The Debt Delusion – Living Within Our Means and Other Fallacies

JWeeksDebtDelusionJohn Weeks has a new book out, The Debt Delusion, which takes a progressive line in debunking a number of what he terms the myths that surround fiscal policy.

Weeks is an Emeritus Professor of Development Studies at SOAS, and coordinator of the Progressive Economy Forum. He is heavily critical of austerity and proposes an ‘anti-austerity’ agenda on tax and spending for today’s policymakers.

Weeks has long been critical of mainstream economics in general, not least in his previous book for the layman, Economics of the 1%.

Summing up his proposed fiscal policy framework, he writes (p.182-3): Continue reading

Understanding the ‘Three Balances’

This 14 minute animated video is a nice introduction to the Three Sectoral Financial Balances, which are an important part of macroeconomics, or the study of the economy as a whole. The dialogue sounds a little odd, but stick with it.

The video helps to dispel some myths about the desirability or otherwise of government budget deficits and surpluses, and how the associated money flows interact with the rest of the economy: the private sector (firms and households) and the foreign sector (the rest of the world).

In particular, the discussion outlines how the US government ran budget surpluses in the late 1990s, but also how this was more than offset by the private sector deficit, and the resultant accumulation of private debt, which ultimately proved unsustainable.

The post-Keynesian economist Wynne Godley, originator of the Three Balances approach, warned about this in 1999 here, and forecast a recession, accompanied by rising unemployment and government deficits, as these trends necessarily began to unwind over the medium term.

Budget deficits forever?


Below is a helpful quote from post-Keynesians Wynne Godley and Marc Lavoie on fiscal deficits and full employment. I am sceptical, based on economic history, that full employment can be sustained for lengthy periods under capitalism, which Keynesians claim is possible given the right policies. However it usefully makes a nonsense of the oft-found obsession many governments have with austerity and ‘balancing the books’, as if the public finances are akin to those of a prudent household. Continue reading

The continued failure of the government’s ‘long term economic plan’


The ex-chancellor George Osborne in his hard hat

Some evidence here that the outcomes of the oft-mentioned ‘long term economic plan’ of the UK government have fallen far short of predictions and claims. First of all: austerity. Geoff Tily, Senior Economist at the TUC, shows that public sector net borrowing for the first quarter of this financial year was £26.6bn, more than the November 2011 official forecast for the whole of the 2015/16, which was £24bn.

The cuts to public spending and tax increases have reduced the deficit much more slowly than hoped, since growth has been much weaker than forecast since 2010.

The government has claimed many times that it has turned the economy around and saved it from ruin. What it doesn’t mention is that recovery was underway when it came into office in 2010. The combination of austerity and the Eurozone crisis slowed growth significantly until 2013, when it picked up and the chancellor George Osborne in fact relaxed austerity to some extent.

The UK’s recovery since the recession has been the weakest since records began. Continue reading

From austerity to expansion?

Contando_Dinheiro_(8228640)Could we be about to see a shift from austerity to fiscal expansion? The UK’s new finance minister, Phillip Hammond, as reported by the BBC here, has signalled that he may ‘reset’ economic policy at his next budget statement come Autumn.

There are some indications that the UK economy has been subject to a substantial negative ‘shock’ as a result of Brexit, the UK’s vote to leave the EU. The latest business managers survey showed a sharp move towards economic contraction. If this heralds a significant growth slowdown or even recession, the budget deficit will tend to increase as a result, even if the government does nothing. This is because slowing or negative growth reduces tax receipts and usually leads to higher spending on unemployment benefits and welfare, automatically increasing government borrowing. If this extra borrowing boosts spending in the economy overall, then it is known as the ‘automatic stabilizer’, in effect stabilizing the economy by compensating for lower private spending.

Mr Hammond could also increase borrowing further through tax cuts or extra spending on infrastructure, beyond what happens automatically, in order to try to boost growth. Alongside the abandonment of his predecessor George Osborne’s aim to achieve a budget surplus, in which tax receipts are greater than public spending, by the end of the parliament in 2020, this would represent a significant policy shift away from austerity. Continue reading

Austerity extended? Economic rebalancing in the UK and Europe


UK Chancellor of the Exchequer George Osborne

The UK government’s Chancellor of the Exchequer, George Osborne, has today announced that his prized goal to achieve a budget surplus by 2020 will be abandoned, as reported by the BBC here. This is apparently justified by the likely shock to the economy resulting from the outcome of the recent vote to leave the EU.

Before the anti-austerity camp throw up their hands in celebration, this apparent sign of flexibility may simply mean that, in the absence of a change of government, tax rises and spending cuts may go on for longer. But flexibility is to be welcomed, especially if the economy slows significantly, which could lead to a relatively larger budget deficit than otherwise.

I have argued before on this blog, and the government has paid lip-service to the fact, that a major rebalancing of the UK economy is required, away from debt-fuelled consumption, and towards investment and exports. Continue reading

The IMF changes its tune on neoliberalism (a little)

International_Monetary_Fund_logo.svgHere is a link to a recent article by IMF researchers which backtracks on some of the tenets of that institution’s policy during what could be called the neoliberal era. It makes for interesting reading.

In particular, they make the case for capital controls to stabilize financial flows in certain circumstances; for reductions in inequality through ‘predistribution’ or redistribution in order to promote more sustainable economic growth; and they cast doubt on the wisdom of austerity which aims to reduce public debt as a share of GDP through tax rises and spending reductions instead of simply through policies to promote growth.

The piece does not wholeheartedly reject neoliberalism. In fact the authors praise certain aspects of it, such as the role of the expansion of international trade in reducing poverty. But this seems like a small step in the right direction.

Kalecki’s remarkable prediction

DSC00228Michal Kalecki was a Polish economist who arguably ‘discovered’ the principle of effective demand at the same time as Keynes in the 1930s. He was more left wing and less establishment than Keynes himself, as a relatively obscure émigré to England.

The economic ideas of Kalecki drew on Marx’s ‘schemes of reproduction’, and he also incorporated theories of imperfect competition, which contrasted with the assumption of perfect competition which Keynes used in his General Theory of 1936.

Kalecki had a strong influence on the Cambridge School of Keynesian, and latterly post-Keynesian, economics. In 1943 his article on the Political Aspects of Full Employment was published. Although brief, it was extraordinarily prescient, predicting as it did the strengthening of the working class under conditions of full employment, and the subsequent turn of business leaders, politicians and many economists against the policies which had ostensibly helped to create this situation. Continue reading

Why more is not always better: potholes and economic growth

More economic output is not always a good thing. This will come as no surprise to many from the green wing of politics, but it is often easy to forget that increased private sector activity may not be associated with increased economic and social welfare. Under capitalism, many of us, including economists, can forget that continued economic growth, punctuated by booms and recessions, is a relatively recent phenomenon in world history. It has not always been with us, and who is to say that it always will be?

As an example of rising private sector output and income resulting from damage, a simple example, relevant to current drivers all over the UK, is the phenomenon of potholes. Continue reading

UK infrastructure is getting worse

Evidence from the Economist magazine this week that the UK’s infrastructure is getting worse. Spending is “projected to fall from 3.2% of GDP in 2010 to 1.4% in 2020”. The chancellor’s dogmatic failure to separate borrowing for productive investment (the capital budget) from borrowing for spending (the current budget) will only harm the economy in the longer term.

This is an area in which his radical opposition Labour Party’s plans make a great deal more sense, although the Economist does not mention this. Plans for a national investment bank seem like a step in the right direction, and a way of making necessary public borrowing seem far more rational than what is proving to be a plan for austerity at any cost.