{"id":16181,"date":"2011-09-19T05:39:41","date_gmt":"2011-09-18T19:39:41","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=16181"},"modified":"2011-09-19T05:39:41","modified_gmt":"2011-09-18T19:39:41","slug":"the-coalition-of-the-willing","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=16181","title":{"rendered":"The coalition of the willing"},"content":{"rendered":"

\t\t\t\tWhen the Liberal Democrats went into coalition with the British Tories I was surprised how readily and brazenly their leadership was prepared to compromise the underlying principles of the party for power. While the Party Constitution<\/a> claims they stand for – “a fair, free and open society” balancing “the fundamental values of liberty, equality and community, and in which no-one shall be enslaved by poverty, ignorance or conformity” and “that the role of the state is to enable all citizens to attain these ideals, to contribute fully to their communities and to take part in the decisions which affect their lives” it is clear that they have become partners in a policy regime that is the anathema of those ideals. By entering the coalition they have allowed a pernicious regime to be inflicted on the British people – one which is driving unemployment up and incomes down. The Liberal Democrats are having their Annual Conference this weekend in Birmingham and it is clear if the utterances of some of their members are anything to go by that the Party is struggling with their identity. The Deputy Leader for example said<\/a> (September 17, 2011) that the job of the Liberal Democrats was “to rein in the ruthless Tories”. The reality is that it is the government that is ruthless and the Liberal Democrats are part of that government and give it the air it needs. I was unfortunate to listen to a BBC interview today with Liberal Democrats leader Nick Clegg and it left me with the impression that there is little to distinguish the coalition partners on the main economic issues. Both parties are infested with neo-liberalism and both fail to understand basic macroeconomics – that spending creates income.
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\nYou can read the Transcript<\/a> of the BBC interview with the Deputy Prime Minister for yourself – it was on the “Andrew Marr Show” on Sunday morning.<\/p>\n

The BBC interview began with the topic of growth and the Euro:<\/p>\n

\nANDREW MARR: Let’s talk, to start with, about hard times. We have the euro crisis all around us … and the latest figures suggest that we may either have a completely flat period in the economy or things might actually return to recession. So talk us through just how bad you think, how worried you are about the economy, first of all.<\/p>\n

NICK CLEGG: Well I think the situation is very serious. You know we are a very open economy. We are hugely dependent on what happens around us, particularly on the Eurozone. Forty per cent of our exports and more go into the Eurozone, so if things are spluttering there – as they are very seriously – then of course that affects us massively, which is why you know it’s hugely in our national interest to make sure that the Eurozone is strong. But that doesn’t mean there aren’t things we can do at home. Now of course we’re balancing the books, everyone knows that; we’re reducing the burden on businesses – less red tape, less tax. But I think there are more things we can do to create jobs today and build for tomorrow, and that’s why you know last week I made a speech about how we’re giving priority to infrastructure projects. Danny Alexander today has talked about \u00a3500 million being set aside for local infrastructure projects. What does infrastructure mean? Broadband, housing, rail, roads. And you know Vince Cable has also been talking about the need to do that – to kind of really, to really make sure that we foster confidence where we can even though, you’re right, the wider context is really tough.\n<\/p><\/blockquote>\n

There is never any excuse for a sovereign nation (one that issues its own currency and floats it on international markets) to allows its domestic economy to falter when its export markets shrink. Clearly, the crisis in the Eurozone is impacting on British exports – which by the way accounts for around 60 per cent of British exports rather than “forty percent … or more” as the Deputy Prime Minister estimated.<\/p>\n

But the impact is on aggregate demand (Britain typically runs a small external surplus against the Eurozone) can be replaced by domestic demand – private households and firms and government. When the recession began in earnest in 2008, the Chinese government, facing a sharp drop in export earnings, quickly used its fiscal capacity to stimulate domestic spending. They very successfully switched demand from exports to public infrastructure development and kept growing.<\/p>\n

The western governments initially followed suit but quickly came under conservative pressure and abandoned their stimulus attempts far to early. As the <\/p>\n

But the Liberal Democrat leader is correct – “there are more things we can do to create jobs today and build for tomorrow” – the only problem is that the British Government is doing exactly the opposite and that is why the economy, which was recovering as a result of the stimulus in 2008-09, is now faltering and unemployment is rising. <\/p>\n

As the Liberal Democrat leader says “they are balancing the books” – which should be expressed as the Government is attempting<\/strong> to balance the books. What they are learning is that the non-government spending will ultimately determine whether they balance the books or not. The budget outcome is not totally in the Government’s control and if they continue to undermine growth then the automatic stabilisers will work against their balancing aims.<\/p>\n

