I think the chancellor was hoping to curb. The overall tax system is set so that someone who is rich pays more than someone who is poor. This allows redistribution of wealth within our society. Although through taxes we all paid for the pot-hole repair, or the peace keeping mission, or the NHS, or the police, the richest amongst us did contribute more and the the poorest amongst us did contribute less.

After a big speech on why we should cut benefits for the poor and vulnerable and why we should cut income tax on the richest few, (neither of which, as we’ve seen, had any factual basis), this point is really what it came down to:

The multi-millionaire George Osborne would like to prevent redistribution of wealth from the rich to the poor.

And this man has the gall to say that I have a vested interest.


George’s Magical Mystery Tour

One day a bus driver, we’ll call him George, was driving a bus full of people up a steep hill but unfortunately his bus had a broken engine.

George had taken on driver duties near the bottom of the hill when the fault with the engine was already in place – as George liked to point out, it had developed under the previous bus driver.

George had known about the fault from the start but had told his passengers it would go away in time if he just kept on driving. Unfortunately driving on in the same way with a busted engine had made the engine fault worse. Progress was sluggish at first but for the past two years the bus had remained static – the failing engine doing just enough to prevent the bus rolling back down the hill into oblivion but not enough to move it any further forward up the hill.

When George first took on bus driver duties many of the passengers were willing to believe his assurances that driving along with a busted engine was better than fixing it but having spent two years looking out of the windows at the same depressing scenery they had reached the point of mutiny.

And so in March 2013, George addressed his passengers:

To get this bus up the hill, we will start by washing the windows – the weight of that dirt is clearly hampering our progress. Additionally we will paint go-faster stripes on the side of the bus. We will follow this up by cutting the price of the journey for the people in the posh seats at the front, which will by magic, generate more money – money that we will use to fit a big spoiler to the back of the bus to make it look like it’s a fast bus, thereby giving you all confidence that we will get up the hill.

The passengers were not convinced.

But what about the, erm… you know, the problem with the engine?

The problem with the engine was inherited from the previous bus driver.

Ok, but you do seem to have made it worse and anyway, even if it were all the previous bus driver’s fault shouldn’t we, you know.. fix it anyway? You know… in the interest of getting up this hill?

George pretended not to hear and gunned the engine some more. It made a sickly, spluttering sound.

He pretended not to hear that too.


The Unteachable

As I wrote over the weekend, today was the day we’d find out what the markets thought of the UK’s credit rating downgrade. For the last three years George Osborne has been arguing that maintaining the UK’s AAA rating was crucial and used that as the primary reason why we should pursue austerity. Were we to lose our AAA credit rating we would be attacked by the bond vigilantes! No one would want to lend to the UK any more! Interest rates would soar ! We would be the next Greece!

Those people who understood a tiny bit about how sovereign debt works disagreed though. They said that interest rates were not low because of everyone loving the opinions of the credit rating agencies and instead offered another explanation. They said that long-term interest rates were low because the markets expected future short-term interest rates to be low. And they expected that because they expected the economy to remain weak. (Full explanation of that here.)

Throughout this debate, those people who whipped up fears of soaring interest rates in the event of a downgrade could get away with their scare-mongering because we still had a AAA credit rating. Today was the first day they couldn’t do that though so today we can put this argument to rest. If the government was right then today we should have seen a huge rise in government borrowing rates as the panicking markets attacked the UK.

So what did happen? Did the bond vigilantes attack? Did the rates at which the UK government could borrow go through the roof?

*Drum roll*


They didn’t go through the roof. They didn’t go up at all. They actually went down a little. Five year rates went down from 0.86% to 0.83%, ten year rates went down from 2.11% to 2.08%.

So what does all of this mean? I’ll tell you and it is not good. It means that not only did the government’s economic strategy fail, it means it was based on a false pretence all along. Maintaining the AAA credit rating should never have been a priority. The priorities should always have been employment and growth.

You’d hope that with the cutting of the last thread by which the government’s economic policy was dangling, they would have come out today, apologised and agreed to listen to those people who had been telling them this all along. What did they say? Sadly they said what they always do when their economic policy explodes in their faces. That’s right – the news on the rating downgrade is even more evidence that they need to keep doing what they’re doing.

It makes me want to weep. Why not for a moment, reassess the policies that have continually got these things wrong and instead listen to the people who have continually got this stuff right? In the face of such evidence, would it really be that hard?

Sadly, it seems as though it would. A government getting things this wrong is bad enough on its own but their refusal to learn anything from it is simply staggering.


P.S. As of Wednesday, five year rates are down to 0.78% and 10 year rates down to 1.96%. Still no sign of those panicking markets, George.

From Triple ‘A’ to Triple Dip?

A few months ago I wrote a post, in which I talked about the real reason that the UK can borrow at such low rates. To summarise it, the main reason is that the markets expect the UK economy to remain weak for the foreseeable future and are therefore prepared to accept low long-term rates now. In that post I did also talk a bit about the UK’s AAA credit rating:

…Despite the government claims that austerity is the barrier against a downgrade, I fully expect the UK to be downgraded next year…

And sure enough, yesterday exactly that happened as Moody’s downgraded the UK from AAA to Aa1. There’s been a lot in the press about it today but what does this downgrade actually mean? Is it even important? The answer to that is both yes and no.

Let’s start with the ratings agencies themselves. Ratings agencies have consistently proven themselves to be among the least reliable sources of useful information. They played a major part in causing the financial crisis by  handing out AAA credit ratings to the dodgy packages of sub-prime mortgages that the banks were selling and then failed to spot the banks themselves were credit risks until it was too late. While it’s perfectly reasonable to want an opinion on whether or not the UK is a credit risk (it isn’t), no one with any sense is going to listen to these people. Their opinions are not important anymore.

So if that’s the case, the downgrade shouldn’t matter, right? Well not quite. For that reason it doesn’t matter but for another reason it really does.

For the past three years David Cameron and George Osborne have used the UK’s AAA credit rating to justify austerity. Maintaining this rating, we’ve been told time after time, is crucially important. Why couldn’t we postpone spending cuts until the economy had recovered? We’d lose our AAA credit rating! Why couldn’t the government follow what basic economics suggests and provide a fiscal stimulus to create an economic recovery? We’d lose our AAA credit rating!

And we were all told what would happen if we did lose that rating. No one would want to lend to the government any more. Interest rates would soar and we’d be the next Greece. Well if that does happen on Monday then perhaps there was something to what George has been saying but I don’t think it will. What I think will happen is this:


Our borrowing rates will not soar because, firstly no one cares what the ratings agencies think and secondly the reason that rates are low is that the outlook for the UK economy is weak. This news is hardly going to change that – borrowing rates will more likely go down than up. And when the UK economy doesn’t implode on Monday morning, people are going to wonder what the fuss of keeping the AAA credit rating was all about in the first place. They’ll emerge from their bomb-shelters and say, “Was this really what we have spent the last three years living in fear of?”

The government has kept the threat of losing the AAA credit rating hanging over the UK public like the sword of Damocles and this was no accident. By convincing us that disaster would strike if we were to lose it they have been able to push through the economic policy they wanted to use anyway. But shortly that game will be up and then it will be clear for all to see that chasing credit ratings at the expense of jobs and growth wasn’t just a strategy that dismally failed, it was a strategy that had no justification all along.