Duncan’s Economic Blog

The Tories, the Debt & the Economist

Posted in Uncategorized by duncanseconomicblog on October 5, 2009

That well known organ of left wing populism, The Economist, has published a survey of the world economy. It’s well worth a read. Someone should probably buy George Osborne a subscription.

Bits I especially enjoyed include:

In assuaging these worries, governments will have to balance two risks. They may tighten their purse-strings too soon, withdrawing a stimulus that is still needed. But if they keep spending heedlessly, they will saddle the economy with a heavy burden of public debt which may crowd out private investment.

According to Richard Koo of the Nomura Research Institute, the first risk is the greater. Governments, he argues, have to borrow the money that banks, businesses and households save or repay because no other part of the economy is willing to do so. If the funds go unborrowed, the flow of income will be interrupted, and anything that weakens GDP only makes the government’s liabilities harder to sustain.

Mr Koo is right that the public finances should not be considered in isolation from the rest of the economy. If households are determined to save and businesses are not prepared to invest, it falls to the government to borrow and spend. The government’s debt must rise so that the private sector’s can fall. They are on opposite sides of a see-saw.

… 

This give-and-take between public and private debtors helps explain why the yields on government bonds in many rich countries are still well below their pre-crisis levels. Indeed, economists find it surprisingly hard to demonstrate the clear link between heavy public debt and higher bond yields that would justify fears of crowding out. There may be a threshold of debt beyond which bond markets suddenly take umbrage. And buyers may also balk at so much borrowing from so many governments at once. Nonetheless, a recent study by Silvia Ardagna of Harvard and her co-authors showed that an increase in public debt from about 120% of GDP to 145% raises long-term interest rates by a mere 0.86%.

In its latest Economic Outlook the OECD shows that a 1% increase in underlying unemployment increases public debt by up to 3% of GDP over ten years. One way to keep the bond market quiet is to keep the labour market healthy.

(All my emphasis)

Time to welcome The Economist to the ‘Crazy People Gang’.

That last paragraph I’ve quoted is important. The Tories say they are serious about cutting public sector debt. But if Danny Blanchflower is correct (and he has been thus far throughout the crisis), then by my reckoning a Tory Government that increases unemployment to 5 million increases the debt/GDP ratio by around 15%! Once more ideology trumps economic common sense.

26 Responses

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  1. freethinkingeconomist said, on October 5, 2009 at 8:29 am

    For a differing view by an economist who thinks the multiplier is ZERO, here’s Sumner.

    http://blogsandwikis.bentley.edu/themoneyillusion/?p=2512

    I must admit I struggle to get it – I need to print and read at leisure. Or ignore.

    The Tories, I understand, believe that the answer is lower incapacity benefits. I am not sure how this works in a depressed economy, unless their view of depressions is that we are all taking a big voluntary holiday. In a boomtime such reforms may make sense but now? http://news.bbc.co.uk/1/hi/uk_politics/8289798.stm

  2. Will M said, on October 5, 2009 at 9:25 am

    yes, i wonder how many minimum wage jobs the tories think exist right now. anyone got any data on this?

    • duncanseconomicblog said, on October 5, 2009 at 9:55 am

      Not sure about minimum wage jobs but:

      http://www.statistics.gov.uk/pdfdir/lmsuk0909.pdf

      “There were 434,000 job vacancies in the three months to August 2009, down 12,000 from the three months to May 2009 and down 174,000 from a year earlier. There were 1.7 vacancies per 100 employee jobs, unchanged on the previous quarter but down 0.7 over the year.”

      434k vacancies against current unemployment of 2.5mn – before we the Tories re-classify anything.

  3. tim f said, on October 5, 2009 at 9:48 am

    The Tories’ incapacity stuff is bizarre. They seem to be saying that paying private companies to dock benefits would save £600m which could be used for extra training programmes on top of existing programmes – but last I heard they’re opposing the current investment in skills and training, which amounts to far more than 600m, so I’m not sure how it’s “on top” of them. That’s aside from the fact that any savings are speculative and impossible to account for – it is of course possible that the project could cost more than it saves.

