The lessons we shouldn’t learn from the UK government’s fiscal U-turns

The UK government’s September ‘mini-budget’ is no more. The chancellor who delivered it has been sacked, and the Prime Minister is hanging on to her position by her fingernails, her authority withered and her humiliation almost complete. The new chancellor has reversed virtually all of the promised tax cuts, and has scaled back support for people’s energy bills. Further spending cuts are likely to be proposed in a couple of weeks. So far, the financial markets have been reassured, with the pound stabilising against the dollar and the price of gilts rising somewhat, though they are still lower, and interest rates higher, than before the mini-budget.

Regular readers of this blog will likely know that I am no right-wing libertarian when it comes to economic policy, and am therefore critical of Trussonomics, which is of course now effectively dead. In today’s post, I thought I would assess some of the wrong lessons that might be drawn in the UK and around the world from the evolving fiscal policy of the current Conservative government. Continue reading

Can tax cuts reduce inflation?

TaxCutsHere in the UK, foreign secretary Liz Truss, leadership candidate for the Conservative Party and potentially our future Prime Minister, has promised immediate tax cuts should she win the contest. She claims that these cuts will boost economic growth and lower inflation. With this approach to policy she will thus somehow solve two of the major current afflictions of the UK economy. Although she has been criticised by a number of party grandees and former ministers, she is claiming Thatcherite precedent for her views. Her rival for the top job, former finance minister Rishi Sunak, has responded by framing her ideas as ‘fantasy’ economics. Indeed her pronouncements do have a whiff of what has been called ‘cakeism’ (ie having your cake and eating it too). This is a key character trait of our ‘caretaker’ Prime Minister Boris Johnson, who is famously unwilling to deliver bad news, preferring instead to rely on ‘boosterism’ to try and please his audience.

So how could tax cuts deliver the economic goodies? The UK economy has performed poorly since the mid-2000s, compared both with its own history and with other comparable countries. Growth in output and productivity has been weak. Raising productivity growth is vital to improving living standards, including the delivery of high quality public goods and services such as health, education and infrastructure, which also support a vibrant private sector. Continue reading

Quote of the week: public investment and the budget in a full employment policy

Copland-DouglasFollowing on from last week’s extract from the 1947 volume The New Economics: Keynes’ Influence on Theory and Public Policy, here is another from the same chapter by Australian economist and government advisor Douglas Copland. This time, he discusses the role of public investment and the government budget in a policy of high employment. It is, firstly, of historical interest, as this was a time when some aspects of Keynesian thinking were in the ascendance in the realms of both economic theory and public policy. Secondly, it is interesting to reflect on how the ideas propounded below are seen today. In particular, Copland covers the role of budget deficits and surpluses, the importance of substantial public investment in the communities of modern democracies, public ownership of utilities, and the need for a change in the attitude of private business towards the budget and its role in promoting prosperity and high employment. Continue reading

The political economy of the current inflation

Contando_Dinheiro_(8228640)Today’s inflation is leading to calls for mitigating policy responses. The distributional outcomes of higher inflation are necessarily uneven, creating winners and losers across society and the economy. I outline some of the likely impacts on households, businesses, government, and the wider economy, as well as the effects of changes in economic policy.

In recent months rising inflation, termed ‘the cost of living crisis’ by the media, has become a major issue for households, businesses and, increasingly, governments and central banks, who are tasked with policy responses. Caused by a combination of bottlenecks in global supply chains and recovering demand as many economies emerge from severe pandemic-induced downturns, it has hit rates not seen for decades in countries such as the US and UK. What are the likely impacts on the various elements of the economy? It is important for decision makers across the economy, from ordinary workers to policymakers, to understand how higher inflation can affect livelihoods and behaviour. Continue reading

Robert Reich on how America got obsessed with the deficit

Robert Reich, who was Labour Secretary under Bill Clinton back in the 1990s, produces plenty of snappy, informative videos and I have shared them on this blog a number of times. Here he is criticising America’s obsession with the government deficit.

Reich claims that this obsession, in its modern guise at least, began under Ronald Reagan, and points out that the concern fails to stretch to the vast and ever-increasing military budget, as well as tax breaks for particular corporations and for the wealthy more generally. Instead, it focuses on the ‘lack of affordability’ of programs which benefit the poor, the middle class and these days even the environment. Republicans in particular seem to do this when Democrats are in power, and then rather ignore the issue when they hold the reigns.

