Whither Keynes? For the past six to twelve months, the big philosophical imponderable doing the rounds in British political life has been the extent to which the government should intervene in the market in order to stimulate the national economy. The Conservative/Lib Dem government’s “Plan A” to cut, cut and cut some more is flatlining; growth is stagnant. Unemployment has risen to 8.4% – the highest it has been since 1995 – as the jobs that the government’s austerity programme has ripped from the public sector and wrung from the strangled charity/NGO sector are not being replaced in the for-profit sector as hoped.
This is by every empirical measure imaginable a failing fiscal plan, but Plan B remains firmly off the agenda. And why? Keynesian economics is not policy anathema, but it has become political anathema. Central to the fable being spruiked by Prime Minister David Cameron and the Conservatives is that Labour’s clunky and interventionist approach to economic matters is to blame for the mess that Britain now finds itself in. If the Tories were to take a backward step from their “Plan A”, the economic dogma they’ve peddled since May 2010, they would be letting the Opposition off the hook. They would also be pricking the bubble of fallacious confidence that George Osborne et. al have, in effect, hitched a ride with throughout their war on public spending. It’s easy to forget given all the sanguine polling doing the rounds, but this is a government sustaining itself not through success in matters of policy, actual popularity, or anything resembling hard work, but merely ego: a reserve of confident bloody-mindedness that the market will eventually prove them right and that those on welfare should be punished.
The rigid stance adopted by the government on economic stimulus is particularly galling when one considers some of the moral peccadillos that the Tories apparently feel do warrant some intervention. This is a government that has no qualms about pulling levers and interfering with the market like a bunch of cardboard cut-out social-engineering lefties when doing so will slap and tickle their upper middle-class conservative base. A crusade to cap welfare benefits, directly impacting the lives of some of the nation’s most needy children has in recent days seen support for David Cameron soaring to a 22 month high. Jobs may be disappearing into the ether by the thousand across the country, but as Allegra Stratton alluded to in The Guardian recently, Cameron’s willingness to engage in blinkered market intervention has been plainly evident for some time now:
In a WH Smith not far from Westminster, there are no Terry’s Chocolate Oranges on sale at the till but there’s every other calorie and additive on offer. This stroll to the newsagent counts for political research because if you listened to David Cameron six years ago, flogging cheap chocolate to captive targets was an exemplar of immoral capitalism run amok.
“As Britain faces an obesity crisis, why does WH Smith promote half-price Chocolate Oranges at its checkouts instead of real oranges?” Cameron protested. Through the bully’s pulpit of office and opprobrium, he sought to change it.
In America, they would call out such a protest as socialism. In Britain, it would just be an all too typically fluffy intervention into the market on behalf of the morally conservative, rich or powerful, while the brutalisation of the truly needy by the market continues, wholly aided and abetted, in the background.
It is a complete misnomer that politics lines up along state intervention vs no state intervention. All politics is statist and always has been.
Well, the problem isn’t easy to solve, obviously. I mean, it’s structural and it’s interesting that while there has been a lot of talk about Keynes vs Heyek, there hasn’t been a lot of introspection in the popular press about what’s changed since the end of the second world war. Like maybe, globalisation and the end of the cold war? Like MMP? The failure of privatisation to invest money more more efficiently than public services? What if public services are inherently not-for-profit?!! “GASP!– You mean we have to do without them?! –No!”
The UK has, like many other “modern economies” not much room to move, as it’s only profitable economic sector is finance. But finance is the problem. Damnation! What to do, what to do? The cost of reform would be Greekish!
Bill Mitchell in his Billy Blog argues that the successor to Keynesian theory is Modern Monetary Theory.
Mitchell argues that government policies to maintain a large pool of permanently unemployed and underemployed does not stimulate the economy
In fact today’s blog http://bilbo.economicoutlook.net/blog/?p=17889 discusses the consequences of Australia running at a surplus in 2002. Every government has to run a deficit, to issue government bonds, so that a interest rate can be established
The problem both in the UK and elsewhere is a lack of investment in and by the private sector. Government spending to try and stimulate jobs growth has failed because they do not create long term profitable businesses that keep people in work for the long term.
How does a Government encourage private investment? Cut taxes – both individual (particularly for individuals with free cash flow to invest) and for companies. Reduce red tape and other impediments to doing business.
However, in the current environment where most Governments are already too far in the red, they need to cut government spending by more the reduction in tax take.
Razor, you have to be joking?
