Wednesday, 19 November 2008

'Clear blue water' means accountability and choice.

One of the less baleful consequences of the financial crisis is that every political pundit, columnist, and indeed blogger, has become an amateur economist, whether economics were previously his/her ‘specialist subject’ or not. Economics’ centrality, as the pivotal issue on which politics turns, might be disputed but its importance is not. Therefore it does no-one any harm whatsoever to start thinking a little harder about how money and markets interact with government.

The truth is, however, that we are dealing with a theoretical rather than an exact science, dismalness not withstanding. National economies are staggeringly complex, that complexity is multiplied infinitely for the world economy, and its workings are hotly disputed.

Yesterday I suggested that David Cameron is beginning to present a coherent economic argument, based on principles of fiscal responsibility and sound money. A commenter dissents from the Conservative view and commends Paul Krugman’s New York Times blog, which posits the counterintuitive notion, that more of the irresponsible spending which created the crisis is what is needed to get us out of it. Essentially this is to hold that the deflationary cure to the liquidity crisis is worse than the disease.

I don’t know which of these analyses is right, although I certainly have an opinion as to which has its basis in sounder logic. But in many ways that is what is cheering about the route down which Cameron is going. His position is based on cogent argument, it dissents from his opponent’s view and the electorate can begin to assess the comparative strength of each analysis.

The predominant phrase in editorials this morning has been ‘clear blue water’. As the best means to tackle Britain’s economic crisis, indeed the world’s economic crisis, is hotly disputed, there should be ‘clear blue water’ between the parties. If a party political consensus were to be formed around Gordon Brown’s economic policies, as they become increasingly contentious, then the Prime Minister and his government would be evading the rigours of accountability.

Brown is offering runaway spending to plug a deflationary gap in the economy and he plans to borrow to fund his plan. Cameron is proposing to spend judiciously and curb borrowing. The public now has a genuine choice as to how it wishes government to tackle recession and prepare Britain for recovery.

6 comments:

Aidan said...

I read that Krugman link and I just cannot fathom this idea that throwing good money after bad will solve the issues in developed economies. Recessions are necessary to clear out the bad and get economies back to the fundamentals. Boom times lead to all kinds of lifestyle industries that have little to do with the real needs of mankind.
As I see it people and institutions borrowed too much and over-invested in an asset class. Now it is pay back time and some businesses will go bust, individuals will have to face bankruptcy and people will need to tighten their belts. Pouring more money into an economy so that people can go on making the same mistakes is the hair of the dog. You have to take the hangover some time.

kensei said...

>I don’t know which of these analyses is right, although I certainly have an opinion as to which has its basis in sounder logic.

This is this: I don't know much about economics, but I know what I like. If you look at the US, even normally right wing economists are supportive of a stimulus. E.g. http://www.washingtonpost.com/wp-dyn/content/article/2008/10/29/AR2008102903198.html

The US is not here, of course, and can get away with more, but there are similar problems. There are other analysis out there. by all means read a bit and come back. But your response is simply ignorance dressed up.

The need for fiscal responsibility is important in the long term. 110%. Money borrowed will need paid back. In the short term, you have the recipe for a depression. The 1929 crash did not cause the Great Depression. It was the response of the US Government afterward that did it - they tightened monetary policy, slashed spending and allowed businesses to go to the wall.

The BoE and the Government are now worried about deflation, not inflation, which is more dangerous and means that the correct solution is to stimulate demand by increasing spending. If deflation gets embedded, we are fucked, either by depression or by stagnation. Investigate what happened to Japan in the 1990s.

Aidan

Recessions are necessary to clear out the bad and get economies back to the fundamentals.

I am going to take a wild case you've never severely been hit by the consequences of one.

It's not a matter of having people make the same mistakes -- banks are no longer going to lend like mad men and people will be more cautious and more fearful of their jobs regardless of how much money the government puts in. What is necessary is getting through the tough period and sort things out when you are not in a crisis.

It's a bit like a bank allowing you a holiday on your mortgage to get your finances in order, rather than forgiving the loan. The alternative is bankruptcy, and everyone loses.

Chekov said...

Kensei, we could spend all day posting different links, but I think that even you should accept there is more than one view on this. The crux of my piece was that it is healthy that different views will be made accessible to the voter.

The Conservatives are not opposed to stimulus. Indeed they have offered plans for funded tax cuts, have acknowledged that spending will go up and so on. They simply will not write a blank cheque to keep borrowing at all costs.

You allude somewhat to the crux of the issue here,

“I am going to take a wild case you've never severely been hit by the consequences of one.”

