Duncan’s Economic Blog

Bouncing along the bottom of the ‘L’

Posted in Uncategorized by duncanseconomicblog on July 27, 2011

The economy is stuck -we’ve had nine months of near stagnation and the prospects for the next two years look grim.

In many ways we now seem to be bouncing along on at the bottom of the ‘L’.

Even excluding ‘temporary factors’ (warm weather, cold weather, tsunamis and royal nuptials) the economy only managed 0.7% growth in the past nine months – a pathetic recovery. As the NIESR have noted this is an historically weak recovery – the only real precedent being the 1930s.

The causes are varied – an over indebted consumer sector who are experiencing falling real wages, falling disposable income and lack confidence. Companies which are cash rich but reluctant to invest, banks which simply aren’t lending to productive businesses, weak export prospects with our major trading partners dealing with their own crisis.

The real austerity hasn’t yet been felt economically – sure the VAT rise has sucked some demand out of the economy and contributed to falling real wages and Osborne’s doom and gloom talk has depressed confidence, but the real impact in terms of public spending cuts is just being.

The regional picture looks even worse with what little growth there is concentrated inLondon and the South East.

So far the government has managed to stop the recovery dead in its tracks but made little impact on the deficit.

‘Expansionary fiscal contraction’ seems to be more contractionary than expansionary.

We can argue about the multipliers of government spending and how effective a second stimulus might or might not be, but what seems clear to me is that cuts in government spending will subtract from growth. Policy makers may or may not be able to spend their way out of recession – but they certainly can’t cut their way out of one.

The right has come out with its preferred growth agenda – dismissed in detail by the TUC’s Nicola Smith here – and it contains few surprises. Attacks on the minimum wage, the welfare system and calls for cuts in red tape and corporation tax – this isn’t their growth agenda, this is simply a repetition of their own long standing prejudices.

The core issues are how we get the corporate surplus down, the banks lending (to the right sort of business), investment increased and demand restored. Get this right and the deficit will start to come down.

Ed Balls proposals for a temporary VAT cut and small investment led stimulus funded by a bonus tax has much merit but isn’t enough to deal with the serious issues we face. I’m less convinced by Cable’s calls for more QE (without radical reform) and don’t see the logic at all of Osborne’s reported desire to cut the 50p rate.

As I’ve argued before, what we need now is a ruthless focus on wages, employment and investment.

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9 Responses

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  1. Tim Worstall said, on July 27, 2011 at 12:39 pm

    “but what seems clear to me is that cuts in government spending will subtract from growth.”

    Given that government spending is included in the calculation of GDP at a 1:1 ratio…..whether it adds value or not,…..this seems obvious, yes.

  2. Rob said, on July 27, 2011 at 2:52 pm

    Cable’s talk about further QE did seem to be on the basis that this would be ‘unconventional’ QE (not just buying more gilts), which might be more effective than the last attempt. Not sure how much anyone’s likely to listen though.

    From a purely political-ideology-observer standpoint, I’m really interested in the nature of the “deal” (informal or otherwise) that exists between Mervyn King and George Osborne. I think you’re right when, in a previous post, you said that Osborne’s plan seems to be to apply a value-for-money test to public spending (with a Tory’s conception of what counts as good value) and leave the matter of economic stimulus to the Bank (call it the Scott Sumner plan, I guess). In which case, where’s the QE we need to get GDP growth?

    I see the Conservative view as resting on the idea that ‘the state’ is ‘too big’ and that there’s a need to re-balance the economy away from public sector to private sector growth, on economic grounds and possibly on the grounds that an over-large state becomes intrusive or stifling to a free society. Their plan to cut government expenditure is consistent with this. The Lib Dems hold a milder version of this opinion, and would probably want to cut different things first (Trident seems to be the regularly-given example). In theory, they should be able to rely on the Bank performing whatever activity is necessary to keep growth going, just as an over-spending government would rely on the Bank to raise interest rates and choke off inflation. How deflationary does Osborne have to be before it becomes a problem for the Bank to address?

    The other key point is that there is still pent-up growth in parts of the economy. Day rates and salaries for, say, software developers are still high and rising, indicating a shortfall of supply and a healthy demand. It may be that any attempt at stimulus in the short term will run up against the basic lack of skilled workers waiting to take up the work created. This kind of problem isn’t amenable to any short-term fix (except, perhaps, relaxed immigration controls?).

  3. Dave Holden said, on July 27, 2011 at 10:22 pm

    The cause is debt. There is no cutting your way out of this and there is no spending your way out of this. Bad debts need to be written off. IMHO..

  4. Paul Newman said, on July 28, 2011 at 7:45 am

    As I said …

    but they certainly can’t cut their way out of one.

    Depends what you cut -A reallocation of resources from community cohesion awareness officer to people doing profitable work would help
    And annuvver fing -Its a lot better than raising taxes obviously.Currently not only are we raising taxes but we are not cutting at all .We are slowing the rate of increase of spending from a level no-one believes could continue .Cutting better than raising taxes, agreed ?
    A ” Focus on employment” will butter no parsnips, only Companies can create employment and if that employment is sustained only by throwing money around we must latter pay back we are better off not having it.
    I agree with you there is no easy way.The real answer is rewarding work, rewarding enterprise, and cutting fat … Sadly, but unavoidably, a period of higher unemployment and double dippyness is another cost of the Labour splurge… When you are morbidly obese the diet is not a pleasure .It may well feel worse .
    Btw Liberal Conspirators – Long term Duncan observers have tracked him backing slowly away from his “Throw money at it” Ballsite stance to a point where he is kind of admitting he was wrong ….
    When as respected a commentator as Duncan is edging for the door for the sake of his future credibility be scared … could be you need a rhetorical Plan

    • duncanseconomicblog said, on July 28, 2011 at 9:21 am

      Replied at LibCon.

  5. yorksranter said, on July 28, 2011 at 12:52 pm

    Tim, private spending is included in GDP at a 1:1 valuation. Wouldn’t it be fun if we were to apply the arbitrary haircut you’re dreaming of to all those bankers’ bonuses?

  6. Carol Wilcox said, on July 31, 2011 at 1:25 pm

    Duncan, it’s not an ‘L’ shaped recovery. It is, as predicted 2 years ago by Gillian Tett, bank shaped, that is the shorthand sign for ‘bank’.
    See http://ftalphaville.ft.com/blog/2009/05/29/56380/gillian-tett-the-shape-of-things-to-come/ and my letter
    http://www.ft.com/cms/s/0/8339b304-819b-11e0-8a54-00144feabdc0.html#axzz1Tgl3HSR7.
    As my letter says, the short uplift was generated by Labour policies and the flatlining is entirely down to the ConDems.

  7. Carol Wilcox said, on July 31, 2011 at 1:29 pm

    What Cable knows, but can’t say, is that if the QE was directed into good infrastructure investment this would feed directly into land values and if all rent was collected for public benefit (land value tax – which Cable supports) this would create a virtuous circle. Vested interests keep this debate out of the public arena.


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