Private debt is what’s causing this little global-financial ruckus, you know?
Razor @ 4:
By your reasoning, Somalia (with no government taxes and no “red tape” or other government-imposed impediments on doing business) ought to have the world’s most successful economy and should today be paradise-on-earth.
The Guardian is reporting UK debt is up to 64% of GDP, growth is predicted to be 0.1% this quarter. Yesterday it was reporting that the “squeezed middle” won’t see an increase in real income until 2020.
Cameron has no plan B, but the Labour party are completely useless. Britain is going to have it tough over the next few years.
I think OBR is partly right, in that there is no worthwhile private sector investment in the UK. Just look at your average cafe in central london as an example: they always have huge queues because they jsut won’t install a second coffee machine. Because that would involve hiring another person (at a princely sum of maybe 4.50 an hour if that person is lucky!) So people queue and gripe while the business overcharges them.
How else can the trains be explained? The British train system is an over-priced disaster, and it’s entirely privately run.
Joe @ 5, it’s part right, private debt is in the mix, but not because businesses with rational expansion plans were borrowing too much, most of the private borrowing problems come from financial institutions making slightly more risky loans and then ‘insuring’ against their failures with derivative products. Works when everything is on the grow, but falls apart without it.
Certainly minimising the red tape load on business would help, but it’s a fine balance, most regulations exist for a reason, have to be a bit careful unpicking it all. That said, investment in government initiatives is also a possible way of increasing employment, but it’s not a full answer either, as taxpayers will pay for it in the end. Balanced approach anyone?
PinkyOz, you sound almost apologetic. I think you’re just being taken for a ride.
Raze, I guess you were out of town when the GFC struck. Let me briefly fill you in on what happened in your absence. As a result, businesses find it almost impossible to borrow at a commercially viable rate. Before the GFC, these businesses could borrow and cope with the alleged red tape and current tax rates.
Certainly, taxes and regulations could be reduced to cope with the consequences of the fraud and incompetence of corporate finance capitalism. But these reductions would erode First World conditions and reward the culprits who precipitated the current crisis.
Such a reward is called “moral hazard”. In other words it simply encourages finance capitalists to persist in their mendacity. This would be a political, economic and cultural disaster.
Tim @ 1 – I agree you could argue that all politics is in effect statist – but there’s quite a big differentiation between governments that go out of their way to regulate and control and those that focus more on loosening regulation and reducing taxes, for example.
Razor @ 4 – The problem that we are seeing in the UK is that reducing public spending has effectively translated into public sector and NGO sector job losses, which means less taxes, which means less ability to repay debt. So in short, its not really working.
faustusnotes @ 7 – I share your pessimism about Labour at the moment sadly, but if the economy keeps tanking for the next year or two any numpty could get elected. Not sure really whether its quite so easy for private enterprises to invest effectively though. To take your cafe example, would investing in another commercial scale coffee machine (let’s say at around $15000) and hiring more staff really result in greater profits? There would have to be some serious demand being turned away currently to actually realise greater profits.
The appeal against “red tape” is one of the more galling of tropes, IMO. While there are doubtless instances of pointless/low value compliance requirements attached to certain business operations, it’s hard to imagine that these might discourage anyone from pursuing an apparently viable business opportunity.
As Pinky correctly notes, rules and compliance exist for a reason. Had financial sector compliance, specifically in the area of due diligence, been effective in the years following the turn of the century, much of the damage to financial markets would have been mitigated. Had the Glass-Steagall provisions repealed by the Republican-controlled congress in 1999 been in force there might have been no serious problem at all.
Rules are designed to ensure that the advantages everyone gets are legitimate; that appearances are a good guide to reality and thus that when someone weighs the balance between risk and reward they do so on a sound basis. One may criticise rules that fail to approach this standard, but to suggest that whole swathes of regulations may be abandoned at the altar of right-of-centre populist libertarianism is at best, muddle-headed misanthropy.
Guy, you’re thinking like a member of the British ruling class:
No, it would result in lower profits, which is the problem. Service quality would improve and an extra person would be employed, but the business owner would have to watch their take home pay decline to a smaller multiple of their (probably foreign) employee. This is anathema to the British ruling class.