Gordon Brown is asserting that by unchecked borrowing he can avoid the pain of this recession. Tories are saying that although they can mitigate that pain, some might be necessary in order to allow the economy to recover more quickly later on.

I’m not making things up. Serious politicians and economists are having this argument, so it can’t be ascribed to ignorance. But this isn’t an exact science and without even fully subscribing top either view at this stage, I think it’s quite legitimate to applaud the fact that the argument is taking place.

kensei said...

Chekov

Kensei, we could spend all day posting different links, but I think that even you should accept there is more than one view on this. The crux of my piece was that it is healthy that different views will be made accessible to the voter.

Sorry, but no. If you are going to make a case for alternative economic policy, it needs to be have some theory behind it and be well reasoned. You wouldn't be praising voter choice if the Tories were pushing Creationism as voter choice; you'd be on a rant. What you are doing is allowing prejudice to blind you and playing the game well below par here.

The Conservatives are not opposed to stimulus. Indeed they have offered plans for funded tax cuts, have acknowledged that spending will go up and so on. They simply will not write a blank cheque to keep borrowing at all costs.

Funded tax cuts are not a stimulus. Not now, not ever. If you are "funding" them then you have taken the money from elsewhere. Now, there is certainly a worthwhile debate where money should be spent (I have heard that upping unemployment is effective as the money is basically pushed straight back into the economy) but that isn't the issue. What the government needs to do is plug some of the gap from the private sector to stop things getting very bad. That means increasing spending overall.

Gordon Brown is asserting that by unchecked borrowing he can avoid the pain of this recession. Tories are saying that although they can mitigate that pain, some might be necessary in order to allow the economy to recover more quickly later on.

We are not escaping pain. No one is. Gordon Brown hasn't stated anywhere we'll escape pain, neither has the Chancellor. He has said we need a stimulus to help the economy. On the balance of what I've read, he's right.

Bear in mind: monetary policy has lost its traction, almost totally. The BoE had to cut by 1.5% - 1.5%! - in order to transmit a much smaller decrease to people and business. That leaves only the other lever of fiscal policy to do most of the work. Bear in mind we are only a month or so from a point where the entire system could have collapsed, and that is accepted almost universally.

It will have a long term cost and consequences either in raised taxes, spending cuts (or slower growth over an extended period) or a mixture of both. But it is not good for the government to admit that right now. They want people to take any money they get and spend it and thus help the economy. If they fear it'll all be taken away in a year, they might save it, and make things worse. What the Tories are doing might be good for them, but not so sure it will help the country. There is a point to pursue this argument and I am not sure we are at it yet.

I’m not making things up. Serious politicians and economists are having this argument, so it can’t be ascribed to ignorance. But this isn’t an exact science and without even fully subscribing top either view at this stage, I think it’s quite legitimate to applaud the fact that the argument is taking place.

If you are going to weigh in and pick sides, which you have done, then you need to back up your argument. Otherwise it is simply bluster.

Chekov said...

“Funded tax cuts are not a stimulus. Not now, not ever. If you are "funding" them then you have taken the money from elsewhere. Now, there is certainly a worthwhile debate where money should be spent (I have heard that upping unemployment is effective as the money is basically pushed straight back into the economy) but that isn't the issue. What the government needs to do is plug some of the gap from the private sector to stop things getting very bad. That means increasing spending overall.”

I don’t think you’ve been listening. As I understand it the Conservatives have accepted that spending will increase. They are not happy that this should be unchecked. Increasing debt exponentially will prove unsustainable and will ultimately create a tax drag on the economy when it is showing signs of recovery. It is not the time to decrease spending and the Tories have not suggested decreasing spending. They have offered plans to cut taxes in a sustainable fashion and to cut waste. Actually I’m being boxed in to defending something that’s merits I’m not entirely convinced of. My point was actually, in terms of strategy, coherence and an alternative, the Tories had launched a credible plan. The pressure on Osborne is already easing.

“We are not escaping pain. No one is. Gordon Brown hasn't stated anywhere we'll escape pain, neither has the Chancellor. He has said we need a stimulus to help the economy. On the balance of what I've read, he's right.”

Gordon Brown hasn’t been up front about the pain which might be necessary. Both parties wish to provide a stimulus. They differ on the best means and how drastic that intervention must be before it becomes counterproductive. Remember that the Conservatives have backed Brown up to a point. They are now saying ‘there has to be a limit on this’.

“Bear in mind: monetary policy has lost its traction, almost totally. The BoE had to cut by 1.5% - 1.5%! - in order to transmit a much smaller decrease to people and business. That leaves only the other lever of fiscal policy to do most of the work. Bear in mind we are only a month or so from a point where the entire system could have collapsed, and that is accepted almost universally.”

