Osborne’s fiscal policy risks stalling recovery

RT @leftfootfwd Osborne's monetary policies risk stalling recovery: http://bit.ly/90vLeU

RT @leftfootfwd: Osborne's monetary policies risk stalling recovery: http://bit.ly/90vLeU

RT @houseoftwits: RT @leftfootfwd Osborne's monetary policies risk stalling recovery: http://bit.ly/90vLeU

RT @houseoftwits: RT @leftfootfwd Osborne's monetary policies risk stalling recovery: http://bit.ly/90vLeU

RT @leftfootfwd: Osborne's monetary policies risk stalling recovery: http://bit.ly/90vLeU

RT @leftfootfwd: Osborne's monetary policies risk stalling recovery: http://bit.ly/90vLeU

RT @leftfootfwd: Osborne's monetary policies risk stalling recovery: http://bit.ly/90vLeU

RT @HouseofTwits: RT @leftfootfwd Osborne's monetary policies risk stalling recovery: http://bit.ly/90vLeU

RT @leftfootfwd: Osborne's monetary policies risk stalling recovery: http://bit.ly/90vLeU

RT @leftfootfwd CORRECTION: Osborne's fiscal policy risks stalling recovery: http://bit.ly/90vLeU

i think a worst case scenario is a sovereign debt downgrade (likely after the PIIGS we bailed out for 3 years). this would mean higher interest rates, and high inflation. the labour government really did it to us bad this time.we may be looking at 10-20 years of stagnation (happened to Japan, stock market still only 25% of peak). we should have paid down our debt from 2000-the crash. we paid off a bit when they stuck to conservative spending plans but after that they went crazy. taxes rose 36->38% GDP, spending rose 36%->48% GDP. That is just f*cking crazy! now you can say we have better hospital and school buildings – they aren’t even counted, that’s PFI. you can say we have more nurses, doctors and police – they are going to be paid for by your children you greedy lazy socialist c*nt

RT @leftfootfwd: CORRECTION: Osborne's fiscal policy risks stalling recovery: http://bit.ly/90vLeU

Is the headline not wrong? Should read fiscal, not monetary. Gideon does not run monetary policy, no?

1. Osbourne doesn’t have control over monetary policy – that is in the hands of the BofE – so the title is an oxymoron. HM Treasury has control over fiscal policy.

2. Real wages are contracting, yes. This is necessary to reduce the factor costs, and thus short-run aggregate supply to the right. It is the economy re-adjusting. I’m afraid that huge government intervention has created a very rigid Labour market, so this has taken longer than expected.

3. The £6billion of savings are not a threat to the recovery, but the opposite. To spend that £6billion the government must get it from somewhere, they must either raise tax or borrow it. You either take money from people who would spend it, or from people who would invest in other things apart from government bonds. To spend the £6bn, you must first take it out of the economy. It is a leakage before it is an injection. Once again I leave it to the ASI for more detail: http://www.adamsmith.org/blog/tax-and-economy/that-%C2%A36bn:-a-lesson-in-economics/

4. By far the largest threat to our recovery is a sovereign debt crisis, and with the events in Greece sharpening the focus of investors and rating agencies, we must bring spending down ASAP. After all, our budget deficit is higher as a proportion of GDP.

5. While I agree that an increase in VAT is a bad manoeuvre, he is tied politically to raising tax rather than cutting spending at least in some part. As you well know – the VAT rise is just speculation currently based on some economists predictions. As everyone knows, take two economists and you have three points of view.

5. It is no surprise that inflation is occurring after the BofE created £200bn on money out of thin air. That’s the driver behind inflation, and to continue with QE will only drive further inflation.

5. Extreme caution means staving off the biggest threat to our economy, a sovereign debt crisis. As such, if he is to be extremely cautious, he should slash spending. Rather a different conclusion than you were coming to.

RT @leftfootfwd: CORRECTION: Osborne's fiscal policy risks stalling recovery: http://bit.ly/90vLeU

[...] More… [...]

what inflation means for osborne's budget – ippr http://www.leftfootforward.org/2010/05/osbornes-monetary-policies-risk-stalling-recovery/

It seems I’ve used 5 three times – I’m not entirely sure how that happened, I think I must have scrolled up to 4 by accident when making points. No doubt they are meant to be 5,6,7 before anyone makes a witty remark about my economics and counting skills.

