The Great Debate UK

Democracy vs. austerity

By Kathleen Brooks. The opinions expressed are her own.

Throughout history it has always been difficult to take something away from someone once you have given it to them. Europe is finding that it is extremely difficult to reign in public finances once they start to go out of control. Democracies don’t like to vote for austerity, which is why Sarkozy lost the Presidency in France, why a radical left party came second in the Greek elections and why the Conservatives got a drubbing at last week’s local elections in the UK.

This tells us something about democracy in the western world. Governments have to manage the public finances directly – they have to sell the debt, do the sums and present budgets. However, the people who vote them into (and out of) power are the public, who rightly in most cases, believe they have worked hard, paid  taxes and deserve the services and retirement promises made to them.

So here we have the problem: some governments in the West have unsustainable debt loads and deficit levels and yet they don’t have the popular mandate to try and bring that under control. That isn’t the story all over the west. The Germans and the Dutch agree that the government books should be balanced. But if you asked the rest of Europe if they wanted to reduce public debt levels to make country finances more sustainable at the expense of public services and jobs, the recent election results suggest that you would get a resounding no.

So there isn’t one unified way of thinking about austerity in the West. Some people see it as a virtue, others as a type of hell. So what to do? Europe’s one-type fits all model that is largely designed by Germany could lead to social disorder and radical political parties grabbing the reins of power in Greece. However, the more people fight against austerity the more unlikely it is that their governments can attract enough investors to buy their debt to fund their public spending needs.

So where does this vicious circle end? The answer is that no one knows. Now that the true state of public finances in Europe has been revealed it can’t be brushed under the carpet and the Greeks et al can’t go back to the pre-2007 ways of living and spending. However, the opposite – harsh austerity designed to reign in public finances at half the time it took to amass the debt in the first place – isn’t working either.

A more sensible plan is for Europe to reach some sort of compromise. Germany and Greece (as the two extremes) need to realise there are multiple views about what a democracy should provide and how public finances should be controlled. The next step is to plan a fiscal pact that allows countries to reign in public spending at the same pace as it amassed it in the first place – and fiscal targets should be spread out over 10 years rather than the current demands to bring down deficits to 3 percent of GDP by the next fiscal year. The UK could probably follow suit and realise that the debts took two parliaments to accumulate, thus it should take two parliaments to rein them in.

Salvation through inflation: The British way out

By Laurence Copeland. The opinions expressed are his own.

Accusing policymakers of acting out of sheer desperation is a pretty standard jibe by critics trying to put them off their stride.

Unfortunately, the latest round of QE came wrapped in comments from the Governor of the Bank of England which amounted, more or less, to saying: “Look! I’m staying calm – but it’s taking a hell of an effort, believe me!”

As the world economy teeters on the brink of relapse, Mervyn King’s action amounts to saying: “Forget the danger of inflation… we’ll settle for anything rather than a rerun of 2008”. He and his opposite numbers in Frankfurt and Washington are haunted by the fear that the history books may say the 21st century’s Great Depression happened on their watch.

The latest measures are probably not going to work and may make matters worse because the mess we are in is a matter of the distribution of real wealth – positive and negative i.e. net worth – and hence is unlikely to be improved very dramatically by printing money. Specifically, the economy is grinding to a halt because, internationally and domestically, even locally, those who save have accumulated wealth which they would normally feel inclined to lend or invest. But since the majority of would-be borrowers are already indebted to unprecedented levels, and investment opportunities are unattractive given that the output they generate would need to be sold to the same overindebted consumers, wealthowners are opting for the relative safety of Government debt, guaranteed bank deposits, gold and even, it seems, blue-chip real estate and agricultural land.

Like the self-similarity of a fractal, this same pattern is repeated at the largest and the smallest scale.