    • duncanseconomicblog said, on October 5, 2009 at 10:02 am

      Tim F, some good numbers in the report I linked to above from the ONS. Page 42 gives international comparisons of the employment rate (which surely is what matters if what the Tories care about is economically ‘inactive’ people on IB, who they seem to think are a major problem).

      The UK scores 70.4% against an EU average 64.6%, only Sweden, Denmark, the Netherlands and Austria are higher.

      The US comes in at 68.1% and Japan 70.1%.

  4. newmania said, on October 5, 2009 at 11:45 am

    The Economist is rather left wing , Planned Economies suit Economists , not that hard is it .So the 40% rule was a mistake eh , we should have plumped for 70 % and lived it up a bit .Labour planned 10% cuts are a mistake ? Is that right ? Labour has never got its revenue predictions right by the way …The demand for our gilts includes freshly printed monopoly money. Great
    What infuriates me though is your endless reassertion that huge debt is a good thing in itself which it is not. Australia seems to have managed without mortgaging its children You have to get it in context there may be a fiddle here or there worth considering but you are suggesting it was actually a good idea to acquire these erupting deficits … heck fire I am not sure you aren’t suggesting we missed a trick and they should be worse .
    You were saying ‘spend spend spend’ then you are saying ‘spend spend spend’ now you always say ‘spend spend spend’ . I expect you will be right one day , wrong quite obviously for the last ‘five years’ in particular though.

    • duncanseconomicblog said, on October 5, 2009 at 11:54 am

      Newmania,

      Been a while.

      First off – the Economist is not ‘rather left wing’, certainly not economically.

      I do think setting an arbitary rule (whether 40 or 70%) was mistake. And I do think the planned Labour cuts are a mistake. At least Labour is not talking about cutting next year though.

      And public debt is neither especially good (nor at current projected levels) nor especially bad.

      I don’t always say ‘spend, spend, spend’ but for the last two years it has been necessary.

      The public finances were not badly managed 1997-2007. Could they have been better? Yes. But I reject the ‘fixing the roof whilst the sun was shining’ argument. Debt/GDP was low in 2007.

      If I was to attack the Brown record it would be to say the consumer borrowing was too high, house prices were out of control and we were over-dependent on the financial/property/retail sectors. All valid attacks. I wouldn’t especially focus on the public debt.

      • (Layman) Mike said, on October 5, 2009 at 7:55 pm

        …consumer borrowing was too high, house prices were out of control and we were over-dependent on the financial/property/retail sectors. All valid attacks.
        To me, this is the legacy of Thatcherism, but OK. How would a Government tackle these problems, and what political backlash would it face if it did? Assuming that these are even classed as problems, without hindsight.
        For consumer borrowing and house prices, there’s higher interest rates. But the Bank of England was given control of interest rates, on the grounds that they knew what they were doing. (Probably over-optimistic in hindsight.) And interest rates are a blunt instrument, affecting industry in general.
        For over-reliance on financial services etc, for the last thirty years, our manufacturing industy has been allowed to decline, while we’re told we’re now a service economy. Yet, Germany attributes its current recovery to its broad manufacturing base.
        And the political backlash if a Government stifled rising share & house prices, the financial sector, etc?
        I ask this as a genuine question, not as a political missive.

      • Cian O'Connor said, on October 6, 2009 at 12:07 pm

        Debt/GDP was actually higher than the accounts reported due to the PFI fiddle. It still would have been lowish by international norms, but its worth remembering that the government were cooking the books (and still are).

    • dannyboy said, on October 5, 2009 at 12:12 pm

      “Australia seems to have managed without mortgaging its children ”

      Their property bubble has yet to burst. Won’t be long now.

      “The government’s debt must rise so that the private sector’s can fall. They are on opposite sides of a see-saw.”