“risk”, dont you mean “gaurantee” stalling recovery.

The PFI schemes are costing the NHS and the Education department a fortune. If we renogiated the contracts to something that wasn’t corporate welfare we would save ourselves a fortune without sacking teachers, doctors and nurses on the way.

RT @leftfootfwd: CORRECTION: Osborne's fiscal policy risks stalling recovery: http://bit.ly/90vLeU

Simon T @ 12.30

From what I have read of your analysis your counting skills, flawed though they may be are far ahead of your economic sentiments.

You really need to move on from the ASI when looking for support to your opinions, the report on Treasury forecasting you mentioned isn’t worth the fag packet it was written on, partial, slanted and wrong is only the half of it.

Today’s ASI report is simpler but just as wrong, we currently have a private sector surplus and a public sector deficit. They are two sides of the same coin, the paradox of thrift is being played out up and down the country and we now currently have the state as the spender of last resort.

Take that away or reduce it and things will only get worse, aggregate demand will fall and the savings rate will improve.

Regarding specifics:

2) Current inflation is down to the VAT increase, the power of Tesco and the remnants of the currency induced import price rises most notably oil. We need real wages to be stable so that demand does not contract further. As for the rest of your thoughts I just don’t get it, do you really want real wages to fall further?

3)Fairy story by the ASI, we currently have tghe reverse multiplier at work along with a significant reduction in the velocity of money. If things get much worse and the private sector surplus gets much larger and the savings rate stays high the best solution would be to tax and spend to get the money moving again.

A bit retro but needs must if we are to stop a potential double dip becoming a death spiral.
AD built the foundations of a recovery, Dave the Rave and Sniffy have turned up with a demolition crew, not the squad of brickies we need.

4) Sovereign debt is a symptom not the cause. The Credit Crunch was generated by wasteful investment in the private sector along with a large dose of casino capitalism to amplify the problems.

2008 = Governments were the lenders of last resort.
2009 = Governments were the spenders of last resort.
2010 = Governments get the blame, no I don’t think so.
It ill behoves the markets who caused the problem in the first place to criticise governments who cleaned up the mess.
It reminds me of the attitude in the 13 Colonies circa 1770.
You have saved us from the bogeyman, now we don’t need you any more we will get rid of you.

5A) VAT rise is Plan B, the NI rise should be Plan A.
The £6bill of cuts / efficiency savings mentioned by Sniffy is just a case of a dog boiler firing up the chainsaw for a bit of slash and burn, political mood music that will sink us all.

5B) Crap, crap and more crap, please see the first VAT increase, the power of Tesco and the last dregs of the low pound import price rises and the rising cost of oil. QE is 2012′s problem.

5C) Herbert Hoover rides again, dog boiling back on the menu, you couldn’t make it up. When will a return to the Gold Standard come back onto the agenda?

RT @leftfootfwd: CORRECTION: Osborne's fiscal policy risks stalling recovery: http://bit.ly/90vLeU

Osborne's fiscal policy risks stalling recovery | Left Foot Forward: Published by Tony Dolphin, May 18th 2010 at 1… http://bit.ly/csXVQU

Osborne's fiscal policy risks stalling recovery | Left Foot Forward: The new Chancellor of the Exchequer, George O… http://bit.ly/csXVQU

the risks of contractionary fiscal policy when a monetary squeeze might be necessary for inflationary purposes #torycuts http://ow.ly/1MJjS

@adamcoomer learn http://ow.ly/1MJjS

@FBOT

Clearly you see the economic analysis as flawed when coming from such a Keynesian perspective, and you argue for demand management. However, Keynes argued this was only necessary because of sticky wages – which now you WANT. The real wage falling is a decrease in the major factor cost and least to an increase in short-run aggregate supply. The economy tends towards full employment and demand management itself only creates inflation in the long-run – as was shown throughout the 60s and 70s.