At the global level, the largest creditors – China and its neighbours, the Gulf Oil producers, Germany  – feel understandably reluctant to keep adding to the trillions of dollars they have already lent to the debtor countries, nor are they overwhelmed by the attractions of direct investment in these countries, especially as the juiciest opportunities are often ruled out by political considerations (imagine a Chinese bid for Intel or Apple, for example).

The QE billions should go direct to consumers

By Mark Hillary. The opinions expressed are his own.

In 1998, the Japanese government was ridiculed for giving away almost $6bn (at 1998 value) of shopping vouchers. The plan was that consumers would spend more of this ‘free money’ and help lift Japan out of the seemingly endless malaise it suffered in the nineties – as many other developed economies were enjoying a roaring decade.

One of the major faults in the Japanese plan was that the vouchers could easily replace the need to spend actual money. If my groceries cost me $100 then why would I still spend $100 of cash on groceries and buy a nice meal in a restaurant with my voucher, when I could just use the voucher for those groceries?

But the Japanese may have been onto something by focusing on demand rather than monetary supply, contrary to most received wisdom at present.

The Bank of England’s Monetary Policy Committee has restarted quantitative easing (QE) in the past week, much to the surprise of the markets and leading some commentators to ask what they might know that the media and financial analysts don’t.

Former MPC member David Blanchflower even used his column in the Guardian to say: “The MPC argued that tensions in the world economy ‘threaten’ the UK recovery. I am unaware of the MPC ever using this word before. Given that a lot of care goes into the exact wording of such a statement all nine members would have had to sign off on this, then things must be pretty bad.”

Perhaps I am over-simplifying the complexity of the British economy, but if the man on the street senses that the economy is not improving then he will reduce spending, luxuries are forsaken, and unsecured credit is paid down.

Osborne’s “difficult” Conference Speech

By Kathleen Brooks. The opinions expressed are her own.

Chancellor George Osborne has weathered criticism of his economic policies from both sides of the political isle in recent months, so it was no surprise that the buzz word from his Conservative Party Conference speech was “difficult”. Life at Westminster is difficult for Osborne at the moment and it’s unlikely to get any easier.

The problem for the Chancellor is that he has staked his credibility on bringing down the UK’s deficit, yet he is also trying to be a pioneer of growth and jobs. In the current environment neither goal looks achievable.

Public sector net borrowing has failed to slow in any sustainable way. Since January borrowing has been on average GBP6.6 billion per month. But that disguises the fluctuations throughout the year, which brought the total to more than GBP60 billion by August. This makes the government’s target to cut borrowing by GBP20 billion to GBP120 billion this fiscal year difficult to achieve.

The Office for Budget Responsibility (the independent verifier of the government’s fiscal plans) forecasts public sector net borrowing to fall to 7.9 percent of GDP in the current fiscal year, down from 9.9 percent in 2010/11. By 2015-16 borrowing is expected to fall to 1.5 percent of GDP, but at the current pace targets such as these seem utterly detached from reality. Either more spending cuts come into play in the coming months or the government misses its 2011/ 2012 forecasts. At this stage the latter seems most likely. For a country that is meant to be on a path to fiscal consolidation, slippage at this early stage of budget restraint suggests the ship has blown dramatically off course.

The latest OBR forecasts date back to March, the next set is due to be released next month. Expect to see revisions to both fiscal and growth targets. The OBR expects to see growth of 1.7 percent this year, 2.5 percent in 2012 and 2.9 percent in 2013. This is far higher than credit rating agency Standard & Poor’s, which has forecast growth of 1.8 percent on average between 2011 and 2014. The International Monetary Fund (IMF) cut its forecast for the UK growth for the third time in nine months in September. It now expects the economy to expand by a fairly lacklustre 1.1 percent this year, and only 1.5 percent next year. It also warned that further growth under-performance would warrant a U-turn in policy and a slower pace of fiscal consolidation.