      I take it from your comments you disagree with this statement? If so then you have merely disagreed, without stating why. If you would clarify your reasoning then we can see whether its based on an economic or ideological argument.

    • Cian O'Connor said, on October 6, 2009 at 12:05 pm

      The Economist is rather left wing , Planned Economies suit Economists , not that hard is it

      The Economist is a right libertarian magazine that was one of the early cheerleaders of Thatcherism, a strong supporter of privatisation and limited government. If it is left wing, that means that the Adam Smith institute and the CATO institute must also be “rather left wing”, making 99.9999% of the UK/US “rather left wing”.

      I guess it is hard for some…

  5. newmania said, on October 5, 2009 at 1:37 pm

    D, spending grew in that period by about the amount we collect in Income tax , nothing has been done about the tax eating incapacity scam ( which Labour have hastily started to notice) and Public Sector salaries have risen at twice the rate of private sector . You do not think that Public Sector finances have been badly handled but by the logic of Gordon Brown they have been in every possible way. 40% Rule , No more boom and bust …… .
    In common with the rest of the country I utterly disagree with you that the position of debt was healthy in 2007 . When you looked at the counter intuitive and staggering effect of recession on the books which we recovered from during the Major period it was quite clear that with the new vast ongoing Public Sector beaks we acquired the result of any disturbance to this accumulator was going to be catastrophic . You make historical comparisons but you appear not to have noticed what happened to the country in the period which renders them obsolete , this is because you are only an economist .I forgive you
    In my own business we are suffering still from a flood of unneeded and distorting easy finance . Whilst new deals are hard to come by the amount spent on worthless debt driven lumbering giants will take ages to work through the system ( Insurance Brokers ). You assume that there is a lot of stuff worth lending to .That is not my experience and at least I have some . This business badly needs a shake out, it has hardly begun and it does not need high taxes easy credit ….over regulation and impediments to competitiveness erected by the Left( Which Duncan is also unconcerned about )

    Danny that obviously means something to you but I have no idea what you are on about .I think you are suggesting that if we had grown a less bulbous welfare state over paid Police force and acquired fewer people who do nothing then this would have persuaded the Private Sector to borrow less ..and then we`d be rich…? If so then next time I would like to be one of the people sitting around doing nothing assisting the economy by acquiring debt ….yippeeee I have packed my bucket and spade and I leave on a crusade of debt acquisition .. (send money )

  6. dannyboy said, on October 5, 2009 at 3:54 pm

    All I am suggesting is two things:

    – that the net saving of the private sector as a whole becomes a liability of the government that issues the currency whether that government wants to take on that liability or not. That’s how fiat money works. That is, all currency and the reserves commercial banks have on deposit with the central bank are liabilities of the government and therfore mean that if those reserves increase then so does the national debt.

    – that if the debt being repudiated by the private sector is taken on publicly and then spent back into the economy (sensibly) that flow of spending can both generate real public assets AND contribute to paying off private debts as it passes (recirculates) through private hands. If the savings of the private sector are not recirculated then where is the income to pay off their debts going to come from?

  7. newmania said, on October 5, 2009 at 5:56 pm

    Yes … the ‘gibber’ people would follow you no doubt .My publicly funded holiday still sounds good and now I have an added bit of mumbo jumbo I can justify myself with . What I was thinking was that if only we could actually burn money so we had to borrow some more we could really get this Economy moving .

    Matches or swimming trunks ? I am loving this New World what shall we fuck up next , every little helps !

  8. duncanseconomicblog said, on October 6, 2009 at 7:28 am

    Mike,

    A few ideas:

    Giving the Bank a target that includes asset prices as well as consumer inflation.

    Tighter regulatory standards on banks (in terms of actually regulating LTV ratios on mortgages, and loan-to-deposit ratios) – some form of monitoring o(and occassionally rationing) of credit availability.

    An active industrial policy – re-skilling, tax breaks, R&D support.

    I think Germany is too reliant on exports, it’s not my ideal. But we can strike a balance.