QE is a problem now – not just in 2012. The inflationary risk was forseen but dismissed that the money would stay within banks in order to bolster their balance sheets, not to fund a whole new bunch of loans, that is the money wouldn’t ‘leak’. It has – how else do you explain the increasing inflation month on month. After all, the VAT increase is fixed from when it went back up in January, the power of Tesco is just frankly crap – oligopolistic market structures breed price stability and the oil price is historically low – it is running at $85/barrel. Your speculation is wrong. If you increase the money supply (M4) as they have by 10%, then to not expect inflation is madness. It is clear it is having an inflationary effect. You can also see the effect on the value of the pound in currency markets, Sterling has depreciated rapidly since the start of the programme, it is clear it is having an effect now.

The way to get money moving again is to increase business confidence. Currently, business confidence is not shot because of economic downturn, but because of the threat of higher taxes because of the huge deficit. That is the biggest threat to business confidence and taxes are the problem, not the solution. If there are high levels of business confidence it does not matter that people are saving – as businesses will take advantage of the lower interest rates to invest. Of course, if business confidence is low, because of fear of future tax hikes, then it becomes a problem. Once again – it stems back to the deficit.

It is not the governments that solved the problem caused by unrestrained capitalism, but governments that caused the problem in the first place. As Gordon Brown is so keen to say – the problem came from America. The sub-prime crisis was caused by the 1996 Community Reinvestment Act which forced banks to lend to poorer people or face sanctions. These are the very people who couldn’t pay the money back as interest rates rose to counter the increasing inflation. The increase in default rate is amplified by structured finance and hey ho we have a credit crunch. The origins lie with the government of the USA under Clinton.

That and poor regulation of the banks (and believe me it will only get worse after this crunch), pushed banks into riskier and riskier corners in the investment sector, as regulation does. So – to paint governemnts as the saints and capitalism as the devil is the wrong way around. If you create perverse incentives, you will get unintended outcomes, and perverse incentives led to systematic malinvestment, the driver of most recessions. The cause? Government.

The NI rise is just as damaging. After all, it would cost 57,000 jobs. It’s hardly the way to stimulate a recovery, increase costs to businesses and stifle supply just when it costs to businesses need to be lowered. Creating a high-cofidence low tax environment should be the key to any recession, you cannot spend your way out of recession and you cannot borrow your way out of debt.

The £6bn is token, but it’s £6bn better than nothing. As I stated above to spend £6bn you must take £6bn, either through tax, borrowing or printing money (the inflation tax). A return to the gold standard is not necessary – but growing the money supply in line with increases in output is all that is required, inflation causes distortion in the price signal and as policymakers have realised this world inflation has fallen dramatically.

As for Hoover’s failure to steer the US out of the great depression – I’d look toward the Smoot-Hawley Tariff Act and subsequent retaliations, it was a huge barrier to getting out of the depression. Imports and exports dropped by 60%, and the mutual benefit of trade was lost.

The mistake on monetary policy headline is not such a gaffe; Osborne has incorporated that error into policy. That is, he repeatedly refers to looseness of monetary policy as obviating the need for stimulus and allowing cuts.

But monetary stimulus is not working or is workig perversely. A weaker pound is not producing increased exports because investment has collapsed, off-setting the improvement in competitiveness. Lower short-term interest rates are merely serving to bolster asset prices and not productive investment. The upshot of a weaker pound, higher import prices and higher asset prices is rising prices, not increasing activity.

For sure, depressing demand further by fiscal tightening should alleviate some of those inflationary pressures. But any sustained recovery is likely to be a weak export/high inflation one, pushing the Bank to hike rates sooner rather than later. Fiscal and monetary tightening, the worst of all worlds.

Simon T @ 8.18pm

Thanks for the reply, it makes for interesting reading.
However, as they say, if you give some people enough rope and they will hang themselves and you certainly managed that.

Consequently, best of luck with your A levels.

Now the detail, most of what you write has the pungent odour of reverse engineering hanging over it as you desperately thrash about looking for excuses to get the banking sector and casino capitalism off the hook regarding the Credit Crunch.

Para 1 — Could you please re-write as it doesn’t currently make sense.

