Quote of the week: the historical ubiquity of state intervention in finance

“The more one studies the historical origins and development of modern financial systems, the more it becomes apparent that at most of the critical points when financial systems changed, sometimes for the better, sometimes for the worse, the role of the state was of paramount importance… Long before private economic entities…came to require financing on a scale beyond the capabilities of individual proprietors and partners, governments had needs for large scale finance… Among the needs for which states needed financing were: solidifying and extending their authority, unifying the disparate components of their states under a central administration, promoting state-led and state-financed economic development projects as means of increasing state power, and, perhaps most important of all, waging wars against other competing states.”

Sylla, R., Tilly, R. and Tortella, G., (1999), The State, the Financial System and Economic Modernization, Cambridge: Cambridge University Press, p.1.

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

Deficits, savings and a post-lockdown consumer boom

Lockdown restrictions are slowly being lifted here in the UK, and after a severe downturn there are signs of economic recovery, with consumption predicted to rebound substantially. It may be some time before the economy returns to its previous growth ‘trend’, but the signs are that consumers are returning to the shops as pent-up demand is beginning to be unleashed.

If this rebound in consumer spending takes place, it will be funded, at least in part, from the high levels of household saving that have been accumulated during the lockdowns. It is my contention that these high rates have been made possible in part due to a massive increase in government borrowing. Without the latter, household incomes and savings would have been much more constrained than otherwise. This is a typically Keynesian argument, and it will be illustrated with a ‘financial balances’ equation. Continue reading

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?

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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’

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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

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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.