    Politically this isn’t easy. Although I think the argument may be easier to make post this recession.

    • Cian O'Connor said, on October 6, 2009 at 12:15 pm

      The Netherlands might be a good model, as might also Sweden. We’ve lost heavy industry and its unlikely to come back (Germany and Japan have the high end, the rest is in the developing world). However we’re not bad at certain types of skilled light industries, as well as design and software. Both the Benelux and Scandinavian countries are good at supporting these, particularly the kind of nimble small companies that our finance sector supports so poorly. Its a mixture of things: appropriate financing, advice, a university sector that provides research/training support as well as building the kinds of networks that you find in places like Silicon Valley.

  9. newmania said, on October 6, 2009 at 11:25 am

    Giving the Bank a target that includes asset prices as well as consumer inflation

    One problem I see with this is that having destroyed Pensions and made saving a waste of time a lot of people have their pension in their property in effect thanks to ….
    Cuts have been happening for long time now so you are talking fiction there Duncan are you still under the impression that what politicians say bears any relation to what happens . You did not follow the Brown spending promises very carefully did you ?

    You white heat of technology idea has been tried but such well loved figures as Harold Wilson Tony Benn to say nothing of Ilya Yakovlevich Brezhnev and many more ….. we have regional development agencies universally regarded as an expensive joke , you want more of this ?
    By the way do you recall your claim based on a report produced ( mirth) by Unite , that the middle income in this country was £2.50 per household or some such rubbish . The report Hopi posted the other day showed the average household income (ex retired ) is £38500 and that Nation wide higher in the South I assume.

    What do you make of the suggestion of living wills for Banks over a certain size encouraging them to be smaller and simper or providing an exit at their own expense if they are wound up . Makes sense to me active incentives not to be large enough as to have an implicit guarantee .

    What about getting some of the regulatory cost off everyone’s backs and reducing taxes , that would help

    • Cian O'Connor said, on October 6, 2009 at 12:10 pm

      Its probably best to limit the sarcasm if you don’t know the difference between the median income, and the mean income. Mean income is skewed by the very wealthy, whereas median income is a much more accurate indicator of middle England’s income. If you don’t understand why this is, I suggest that you read a book on elementary statistics before further embarrassing yourself.

  10. newmania said, on October 6, 2009 at 2:31 pm

    median income, and the mean income

    Mean and median ? Surely with such exotica at your command you must be a professor of maths ?

    http://www.statistics.gov.uk/downloads/theme_social/Taxes-Benefits-2007-2008/Taxes_benefits_0708.pdf

    Its all there , points to be made on both sides actually , and worth making the effort to understand …well for some ….

    • Cian O'Connor said, on October 6, 2009 at 4:45 pm

      You mean the report that you haven’t actually bothered to read? It states that he mean household income, prior to benefits, for the middle quintile is 23,600. The Unite report was reporting a different figure, the median individual income (you know the difference between individual and household income, right? I wouldn’t want to presume). The figure it used was the uncontroversial figure provided by the Office of National Statistics.

      This isn’t about sides, its simply about basic facts.

  11. newmania said, on October 6, 2009 at 9:26 pm

    Cian …sigh … I take it you have not read how the quintiles are arrived at or noticed the key point that retired people are not included in the figure that I gave .The distinction is treated as key in the report as I say there are points on both sides you have as yet understood none of them. The figure I quote is given in the report exactly as I gave it
    On individual income as everyone starts earning very little and then hopefully , by the time they are supporting a household they are earning a lot more . This average also includes part time work and second incomes where there will be large opportunity cost in benefits and vitally (something you are yet to discover I guess) the cost of child care . The whole effect is to utterly distort a true picture which suits those who wish to attack middling families .
    It is indeed about facts but facts as New Labour know all too well are slippery things when quoted out of context or misleadingly as you do. , Perhaps you have noticed how children are factored into income ( figures in Italics ) . Perhaps you have noticed that a houses in the quintile you mention actually pretty much breaks even from tax after benefits in kind are taken into account. Of course that assumes we are not paying far to much for education , NHS etc. which is not something I would accept…and presumably nor would you…

    You make crushing case for reducing Public Sector salaries as Policeman and a teacher might expect to be pulling £70,000 easily and avoiding child, care costs entirely ….pretty much aristocrats in your world , I expect you’d like to see them suffer eh ….these exploitative wealthy fat cats whose salaruies have grown at twice the rate of private sector salaries and who have protected pensions jobs and no commercial pressurres
    Off to the guillotine with them !