This is very worrying for Osborne. Low growth will hit tax receipts. Revenues and Customs reported that receipts from income tax, capital gains and national insurance fell as a proportion of GDP to 16.8 percent of GDP in 2010-11, compared with 17.8 percent in 2007-08 as a direct result of the recession. If we get sluggish growth as the S&P predicts then the UK’s tax receipts are unlikely to recover anytime soon.

No excuse for inaction – BoE’s Adam Posen

By Adam Posen. The opinions expressed are his own.

It is past time for monetary policy to be doing more to support recovery. The Jackson Hole conference has come and gone, and no shortage of excuses was provided for central banks to hold their fire — even though most economists acknowledged the grim outlook for the advanced economies.

Too much attention has been paid, however, to the failings of fiscal policies and to the shortfall from effects of earlier quantitative easing. Further asset purchases by the G7 central banks are needed to check not just a downturn, but the lasting erosion of productive capacity and of debt sustainability — especially when even justified fiscal and financial consolidation is undercutting short-term recovery. Easier monetary policy will increase the odds of other policies improving, and those policies’ effectiveness when they do.

It is also past time to stop fearing inflationary ghosts. There is no credible threat of sustained higher inflation in the advanced economies that should restrain central bank action. The rate of wage growth is tepid and compatible with price stability, at most, even in Germany; the inability of wages to keep up with recent real price shocks underscores the ongoing downward pressure from labour market slack. Consumption was driven down by fiscal tightening and household retrenchment as much as oil prices, and those forces will be ongoing. Had consumer confidence not been weakly footed to begin with, the oil shock would not have had such an impact.

Commodity prices have since demonstrated again that they go down as well as up, and thus monetary policy should not react to their short-term gyrations (and deceleration in Western growth will likely send them further downwards). Credit and broad money aggregates are barely growing and current account deficits are slowly shrinking, so no asset price bubbles will emerge. Importantly, interest rates on long-term G7 government bonds display no consistent rise in inflation expectations, no matter how the data is parsed.

Some of us had seen this coming. This is what happens to economies following a financial crisis, particularly when the crisis hits simultaneously across integrated markets. That is why I began advocating more quantitative easing in the UK a year ago. Yet even if some believe that the recent setbacks reflect new developments — rather than just long-run vulnerabilities (fragile Central European banking systems, dysfunctional American fiscal politics, British over-dependence on the financial sector) exposed by the crisis — that still should be enough to downgrade any plausible prior forecast for growth and inflation to where additional monetary stimulus is called for on its own terms.

Just because a downturn is expected does not mean its course is inevitable, and some of the present prospects’ severity certainly still can be usefully offset. The lesson from past post-crisis recoveries, whether from the late 1930s worldwide, the late 1990s in East Asia, or the 2000s in Japan is that aggressive monetary easing can ease the process of real adjustment and limit its lasting damage to economies and to people. Insufficient monetary stimulus, let alone premature tightening, makes fiscal and financial problems worse, and raises prospects for dangerous political reaction to policy failure.

from The Great Debate:

Rioters without a cause

By John Lloyd All opinions expressed are his own.

On Sunday evening, a middle aged woman waded into a crowd of rioters in Hackney and shouted that she was ashamed to be black, ashamed to be a Hackney woman – because of the destruction and fear the rioters were spreading about them. But she went further. She said - Get real black people! I am ashamed to be a Hackney person! If you want a cause, get a cause! (See video below; contains graphic language.)

I had just spent a day, in Glasgow, with men who had had a cause. Forty years ago, workers at the Upper Clyde Shipyards in Scotland’s great old industrial city, where the workforce was being cut, voted to stage a work-in: a novel form of industrial action in which those laid off reported for work as normal, and continued to build ships. The action was led by two men, Jimmy Airlie and Jimmy Reid, both charismatic, both fighting for a cause – the right to work, the protection of the working class. They got huge support, in the city, in the country, even internationally. They won, for the shipyards on the Clyde, a temporary reprieve.