The BBC interview proceeded:<\/p>\n

\nANDREW MARR: I want to come back to the wider context in a minute, but there’s a sort of simple question which is you’re cutting expenditure, taxes remain high in order to balance the books, so where possibly is the money going to come from for the kind of substantial infrastructure projects that would actually get unemployment down?<\/p>\n

NICK CLEGG: Well let me just first a little bit of perspective. We as a government are still spending \u00a3700 billion a year. That is … (Marr tries to interject) No but hang on …<\/p>\n

ANDREW MARR: None of us understand what that means. That’s the trouble.<\/p>\n

NICK CLEGG: Okay well let me … The thing is there is this ludicrous caricature that because we’re balancing the books government can’t do anything, that somehow we’re turning the clock back to the 80s or the 30s. Do you know as a proportion of the country’s wealth, this government will be spending more in public spending at the end of this parliament, after all these cuts, than Tony Blair and Gordon Brown were when they came into power. So there’s a lot that government can still do – not only through direct spending on Broadband, on housing, on road, on rail, but some of the innovations. We’re setting up the first green investment bank, which is an investment bank which takes public money, taxpayers’ money, and then gets private investors’ money into, for instance, renewable energy.<\/p>\n

ANDREW MARR: (over) So coming back to my …<\/p>\n

NICK CLEGG: (over) That makes a big difference in actually creating jobs today, but, as I say, building for the future as well.<\/p>\n

ANDREW MARR: So where does the money come from for these big projects, and how much money will there be?<\/p>\n

NICK CLEGG: Well there will be literally billions of pounds of investment, which we’d already planned, but what we’re making sure is that the ones which stimulate growth most effectively now and help for instance employ young people, young men who at the moment can’t find a job, that they are given real priority.\n<\/p><\/blockquote>\n

It was very frustrating listening to this. How the British public finds Nick Clegg likeable is beyond me. But personalities aside (which are less important anyway), it is clear that the macroeconomics of the current situation in Britain escaped the Liberal Democrat leader.<\/p>\n

You can access British government spending and revenue data from the British Treasury<\/a>. Particularly useful is their Public Finances Databank<\/a>.<\/p>\n

For the record, Blair took over in May 1997 and the Labour Party lost power in May 2010.<\/p>\n

If you examine the Treasury forecasts you will see they are projecting what seems to be robust nominal GDP growth over the forecast period (to 2015-16). But when you examine them in real terms (by deflating them), the forecasts are much more modest.<\/p>\n

The following graph captures the difference between the forecasts for nominal GDP (blue line) and real GDP growth. You can see that in 2011-12, real GDP is forecast to shrink back to 0.8 per cent and then recover slowly.<\/p>\n

The reality is that it is likely given the current trajectory that real GDP growth will be close to zero or even cross the zero line in the coming year. The ideological faith the British government had in the recovery of private spending plus a net export-led recovery were always going to be gross overestimates of what will happen.<\/p>\n

That means that the output gap estimates in the Budget will be biased downwards which makes it more imperative that the government increases real spending growth rather than cut it.<\/p>\n

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<\/div>\n

What about the Liberal Democrat leader’s public spending claims above? I did some analysis of the data as one would.<\/p>\n

Total public sector spending in 2010-11 is \u00a3691.7 billion with the central government spending being \u00a3502.7 billion. So when Mr Clegg says “we” are spending 700 billion pounds he is being very “liberal” with his definitions.<\/p>\n

But if you then consider the real spending, you get quite a different picture. Output gaps are real concepts – that is, the percentage shortfall in real output from potential output. The Treasury data allows one to project the real spending until 2015-16. While they provide a GDP deflator (to allow the real series to be computed) up to 2010-11, I extended it by assuming that inflation was 4 per cent in 2011-12, 3.5 per cent in 2012-13 and 2013-14 hen 3 per cent for the remainder of the Treasury forecast period to 2015-16.<\/p>\n

I don’t think the inflation assumptions are particularly unrealistic or likely to distort the main conclusion – that real spending is falling under the current British government.<\/p>\n

The following graph shows you the evolution of total public sector spending in \u00a3 billions indexed at 100 for the 1997-98 year (Blair’s first budget) until 2015-16 based on actual data and Treasury Budget forecasts.It also shows total real<\/strong> public spending over the same period (at 2009-10 prices). The truth is revealed. The British public sector is forecast to contract significantly in real terms over the coming years.<\/p>\n

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<\/div>\n

Further, as a percentage of GDP, public expenditure peaked at 47.6 per cent in 2009-10 as the output gap rose from 1 per cent in 2008-09 to 4.2 per cent in 2009-10. In the 2010-11 year, it had dropped to 47 per cent despite slowing GDP growth. The Treasury forecasts suggest a rising output gap this year (2011-12 to 3.9 per cent) but public spending will comprise a smaller proportion (46 per cent). It is then forecast to drop to 39.9 per cent by 2015-16 (about the same proportion that Blair inherited in 1997).<\/p>\n