Firstly there is a view that monetary policy will only regain traction when the value of sound money is reasserted and borrowing is reduced. Secondly all major parties have accepted that tax cuts are needed. Even Labour has made illusions towards casting around for inefficiency savings in response to the Tory shift.

“It will have a long term cost and consequences either in raised taxes, spending cuts (or slower growth over an extended period) or a mixture of both. But it is not good for the government to admit that right now. They want people to take any money they get and spend it and thus help the economy. If they fear it'll all be taken away in a year, they might save it, and make things worse. What the Tories are doing might be good for them, but not so sure it will help the country. There is a point to pursue this argument and I am not sure we are at it yet.”

Which is Brown’s argument entirely. It is that debate must be stifled. The thing is that there is a perception that Brown likes to stifle argument anyway and does so in every situation, so is this a special case? He’s suffering from ‘boy who cried wolf’ syndrome.

“If you are going to weigh in and pick sides, which you have done, then you need to back up your argument. Otherwise it is simply bluster.”

Firstly I have not. I have offered political rather than economic analysis, essentially.

kensei said...

I don’t think you’ve been listening. As I understand it the Conservatives have accepted that spending will increase. They are not happy that this should be unchecked.

No, they have said they will "fully fund" tax cuts. That requires cuts elsewhere.

Increasing debt exponentially will prove unsustainable and will ultimately create a tax drag on the economy when it is showing signs of recovery.

So a long and deep recession is ok as long as when we do eventually recover it is quick? It's like interest rates. they get increased in boom time to slow growth, to give a more even keel.

When your house is in fire, you don't worry about the cost of the damage until the fire is put out.

It is not the time to decrease spending and the Tories have not suggested decreasing spending.

Sustaining spending is not enough. Other parts of the economy are falling. Spending has to rise to plug some of that gap. the government is effectively the spender of last resort. You'll never get all of it but you try and take off the edge. What is very important is how it is spent -- tax cuts versus spending? Infrastructure versus unemployment benefit? Cutting waste is good because you can convert useless spending into useful one.

Oh - by the by. if you simply sustain spending and economic activity drops with nothing to replace it, borrowing will go higher as your tax receipts will drop. So - cut spending now as it is prudent?

They have offered plans to cut taxes in a sustainable fashion and to cut waste. Actually I’m being boxed in to defending something that’s merits I’m not entirely convinced of. My point was actually, in terms of strategy, coherence and an alternative, the Tories had launched a credible plan. The pressure on Osborne is already easing.

It may be coherent, but it is not credible. How will this pull us out of the nasty recession we are heading into? How does it stimulate demand, or lower costs for businesses to increase supply? The danger with tax cuts in this environment is that people save them.

There are holes in GB's argument but I'm not sure this is it.

Both parties wish to provide a stimulus.

If there is no spending increase, then there is no stimulus. Either you don't understand what a stimulus is, or you are being willfully ignorant. Which is it?

They differ on the best means and how drastic that intervention must be before it becomes counterproductive. Remember that the Conservatives have backed Brown up to a point. They are now saying ‘there has to be a limit on this’.

There have been no stimulus at all yet. We have merely staved off complete disaster in the financial system. That is not the same thing, and something impossible for even the Conservatives not to back.

Firstly there is a view that monetary policy will only regain traction when the value of sound money is reasserted and borrowing is reduced.

So ignore the risk of deflation, raise interest rates, haircut shareholders and raise taxes. If your certain, that's what to do. I'll point to 1929. If not, then a stimulus needs to be full blooded.

Secondly all major parties have accepted that tax cuts are needed. Even Labour has made illusions towards casting around for inefficiency savings in response to the Tory shift.

To focus on the tax cut is to miss the point. What is necessary is to stimulate demand.

Which is Brown’s argument entirely. It is that debate must be stifled. The thing is that there is a perception that Brown likes to stifle argument anyway and does so in every situation, so is this a special case? He’s suffering from ‘boy who cried wolf’ syndrome.

It's a bit like what Osbourne said regarding the currency. It's true, but bringing attention to it will only make it worse and piss of civil servants. The Tories have their job to do, and may well believe it. In that case fair enough, but the balance of opinion seems well set against them. I suspect it is opportunistic though: things are happening so fast everyone is making ti up on the hoof.

Firstly I have not. I have offered political rather than economic analysis, essentially.

You stated "I know which one I like more". I'm simply calling you on it. If you pick a side, be prepared to back it up.