Both Jimmies are dead: the men I met, interviewees for a BBC program marking the anniversary, were fellow union representatives, well into their seventies. Yet, straight-backed and articulate, they knew what they were fighting for. As we talked after the interviews about the news from London, they expressed bewilderment: what were “the lads” fighting for? Why were they destroying their neighborhoods?

It’s a puzzlement shared in conversations across the capital. We can talk, still relatively lightly, about our lack of fear (except for those who have had a taste of it) based on the implicit assumption that the police will, tonight or tomorrow, take charge, show who has the power on the streets and bring the most egregious of the burners and the looters to justice. We exchange stories – of how near the riots got to us; of how we had friends caught up in it; of how shocked we felt. But beneath it all is the same puzzlement: what are they doing it for?

Most demonstrations have spokespeople, who sooner or later – usually sooner – seek to make their cause known and attract support to it. The cause might be, as in Glasgow, jobs and dignity; or it might be protests against racial discrimination, of which London has seen a few over the past three decades; or it might be against immigration. All of these, however much opposition they raise, had content  and demands.

But the London demonstrations, and those in Birmingham, Manchester, Bristol and Nottingham, have no spokespeople. They hide their faces, run away from reporters – or, as often, beat them and smash cameras. Journalists would love to come back to their newsrooms with an interview recorded or in a notebook: but they won’t talk.

Why is the West bankrupt?

By Laurence Copeland. The opinions expressed are his own.

The UK, USA, the PIIGS (Ireland and Italy are together in the same stye), France is in poor fiscal shape  – OK, Germany is ostensibly living within its means, but it looks a lot less solvent when you remember that it has underwritten the rest of the euro zone (in large part, to protect its own irresponsible banks). In any case, as I have argued in previous blogs, this or a future German Government is likely to cave in to the pressure from its own electorate and from inflationist economists at home and abroad to join the party and spend, spend, spend. Only Australia and Canada, riding high on the commodities price boom, and a handful of small countries, look stable.

Where will it all end?

With inflation, almost certainly, but beyond that, it is hard to say. However, there is one prediction I would offer for the medium to long term outcome, and it applies not only to the euro zone, but to Britain and America too – in fact to the whole of the comfortable, complacent industrialised world – and it is this.

We are living through the death throes of an ideal, a dream which has turned into a nightmare – it is the end of the social democratic welfare model.

I am referring to the whole panoply of benefits (entitlements, as they are called in America), labour market regulations (employment protection, minimum wage legislation, limits on the length of the working week etc. etc.) and other social democratic devices intended to inflate like airbags to protect us all from shocks from any possible direction. The whole edifice built up in Western countries to shelter us from the need to earn a living is now clearly unsustainable. We can no longer afford a regime which allowed, indeed encouraged us to live permanently beyond our means both as individuals and as a society.

Two aspects of the current crisis make this apparent. First, and most obviously, we are all more or less like Greece – our debts may be proportionately smaller, but they are still crippling. Our pensions regime may be less egregiously wasteful than Greece’s, but they are still more generous than we can afford. As for healthcare and care for the aged, they are a crippling burden and demographic pressures will make them impossible for any country to sustain at anything like present levels.

from Africa News blog:

Is Africa drought a chance to enact new UK policy?

New ways of managing aid are being debated in Britain as global concerns mount over a hunger crisis devastating the drought-affected Horn of Africa.

Randolph Kent, director of the Humanitarian Futures Programme at King's College in London, says the crisis provides a perfect opportunity for the British government to test its recent promise to reform how it responds to humanitarian emergencies.

The severe drought, caused by the driest weather since 1995 in East Africa, has affected an estimated 10 million people and is expected to continue to worsen into early 2012, according to the United Nations Office for the Co-ordination of Humanitarian Affairs (OCHA).

While Kent acknowledges the importance of a $145 million (90.2 million pound) injection of humanitarian aid from the British government, he says the money will not help prevent the next Horn of Africa drought and that the government needs to become more "anticipatory".