So the “we are spending our heads off” claim by the Liberal Democrat leader are less than true. Both real current and real net investment spending is projected to decline over the next several years.<\/p>\n

Even if the Government is still spending (a flow) \u00a3700 billion a year the output gap suggests they should be spending much more than that. There is no real consensus on the size of the output gap but it is an important concept because it conditions the way the Government estimates its structural deficits.<\/p>\n

By way of summary, the actual deficit outcome is composed of the structural component – the discretionary policy stance; and the cyclical (automatic stabiliser) component which indicates the departure from some “full employment” level of output. The wider the output gap the larger will be the cyclical component of the budget outcome.<\/p>\n

The cyclical component results from the fact that as the economy moves away from full employment tax revenue falls and welfare spending rises which push the budget deficit up automatically (or reduces a surplus).<\/p>\n

The structural deficit is thus measured at what is deemed to be “full capacity” or potential output. So a structural deficit of 2 per cent of GDP would reflect an expansionary fiscal stance whereas an overall budget deficit of 2 per cent may, in fact, reflect a contractionary fiscal stance if the cyclical component was, say, 3 per cent of GDP.<\/p>\n

A further point is that a structural deficit is not necessarily inappropriate. If non-government overall saving desires are equal to say 2 per cent of GDP then a structural deficit of 2 per cent would be required to maintain income growth at potential and fill the non-government spending gap.<\/p>\n

It is highly likely that the structural deficit estimated by the UK Treasury is biased upwards. Please read my blogs – Structural deficits – the great con job!<\/a> and Structural deficits and automatic stabilisers<\/a> – for more discussion on this point.<\/p>\n

But even if the current structural deficit estimates are accurate, there is no case that can be made for real spending cuts in the UK at present. Rising unemployment is a sure sign that the budget deficit is too low.<\/p>\n

Despite what the Liberal Democrat leader constructs as a “ludicrous caricature that because we’re balancing the books government can’t do anything” – the reality is very clear. Clearly with a balanced structural budget balance the government is still spending and pursuing its program. But that misses the point – the British government needs to be expanding its budget deficit. There needs to be more spending. Changing the composition of declining spending may divert funds into more desirable areas of activity but at current productivity levels will not expand employment to any extent.<\/p>\n

Further, when the Liberal Democrat leader uses terms like government spending “as a proportion of the country’s wealth” you know how confused they are about macroeconomics. There is no meaningful concept linking government spending (a flow) to national wealth (a stock). What he means is national income which is a flow like spending. But the looseness of the language is indicative.<\/p>\n

Then we came to this interchange after Clegg was boasting about how much money they plan to spend on Broadband:<\/p>\n

\nANDREW MARR: But this is not new money, is it? This is something you’ve announced already.<\/p>\n

NICK CLEGG: Well let’s be clear. Quite a lot of it is money that was already in the system, but, crucially, we will actually by 2014\/15 be spending a little bit more on what they call capital spending – on these big, big projects …\n<\/p><\/blockquote>\n

By 2014\/15 real net investment will be \u00a320.9 billion (2009-10 prices) compared to \u00a330.3 billion pounds (2009-10 prices) in 2011-12. It is a lie to say they will be spending more in real terms, which is the only measure that is relevant given that inflation eats away the growth in nominal spending.<\/p>\n

But you can see the interviewer is pushing Clegg to talk about the direction of change in aggregate demand rather than the existing level of spending.<\/p>\n

A short-time later, the BBC interviewer said:<\/p>\n

\nANDREW MARR: And yet you know that out there, there are no signs of growth. I mean the private sector is not racing to the rescue, as you might hope, and indeed everyone’s looking at the global picture and shivering and retrenching rather than spending more. So what else can you do? What about looking again at the tax system for small businesses? What about tearing up some of the old planning rules to make it easier for house builders and other people to … [after some to and fro Clegg then said]<\/p>\n

NICK CLEGG: … economists talk about numbers and they talk about percentages and billions here and billions there. At the end of the day what this is all about is something much more elusive and much more delicate, which is just confidence. It’s confidence to get people to start building that first house, confidence that the business uses money they’ve got to create a new job, confidence to households to go out and actually spend a bit of money in the high street. And that’s a delicate thing. It’s affected by international circumstances, over which we only have limited control – we have influence but not control – but we can also do things in the way that I’ve described to boost confidence at home.\n<\/p><\/blockquote>\n

I agree that confidence is crucial to private spending recovery. But the numbers he refers to, in part, relate to orders coming into firms, incomes coming to workers, decisions to spend, decisions to save. Confidence in a capitalist market economy reflects how much profit can be made from the sales of goods and services, and for workers how secure their jobs and incomes are. Firms will not employ if they do not think they can sell. Workers will not expand their spending if they are worried about losing their jobs.<\/p>\n