  12. Cian O'Connor said, on October 7, 2009 at 9:37 am

    Oh you’re right, serves me right for skimming. 34K. That’s not a terribly useful figure in and of itself for the point you (seem) to be making, as a household can include everything from my own bachelor years (very well remunerated, thanks for asking), to a divorced mum with three kids. It really depends upon what questions you want to ask of the data as to who you wish to include. Assuming that one isn’t a hack of course.

    [The individual income] average also includes part time work

    No it doesn’t. Full time work only.

    average also includes part time work and second incomes where there will be large opportunity cost in benefits and vitally (something you are yet to discover I guess) the cost of child care.

    I have two children, thank you. I really have no idea why you’d make this assumption. Its not really clear what point you’re trying to make here, incidentally. If you’re saying that we should increase benefits/tax credits to those with children – hey, I agree!

    Perhaps you have noticed how children are factored into income ( figures in Italics ) .

    Not really… Um, what?

    The whole effect is to utterly distort a true picture which suits those who wish to attack middling families.

    What are you on about?
    a) Even if a household with an average income of 34K was entirely reliant on a single person, they would still be around 7K under the higher rate tax band.
    b) What exactly is a middling family? Because 34K is not the average income of a middling family with children, its that of a household. Different things. Skimming the appendices, the average family seems to have a lower income that the average household. It also depends upon the number of parents.

    Perhaps you have noticed that a houses in the quintile you mention actually pretty much breaks even from tax after benefits in kind are taken into account.

    Um yeah. What exactly is your point here.

    Of course that assumes we are not paying far to much for education , NHS etc. which is not something I would accept…and presumably nor would you…

    Huh? Why would I think we’re paying too much for education and the NHS? Given international comparisons we’re paying too little for the NHS, if anything.

    You make crushing case for reducing Public Sector salaries as Policeman and a teacher might expect to be pulling £70,000 easily and avoiding child, care costs entirely ….pretty much aristocrats in your world

    My world includes (unfortunately) investment bankers. But carry on to make stupid assumptions about people you’ve never met.

    Given that a single parent teacher (widow) could be bringing up three kids on an income of 35K (about the average household income, excluding pensioners), maybe we don’t pay them enough. Or maybe this is a mind numblingly stupid argument. I dunno, you tell me. Maybe policemen are overpaid, wouldn’t surprise me. Teachers are graduates, and so the appropriate comparison there is with other graduate incidentally.

    I expect you’d like to see them suffer eh

    I would? What are you basing this on? My syntax structure, my prose style? I think they could afford to pay considerably more tax relative to the general population, but implenting that would be extremely difficult in practice.

    Cian

  13. newmania said, on October 7, 2009 at 11:36 am

    Original income
    The average original income for non-retired
    households is £38,100 per year (Table 6).
    Page 7 –
    Twit
    Your prose style is more Trollope than Hemmingway isn`t it so if I had to make a guess I ‘d have said you were a repressed homosexual Vicar lording it over some parochial dead water ( since you ask) .Right so you did not read the report , you accept that it is not’ simple fact’, you accept that these comparisons have been used in a misleading way I think… more supercilious crapola …blah blah don`t know why families appear to have a lower income , suggest reading ( it is a scale calculation) ,bit of half baked sniping and that’s about it .
    Another time I `ll give you a lesson on the cost of the NHS but I had better get some work done .