"This disaster has to teach us that the ways we've approached such crises in the past is not good enough," Kent said in a statement. "If we don't want to be consistently on a back foot when disasters happen, then we need evidence of strategic planning taking place at an international and regional level now."

The British government's Humanitarian Emergency Response Review (HERR), released in June, recognises that as a result of the increase in the intensity and frequency of disasters - a trend expected to grow with climate change and population growth - preparedness must be a key goal.

What can the U.S. learn from the Spending Review?

Watching George Osborne present the results of the Government’s Comprehensive Spending Review last week, two thoughts went through my mind.

On a personal level, how could I have been so wrong about Cameron and Osborne? A pre-election blog of mine was titled “A Pair of Lightweights”. Both have already done enough to assure even the most cynical observer (which probably doesn’t mean me) that they are every bit as serious as the job they face.

The other thought was: are they watching in Washington?

America is in a hole every bit as deep as Britain.  The Federal budget deficit is yawning (9 percent of GDP compared with 10 percent in the UK in 2010). The Obama healthcare plan is going to add trillions of dollars to the already-crippling cost of Medicare and Medicaid, and there is the prospect of having to bail out many states and cities, especially those which rely on property taxes for their major source of revenue. The USA needs its Osborne moment before it is too late.

Yet, before anything like it could happen, the situation will have to get far far worse, so bad that the air of crisis is palpable to every American from sea to shining sea. Could the Federal Government cut spending drastically when the unemployment rate is near 10 percent? Could it reduce the defence budget while the GI’s were in action in Iraq and Afghanistan? Could it tell insolvent states to tighten their belts?

And again, how could the President – it would presumably have to be Mr Obama or his successor, not the Treasury Secretary – actually deliver the cuts he (or she) proposed? Whereas in the UK, even with a coalition government, George Osborne can announce measures which are more or less certain to be implemented, the US President could only ever tell the world what proposals he is going to send to Congress, then spend weeks and months arm-twisting, flattering and bribing its members to endorse them.

What would emerge at the end of this process would be a bill containing some of the original ideas intact, some modified to varying degrees and some totally eliminated, and the whole thing larded with billions of dollars of pork (some of which may get attached to other bills as a quid pro quo).

from Breakingviews:

Britain’s unkind cuts may help growth sprout

It was billed as a bloodbath, and it is. By slashing public spending by 81 billion pounds over five years, Britain's coalition government is reversing the big increases of previous years. The plan is billed as necessary pain to secure the country's financial future, but it is also ideological. The aim is to move from unaffordable levels of public employment and welfare to private employment and a balanced budget. The danger, however, is that the economy stalls.

The cuts to the civil service are drastic and will cause distress, even though most departments' budgets over the life of the parliament have been reduced by a fifth, not the threatened quarter. The BBC, the foreign office, the police, even the royal family: none have been spared. The government wants services to be delivered more cheaply -- which means by fewer people.

Britons know the public sector is not short of fat cats, and some fat cuts won't be the end of the world. Nevertheless, losing half a million public sector jobs is a heavy toll. If the private sector cannot absorb these workers, total UK unemployment may rise to a very high three million.

Taking the axe to many departments has allowed the government to lift health spending and maintain the schools budget. In welfare, however, it risks looking harsh. Ending child benefit for better-off families saves 2.5 billion pounds by 2015. But most of the overall 7 billion pound fall in welfare spending hits the least well off. Though the intention is to get people to swap welfare for work, the danger is greater social division.

The big macroeconomic risk is that the cuts cause a return to recession, thereby wrecking the government's fiscal calculations. That risk is real: house prices have not yet finished falling, and consumers are still deleveraging.

The Bank of England is likely to do its bit by cranking up the printing press and making money as cheap as possible. Nevertheless, tough years lie ahead. A country that was living far beyond its means now faces simultaneous big spending cuts and tax rises. The government will hope its decision brings clarity and a swift climb in private investment. A happy outcome is far from assured. But the decisive start is probably for the best.