From Reagan and Bush Junior to Trump, tax cuts for the wealthy were prioritised under the mantle of ‘trickle-down economics’, the idea that these cuts would pay for themselves since the wealthy would respond by stepping up investment and job creation. But this assumes that most wealthy people are entrepreneurs and are motivated primarily by ever-higher earnings. The case for this is not so clear cut.

It is worth noting that outside of the Great Financial Crisis of 2008-09 and the pandemic, moments when substantial fiscal stimulus was more justified, Republican policies of tax cuts for the wealthy and large increases in military spending have consistently blown up the deficit rather than pay for themselves by shrinking it through faster economic growth. These outcomes have then led to calls for ‘starving the beast’, or cuts to spending programs which prioritise the most vulnerable.

The decade the rich won: was there an alternative?

800px-A1_Houston_Office_Oil_Traders_on_MondayA new tv documentary explores the decade following the crash of 2008 and the uneven outcomes of economic policy which benefited many wealthier households while living standards for the majority stagnated. The theory of balance sheet recessions suggest that the policy response could have been very different.

The BBC still makes plenty of quality documentaries. One of the most recent, The Decade the Rich Won (hereafter TDTRW), chronicles the story of the lopsided results of the economic policy response to the Global Financial Crisis (GFC) of 2008. It focuses on the UK, though the lessons are universal, and features interviews with many of the key players, from government ministers and the former governor of the Bank of England to those working in finance, as well as those who truly suffered at the hands of austerity. It is implicitly critical and begs the question: was there an alternative? Continue reading

Steve Keen’s manifesto for a new economics

Keen-Interview

A brief review of prominent heterodox economist Steve Keen’s latest book, in which he lays out his vision for the future of economics, arguing that the neoclassical approach has been highly damaging to humanity, and needs to be replaced.

Steve Keen has a new book out, entitled The New Economics – A Manifesto. It is the latest chapter in the author’s tireless efforts to replace neoclassical economics and its damaging dominance of mainstream thinking with what he argues is a more scientific and explanatorily powerful body of thought drawing on post-Keynesian and, more recently, Biophysical economics.

Keen, who has been a heterodox or non-mainstream economist since his student days, has been critiquing neoclassical economics for many years. Post-Keynesianism takes its main inspiration from arguably the twentieth century’s greatest and most influential economist, John Maynard Keynes. It draws on the work of Keynes’ followers at Cambridge University, and those who studied under or have been influenced by them, though post-Keynesians remain a radical minority in the grand scheme of things.

Keen was one of the few economists to correctly predict a major financial and economic crisis in the years leading up to 2008. Not one of these iconoclastic souls was a neoclassical. In the 2011 edition of his book Debunking Economics, he painstakingly deconstructed much of neoclassical theory, and began the task of laying out the monetary economics he felt should replace it. Continue reading

Thomas Palley and the ‘vampire squid’ economy

800px-A1_Houston_Office_Oil_Traders_on_MondayPost-Keynesian economist Thomas Palley has written a new paper on financialization which can be downloaded for free here. Palley has long argued that rising inequality across the capitalist world has produced sluggish growth in aggregate demand, undermining GDP growth. Growth has been maintained to some extent through rising public and private debt. These trends have been building for the last forty years, since the shift towards a neoliberal policy regime and ideology. Mainstream economics has recently tried to account for sluggish growth with an appeal to ‘secular stagnation’, and arguing that with interest rates now at historically low levels, there is room for public borrowing to stimulate growth, at least until interest rates begin to rise once more. Continue reading

Questioning Modern Monetary Theory: Part 2

Contando_Dinheiro_(8228640)This is the second part in a new series which explores some aspects of Modern Monetary Theory. As I’ve said already, the series does not aim to be comprehensive. Rather, I cover the aspects which I find most interesting. Here I focus on fiscal policy.

How is the government budget different to a household budget?

Governments of all stripes, as well as many economists, often caution against running persistent budget deficits, with public spending exceeding tax revenue. They liken the situation to a household that cannot maintain spending greater than its income, and accumulates debt until the situation becomes unsustainable. However the government budget is very different to a household budget. Continue reading