    • Cian O'Connor said, on October 7, 2009 at 12:15 pm

      You might want to work harder at the insults. The first is meaningless (Hemmingway? We’re discussing national statistics and your insult is that I don’t write like Hemmingway? Bizarre), the second is pathetic (oh no, he called me a homosexual. What will I do). Twit’s a nice retro touch though.

      I made a mistake skimming the report which I admitted to. You have made dozens of mistakes, which you simply ignore once pointed out to you.

      By simple fact I meant median income. Which you know, I stand by. It is what is. Unision didn’t use it in a misleading way for the point they were making it. Misleading would be to use household income to argue that the public sector workers are overpaid, based upon a hypothetical couple. Now who made that argument.

      If you’re making a point about how welfare payments are distributed then household income is more appropriate. If you’re interested in how families are doing (which that report was not), then you need to further subdivide according to number of children, though that analysis is far messier and there’s no direct way to tie that to income distribution.

      The average original income for non-retired households is £38,100 per year (Table 6).

      That’s including benefits. Its a fairly meaningless number for most purposes unless you subtract tax (because its all about redistribution, so have you to take into account all forms of redistribution). Which was why I wasn’t using it. Either you use the net income (and are upfront about including government redistribution as part of your argument), or you use gross income.

      don`t know why families appear to have a lower income , suggest reading ( it is a scale calculation)

      Do even you know what this is supposed to mean? I can guess at why families might have a lower income than comparable households with no children, though without reading the appropriate data/research I do not know.

      Household income simply means the income of a household. There’s no adjustment for kids, or the number of adults, because by definition they’re part of a household. Children are not factored into income, it simply attempts to breakdown a little (that’s the bit in italics) the average number of children for each quintile to provide additional data. That breakdown suggests (though does not prove) that the average familial income is probably below the median. There’s no attempt at adjusting income for number of kids because you don’t have to to calculate household income. There’s more of a breakdown in the appendices, but its raw data and so needs further processing.

      Another time I `ll give you a lesson on the cost of the NHS but I had better get some work done .

      Given you seem confused as to how household income is calculated, I think I’ll pass.

      How’s the Economist, btw. Still a left wing rag?

  14. newmania said, on October 7, 2009 at 12:57 pm

    I did not say you were a homosexual I said that your prose and syntax ,with its prolix maiden aunt preening suggest a ‘repressed ‘homosexual from the world of Trollope . I alluded to Hemmingway because he is famously terse and sinewy … seems to have worked …..
    The average original income for non-retired households is £38,100 means what it says . People know they pay tax and they know many people have an income from the State in one form or another . If you wish to define income so other way the onus is on you to say so . If users of this propaganda stick to that rule then we are as one .On Household income/chiuldren and its use in this report I was referring to the McClemnts scale right column page 2 , not sure if we are at cross purposes there , possibly.

  15. Cian O'Connor said, on October 7, 2009 at 1:45 pm

    The equivalised income is applied to net income, which should have been obvious and has been used to sort people into the different quintiles. Its not been used in the fashion you seem to imagine. The adjusted figures are in the appendix, if you’re really interested. There’s a lot of interesting raw data in there.

    I have no idea what propogandists do. Statisticians do not as a rule use gross income to include government welfare payments as its not a very useful figure for comparative or economic purposes. If you think this figure is relevant for some purpose, please state what the purpose is. If you simply want to wave the largest figure around that you can then that’s an exercse in propoganda.

    All the people I know use two figures. What they earn, and how much they get in the bank each month. Can’t think why.

    You’re probably right about what you meant to write, but you actually wrote “if I had to make a guess I ‘d have said you were a repressed homosexual Vicar lording it over some parochial dead water”. The only vague connection was that somehow having a prose style like Trollop’s (which I don’t particularly. Closer to stuffy 50s academic if anything) suggested a gay vicar. Which I didn’t really get. WHen I think of Trollop, I think of John Major. Gray men dreaming of cricket, cream teas and maiden aunts. As for Hemmingway. National income stats vs bull fighting. I see what you were doing there…


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