Para 2 — Inflation is rising because of the issues I raise, low inflation months are falling off the annual measure so any rise is running straight through to the headline figure. Regarding specifics:

Oil — $85 per barrel is high.
Food — Tesco et al are having a good recession, they have managed to pass on the low pound inflation and then some. If Sniffy and his wrecking crew manage a double dip then they will find it a lot harder than the last 15 months but so far they have played a blinder.
Pound — The 25% devaluation of the past 2 years was caused by the end of the yen carry trade / Sterling chapter. The ups and downs of the past 6 months are the normal gyrations of a currency market in full coin clipping mode. That is generating turmoil so that they can turn a trick.

Para 3 — Orthodox tripe, confidence is low because of the current low levels of business activity. Low demand is the issue not the threat of high future taxes.

Please remember a horse struggles to push a cart.

Para 4 — Best bit of reverse engineering so far.
Straight out the US rabid right wing of excuses, Slick Willie did it and he ran away.
10 year gap — Don’t talk about it?
Derivatives — Turning shite into gold at the pressing of a button?
Sales Tactics — Teaser rates, they are the future you know.
Structured Finance — Bloody do-gooder liberals again?

Para 5 — What are the perverse incentives you talk about?
Business rule No.1 — Don’t go bust, when did the government outlaw this?

Para 6 — £6bill efficiency savings, first up is the figure net or gross?
57K job losses = 23K job losses from the original study plus the fiddle factor that Dave the Rave ordered them to use. You really couldn’t make it up, I wonder where Sniffy got the idea about politicians fiddling statistics.
Please set this against the job losses that the £6bill of savings will produce, 60-80K would be my guess.
Also the NI rise comes in during April 2011, another 11 months to see how the recovery is developing.

Para 7 — Let you in on a wee secret, the return to the Gold Standard is only the start.

Next up will be the economic efficiency of Continual Indentured Servitude / CIS.
I have it on good authority that Niall F will be pushing this as the next stage in Workfare — CIS / Neo slavery as it is called by the true believers.
Sniffy will sell the unemployed to Hedge Funds who then have full income rights till retirement age on payment of the dole + 2000 calories per day.

The legals tell me that Justice McCombe will make sure that the civil liberty issues are sorted and we should be good to go.
In fact a certain Mr William Walsh could well be the first customer as he will have few vacancies once he has effected a large scale rapid transition strategy onto his existing workforce.

That is the great advantage of “Dog Boiling”, once you have persuaded the poor and the unemployed that sustenance for them and their family lies in cooking the family pet all sorts or wonderful opportunities open up for the upper middle class establishment politician with an eye for the perfect efficiency of markets.

Para 8 — We live in interesting times.
Tariff reform is out there on the back burner, for now.
As the 1930′s showed, put enough stress on the population and anything is possible.

Consequently away and bile yer heid ya numpty.
Surely you can get the Ladybird Book of Economics in Tonbridge Wells.

MB @ 12.02am

Low pound provides two boosts — import substitution + increased exports.

We do not need investment at the moment, the current low levels of activity mean that we can sweat what we have to get things started.

Biggest plus in all this would be a change in attitude.
Manufacturing lost out to the city at every level.
New blood will help turn around the old managed decline ethos.

In addition immigration will help as more people who see making things as a career become available rather than the old British upper middle class attitude that it was somehow beneath them to get their hands dirty, all a bit too much trade for their liking

Inflation is being supported by one of the effects of the credit crunch, the survivors have less competition and are trying their luck with putting up their prices.

Also in the housing market activity is the issue not asset price inflation. Lack of buyers meant that prices fell due to the need of distressed sellers to sell at any price.

Non distressed sellers just sat tight and waited for mortgage lending to improve.

“However, Keynes argued this was only necessary because of sticky wages – which now you WANT.”

Keynes argued no such thing. His analysis of why a general cut in wages would not increase employment took it for granted that wages could adjust downwards. He argued that if wages fell, then so would prices and so there would be no change in real wages. However, such a cut would impact negatively in effective demand and cause more problems for the economy.