This born-to-rake-it-in attitude is the only explanation I can think of for the apalling inequality in the UK. Consider: the minimum wage (which most (mostly foreign) service staff never get close to) is about 4.70. A coffee is 2.50, a beer 3.30, a single dish in a restaurant about 6.50. In Australia, the minimum wage when I left the country was about 13.00; a coffee was 2.50, a beer 3.60 (maybe 5.00 if you scale up to the UK’s ludicrous serving size). A single dish in a restaurant was between 9 and 12.00. In Japan now, minimum wage is 850 yen, a beer 500, a coffee 350, a single dish in a restaurant 600.
How is it that British business owners can be paying their staff less than Australian or Japanese staff, and yet charging more or the same for the same product? They’re pocketing the difference, is how, and refusing to invest that difference in (just to pick some examples): cleaning staff; repairs; design or fittings for their tawdry shops; more and better equipment; training; or heating. The problem is not high taxes; it’s bad attitudes.
In Japan, on the other hand, it would be natural for the person who opened the business to employ sufficient people and invest in sufficient infrastructure to keep customers happy. Lower wages would result – and we see this at every level in Japan, where CEOs’ average wage is something like 18 times that of their employees, vs. something like 60 in the UK. This is why even the smallest, nowhere cafe or restaurant in Japan, and every hairdresser, has to be designed – you can’t just rent a room and stick some chairs and tables in like you do in the UK, you have to make an atmosphere and look like you’re making an effort. That concept is anathema in the West, and most especially in the UK.
The British ruling class – through its appartchiks like Cameron, especially – like to talk about everyone’s responsibilities, being a good worker, etc. But they don’t ever live up to that themselves. Their attitude hasn’t changed since colonial times – take the money and run!
It’s silly really. It’s not that there aren’t circumstances where a country has no choice but to pursue austerity in the middle of a recession. If no-one will buy your paper then issuing more is pointless. You then have no choice but, at best, to pay as you go (even that’s assuming you’re willing to default on your existing paper – if not you have to cut even harder).
But the UK is not remotely near that position – gilts are selling like hot cakes. For a start they’re not in the Euro so they can still buffer shocks through the exchange rate.
faustusnotes @13 – I can confirm I own no cafes! More seriously though, I think the reason why its possible for the British to get away with paying such low wages is the lack of wage regulation and indeed the massive labour supply. Because of the demand for low-skilled work created by thousands of immigrants from Africa and poorer parts of Europe (courtesy EU labour regulation restrictions), there is a serious amount of competition for jobs in cafes and the like.
Anecdotally, if I go to a chain cafe in Sydney, I am likely to be served by a teenager or a student. If I go to a chain cafe in London, I am likely to be served by a hard-working young lady from Poland.
I think Japan is more of an exception to the rule unfortunately – most small business owners are not concerned to a significant extent with “the bigger picture” or “doing their bit” for society. They’re just trying to a) survive and b) make a bit of money hopefully doing so – both of which tend to imply employing as few staff as they can get along with – sadly.
I am gobsmacked at the amount small businesses generally pay for rent in Central London. I am surprised that any storefront business survives these days!
Guy, it’s got nothing to do with foreigners. Before the UK opened up to Europe, and before there was a minimum wage, my brother (a UK citizen) was offered a job in the midlands for one pound an hour. This was back in 1994, when the Australian minimum wage was probably about $8. Back then, a coffee in London – instant – was 1.20, and an espresso 2.50. In the evening you would pass homeless people on the streets, everywhere.
Think about that for a moment – what a horrific place to live. What you see in the UK now – and what Cameron is determined to destroy – is vastly, vastly better than what they had 15 years ago before the foreigners came in and supposedly took all those native jobs.
The reason that British wages are low is that the British ruling class are plundering their own society, and always have done, and they use their mates in the red top media to constantly redirect the attention of the working class towards foreign competition. Even you’ve fallen for the ploy! But really the only thing driving the UK’s terrible social outcomes is inequality. Fix that, and all else (eventually) will follow.
OBR @4: Business doesn’t automatically invest because external costs and/or red tape are cut. Industry makes productive investments on the basis of either the potential for internal cost reductions or the potential for increased sales. (“Productive” doesn’t include speculation or take-overs.) Large productive investments tend to be driven by the prospect of increased sales with cost per unit reductions a bonus.
Increasing sales depends on growing the purchasing power of the customers. Rudd did the right thing by moving funds to the less well off in response to the GFC. Ditto Gillard when the carbon tax was set up so that people on below average wages will become relatively better off.
Cameron’s cost cutting is going to reduce the purchasing power of those most likely to spend money – hardly a way to stimulate the economy.