When unemployment rises it reduces the confidence of households. When households reduce spending, firms do not approach the future in an optimistic way.<\/p>\n

It is true that measuring “confidence” is difficult. But there are enough surveys around that seek to calibrate shifts in sentiment and they all verify that firms and households are very cautious at present and that uncertainty about jobs and the loss of spending from public sector cutbacks are key factors driving this conservatism.<\/p>\n

There is no evidence to support the Ricardian Equivalence postulate that the British government has based its fiscal austerity program on – the claim that private spending will rise once governments attack the deficit because firms and households will believe their future tax burdens will be lower. There has never been any empirical evidence to support that claim.<\/p>\n

The British government has a major influence on the state of confidence in their economy – and the evidence supports the fact that they are currently undermining it.<\/p>\n

After some discussion about increasing taxes on the high income earners and some motherhood stuff about the Eurozone, the Liberal Democrat leader was then probed about the coalition agreement which has tied the Liberal Democrats into the fiscal austerity obsession of the Tories:<\/p>\n

\nANDREW MARR: Is there any part of you, looking at the terrible economic circumstances which may be ahead, that thinks actually we do have to go a little bit slower and cut a little bit less hastily?<\/p>\n

NICK CLEGG: Oh I think people who advocate that just need to think this through.<\/p>\n

ANDREW MARR: (over) So the answer is no?<\/p>\n

NICK CLEGG: Well does anyone seriously think by ripping up the plan to balance the books that somehow you’ll create growth by next Tuesday? It’s a complete illusion. Actually what you create is outright market panic, higher interest rates and more unemployment.\n<\/p><\/blockquote>\n

The interview ended at that point. It was clear that the Liberal Democrat leader has taken on all the neo-liberal myths that the Conservatives perpetuate. It is a fact that if the British government ripped up its plan and maintained fiscal support for the private deleveraging process that recovery would have continued. It was a relatively modest recovery but since the austerity has been progressively introduced it is clear that the recovery has stalled and is now going backwards.<\/p>\n

It is also a fact that if the British government announced a wide-scale public sector job creation program and offered anyone a job at a minimum wage that it would change the direction of the British economy dramatically. If they announced it today (Monday) and offered to pay a wage from Tuesday for anyone who turned up for work – I predict hundreds of thousands of workers would register for work within 24 hours. If the wages were paid within a week – then I predict there would be an instant spike in retail spending.<\/p>\n

If the government indicated they would maintain the jobs until the private sector had recovered I predict private investment would rise quickly in the coming months. I also predict that within a year there would be very few workers left in the public job creation programs.<\/p>\n

So there is something the government can do immediately – with immediate effects. Expand government spending in the form of wages for workers employed in public sector job creation programs. It doesn’t even matter if the government departments need some time to design and implement the job creation program. As long as the wages started flowing immediately, the economy would start responding immediately. Spending creates income whether the wages come from public sector job creation programs or are given to some banker in the “City”.<\/p>\n

Further, the final throwaway line about “outright market panic, higher interest rates and more unemployment” is just neo-liberal jabber. At that point, the interviewer should have asked Clegg to explain the experience of Japan over the last 20 years.<\/p>\n

He might have also asked how Clegg explained the low interest rates in Britain. Like “who sets interest rates”?<\/p>\n

Like – bond yields remain very low and markets cannot get enough of government bonds – how do you explain that?” <\/p>\n

Like – the same applies to all the advanced nations outside of the EMU – how do you explain that?<\/p>\n

Like – how does market panic actually occur when the government is issuing its own currency and the central bank is setting interest rates (and yields)? <\/p>\n

Like – please give an instance where a nation has been destroyed by market panic and unemployment has risen when that same nation bestows a currency-issuing monopoly on its national government and that government only has liabilities in its own currency?<\/p>\n

The UK Guardian (September 18, 2011) covered the interview in this article – Lib Dem conference: Nick Clegg denies plan to step down in 2015<\/a>.<\/p>\n

The Guardian decided to highlight the speculation that Clegg would be a one term leader, which he denied in the interview. They also highlighted the falling popularity of the Liberal Democrats which suggests they will be wiped out at the next election – and deservedly so.<\/p>\n

Conclusion<\/strong><\/p>\n

While the Liberal Democrat leader is trying to differentiate himself and his party from the mayhem that the “ruthless” Tories are now inflicting on Britain the reality is the polls will sort his lot out.<\/p>\n

The coalition agreement has allowed the government to impose job cutting austerity on Britain at a time that it was showing signs of recovery. All the parties to that agreement will be held responsible for the results.<\/p>\n

They are the coalition of the willing.<\/p>\n

That is enough for today!\t\t<\/p>\n","protected":false},"excerpt":{"rendered":"

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