Keynes concluded in “The General Theory” that there was “no ground for the belief that a flexible wage policy is capable of continuous full employment . . . The economic system cannot be made self-adjusting along these lines.” As he summarised:

“the contention that the unemployment which characterises a depression is due to a refusal by labour to accept a reduction of money-wages is not clearly supported by the facts. It is not very plausible to assert that unemployment in the United States in 1932 was due either to labour obstinately refusing to accept a reduction of money-wages or to its demanding a real wage beyond what the productivity of the economic machine was capable of furnishing . . . Labour is not more truculent in the depression than in the boom — far from it. Nor is its physical productivity less. These facts from experience are a prima facie ground for questioning the adequacy of the [neo-]classical analysis.”

The whole “sticky wages” notion was a neo-classical assumption used to explain high unemployment. This was smuggled back into “Keynesian” economics after Keynes died, as part of the neo-classical Keynesian synthesis.

As the Tories subscribe to neo-classical economic dogma, they will be seeking to cut wages in an attempt to reduce unemployment. That will more than likely increase unemployment (it did in 1979 onwards):

http://anarchism.pageabode.com/anarcho/would-cutting-wages-reduce-unemployment

The next few years are going to be unpleasant — unless we are willing to organise and resist the attacks being launched to fix the economic crisis the bankers created.

@ FBOT

I have to say, reading your rants do highly amuse me – typical socialist nonsense.

We are a nation of importers….so while you suggest that “evil” corporations like tesco are making out like bandits and screwing the poor worker, what you’ll actually find is that thanks to the >25% drop in sterling, their profit margins have actually dropped. They’ve actually managed to keep prices relatively low, despite everything.

As for sterling itself, it’s hardly surprising it’s dropped. With the budget deficit we have, plus monetisation of it. The UK economy is screwed, and massive government overspending is the cause of it. Not banks, and not the credit crisis.

You are also completely wrong (and Simon T completely right) about what caused the credit crisis. It was CRA96 which created the subprime market overnight. It sparked a massive boom in (unnaffordable) mortgages which relied on cheap short term financing and low interest rates, and ever increasing house prices. When house prices faltered, funding became more expensive and mortgage resets started hitting, the whole house of cards came tumbling down.

Your solution to everything though, as with many on the loony left, is more debt. Even though that debt is going to have to be funded through higher taxes (as we can’t grow our way out fast enough) which slow growth, and the compund interest on that debt will slow long term trend growth even further. The original crisis was caused by too much mortgage debt, and the current crisis in Europe is caused by too much government debt. What is your solution? More debt.

You don’t even know how this extra debt is going to help, other than a hand wavy “extra demand through government spending”, though of crouse, if the money was left in people’s pockets, much of that demand would still be there. It also ignores the most important point, which Greece has found out only too clearly;

What happens when your bond buyers lose confidence in you, because of your massive budget deficits and inability to repay debt?

In reality, you become unable to finance yourself easily, your rates go up massively (which squash growth) and you have to undertake massive internal and external devalutations, like so many countries accross Europe are currently having to do. Cutting the deficit isn’t a choice, it’s the ONLY choice. It’s also one which will help the economy grow faster as taxes will be able to come down long term, rates will be lower and confidence higher.

Finally, that £6bn you talk about isn’t really only £6bn. Its more like £9bn once you include the compound interest…now translate that to the debt we are running up at the moment, and our ability to repay it, and at best you should see how much taxes are going to have to go up (which slows growth) to pay for it, and at worst you can see what a total disaster Labour’s economic management has been, as it will force net spending levels down below 1997 levels before the budget is balanced.

You have a nice day now.

Tyler @ 2.01pm

You are what a dog boiler would call a dog boiler.
Neo classical orthodoxy from start to finish.
Good old time religion it may be but it is wrong from start to finish.

Couple of highlights:

Tesco — What news did their last accounts have on their profits and margin?

CRA96? — The idea that this act has caused the Sub-Prime loan disaster has been refuted “up down and sideways” by people better than me. It really is a piece of Ayn Rand style myth making aimed at deflecting blame. Reverse engineering of the highest order.

The whole idea is so brazen as to be breathtaking — the timing, the scale and the linkage to commercial property suggest that the suggestion is tripe from start to finish.

With regards to the rest of your analysis, I fear that you are another right wing mentalist who would do well to read the Ladybird Book of Economics as you might learn something.

If however you are an academic in the field then I despair.
Consequently away and throw shite at yersel ya muppet.